What Is The Difference Between A Subsidized And Unsubsidized Loan

Borrowing an unsubsidized loan is not an issue, but getting a subsidized loan will help you save the interest amount. Let’s understand how they’re both different.

Loans in general are confusing to apply, especially with the different forms of loan available. When you’re intending to take out a federal loan to pay for education, you’ll either receive a subsidized or unsubsidized loan.

Both the loans are generally the more affordable student loans options out there, but if you qualify, subsidized loans have a more generous repayment option.

Subsidized Loans vs Unsubsidized Loan

The main difference between both these loans is that one of them charges interest and the other doesn’t. Undergraduates who apply for a Free Application for Federal Student Aid (FAFSA), are eligible for a subsidized loan if they exhibit a financial need.

Whereas, unsubsidized loans are only eligible for undergraduates, graduates or any professional student who’s in school for at least half-time.

Hence, understanding how subsidized and unsubsidized loans differ from one another, is extremely vital as it impacts the way you pay interest, how your repayment works and the total education loan you’ve to pay off after graduation.

What Is a Subsidized Loan

When a lender applies for a subsidy on the interest part of a loan for the borrower, this is known as a subsidized loan. Basically, the lender would have to pay the loan’s interest charges during particular periods.

Having a subsidy allows the borrower to repay the loan in a much more manageable manner, as their periodic payments done in periods is greatly reduced. This lowers the entire final cost of the loan and the borrower ends up saving money.

Certain governmental agencies at federal, local and state levels, as well as some non-profits organizations, might be offering subsidized loans. However, when they do so, they usually reserve the subsidized loans for low-income borrowers. Hence, why you need to demonstrate your financial needs in order to obtain them.

Hows Do Subsidized Loans Work

The example below should allow you to understand just how exactly do subsidized loans work:

  1. Hannah has decided to enrol herself into a four-year college. However, after calculating the entire of her attendance, and further accounting for a school scholarship, she’s still lacking $10,000 in being able to cover her four years worth of educational costs.
  2. She decided to take out an yearly Direct Subsidized Loan. She’ll be receiving $2,500 annually at an APR of 2.75 percent, that she would incur on a daily basis, or a total of $10,00 for the entire four years, which is repayable over the next 10 years.
  3. Hannah manages to attend college for the entire four years, the lender – US Department of Education, will pay the interest on the loan for the full four years, and up to almost six months after she graduates.
  4. Hannah finally graduated, and all because of the repayment done at the start by the US Department of Education, she only had $10,000 of debt. She’ll pay $95 monthly for her

The total amount of subsidized loan an independent or dependent student can now take out over the period of their undergraduate education is $23,000 as of July 2020.

There are two types of major subsidized loan available:

  • Federal Student Loans
    The US Department of Education offers to pay the interest charged on these loans but for undergraduate students who are able to demonstrate a financial need.
  • Federal Home Loans
    The US Department of Agriculture (USDA) and a few other federal agencies offer loan programs for low/moderate-income borrowers through which they can attain a subsidized home loan.

Moreover, specific subsidized home loans offer a “subsidy recapture” option in which borrowers are required to pay off the subsidy if and when they were to dispose of their property.

Do be mindful of the fact that you’re limited to how much of a subsidized loan you can borrow in a year and in total. Your school ultimately decided your maximum loan amount.

Refer below to see the federal limits on a subsidized loan:

Subsidized Loan Limits: Experian

What Is a Unsubsidized Loan

Unlike subsidized loans, unsubsidized loans can be attained by both graduate and undergraduate students. Also, they don’t need to demonstrate a financial need of wanting to have the loan.

However, there is interest occurring on unsubsidized loans when you’re still attending school, during deferment and during the grace period. If by any chance, you don’t pay the incurred interest before paying back the loan, the total interest amount gets included in the total loan amount.

How Do Unsubsidized Loan Work

You need to meet the criteria on the unsubsidized loan application in order to attain it. You have to:

  • Be an American national, citizen or a permanent resident
  • Be enrolled on a minimum of half-time basis student at an accredited institute
  • Have zero loan defaults or owe any amount of refund from a previous student aid or loan
  • A string academic standing

Firstly, you need to feel out the FAFSA form. Colleges and the government require this form in order to determine a financial aid package for you. Make sure to submit this form by the yearly deadline.

Following that, go through your financial aid letter. Your school’s financial aid officer will present you with a financial aid reward that’ll consist of all the loan options you’re eligible for and have instructions on how you can attain them.
You might be eligible for both subsidized and unsubsidized loans. You can analyze and decide how much of the approved amount you want to request for, keeping your needs in mind and not exceeding what you require.

Here’s a breakdown of how much of a unsubsidized loan can you borrow:

Unsubsidized Loan Limits: Experian

When do Unsubsidized Loan Repayment Start

Once you’ve successfully graduated from school, or have dropped below the half-time basis enrollment, you’ll then receive a six-month grace period before you begin repaying. Your loan servicer will explain how the repayment works and when exactly do you start paying off.

Federal student loans give you the flexibility to choose from different repayment plans.You may be allocated to a repayment plan automatically, but you can always change your plan at any point, for free of cost. Feel free to speak to your loan servicer on what plan is best for you.

You can pick any repayment plan but do know that it’s important for you to start repaying your student loan as soon as possible. Even if you’re not supposed to repay during a grace period, interest will still pile up. So try to make payment in order to prevent your student loan debt from increasing.

If you’re able to pay more than the minimum amount, it’s even better! This will in return lower your loan balance at a much faster rate. Also, your loan servicer might apply the extra payments to your next month’s payment, but you might want to explicitly inform them about the extra payments.

Interest Capitalization

When you’re opting for the federal Direct Loan Program, an interest is capitalized on your unsubsidized loan once the payment status of the loan has been changed. For example, an interest that incurs while your grace period and in-school, will later be capitalized when the loan enters into the repayment time right when the grace period is coming to an end.

Certain private school loans may even capitalize the interest amount every month, which becomes extremely tough to keep paying off your loan in a timely manner, but try not to skip payments.

There are specific periods of time whereby the interest may not be capitalized on Federal Education Loan. This also includes the interest that usually accumulates during a negative amortization solely on an income-driven repayment plan or when an administrative forbearance happens.

Impact of Interest Capitalization

Interest capitalization significantly causes an increase in the size of the unsubsidized loan obtained. Generally, interest capitalization increases the loan balance on an unsubsidized loan amount by almost 20 to 25 percent by the end of the grace period and in- school periods.

The total increase in the unsubsidized loan balance solely depends on its interest rates, duration of the grace period and in-school periods, the total amount you borrowed every year and the frequency of how often interest capitalization is added.

When borrowers complain to their loan servicer about their loan doubling or tripling, it generally involves a long period of time where no payment was made – usually a minimum of a decade in which the borrower made little to no payments.


It’s pretty simple and straightforward that subsidized loans are much cheaper as compared to unsubsidized loans. Especially whilst you’re still schooling, in deferment, forbearance pr during the post-graduation grace period.

However, as mentioned above, you NEED to demonstrate a financial need to attain a subsidized loan. All in all, it all depends on your financial needs and the ability to pay off your student loan in a timely manner.

Charles Bains

Charles Bains

Charles Bains started his insurance career as a marketing intern before pounding the pavement as a commercial lines agent in Orlando, FL. As an industry journalist, his articles have appeared in a variety of trade publications. His insurance television career, short-lived but glorious, once saw him serve as the expert adviser on an insurance-themed infomercial (yes, you read that correctly). Having recently worked for various organizations, coupled with his broader insurance knowledge, Charles is able to understand our client’s needs and guide them accordingly. He is a gem for Insurance Noon as his wide area of expertise and experience have been beneficial in conducting further researches to come up with solutions and writing them in a manner which is easy for everyone including beginners to comprehend.

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