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Federal Direct Subsidized vs. Unsubsidized Loans

Find out which is the cheapest option for you.

Federal Direct Subsidized Loans are ideal if you’re an undergraduate student with significant financial need. The government covers some of your interest payments, so they’re the cheapest option available. But if you’re a grad student or don’t have financial need, you may have to stick to Direct Unsubsidized Loans.

Federal Direct Subsidized vs. Unsubsidized Loans

Direct Subsidized LoansDirect Unsubsidized Loans
Annual amount$3,500 to $5,500$5,500 to $20,500
Aggregate amountUp to $65,000Up to $138,500
Interest rate2.75%
  • Undergraduate students:2.75%
  • Graduate and professional students: 4.3%
Origination fee1.059%1.059%
Terms10 to 25 years depending on repayment plan10 to 25 years depending on repayment plan
Available to graduate students?NoYes
Must demonstrate financial need?YesNo
Interest capitalized?NoYes
Credit requirementsNoneNone
Repayment optionsAll federal options except the Income-Sensitive Repayment PlanAll federal options except the Income-Sensitive Repayment Plan
Deferment and forbearance optionsAll federal options available except Parent PLUS forbearanceAll federal options available except Parent PLUS forbearance

What is the federal Direct Loan Program?

The William D. Ford Federal Direct Loan Program offers several types of loans to students and parents who need money to pay for postsecondary education. The two most common loan types are the Direct Subsidized and Unsubsidized Loans, which allow students to borrow at competitive rates and come with more repayment plans than most private lenders offer. In addition, your loan funds can be used for more than just a four-year university — you can also use a federal student loan to cover the cost of community college, trade school or technical school.

How federal Direct Subsidized Loans work

Federal Direct Subsidized Loans are only available to undergraduates and take your financial need into consideration in deciding how much you can borrow. Annual limits range from $3,500 to $5,500, though the exact amount you can borrow depends on both your financial need and year in school. Loan terms span anywhere from 10 to 25 years depending on the repayment plan you choose — the same as with Direct Unsubsidized Loans.

The biggest difference between the two? The government covers interest that accrues on Direct Subsidized Loans while you’re in school, during your six-month grace period or when you go into deferment. This makes these loans cheaper than unsubsidized loans — where interest is capitalized.

  • Government covers interest while you’re in school, during your grace period and when you’re in deferment
  • Less expensive than unsubsidized loans
  • Only available to undergraduates
  • Based on financial need
  • Lower annual borrowing limits than unsubsidized loans

How federal Direct Subsidized Loans work

How federal Direct Unsubsidized Loans work

Federal Direct Unsubsidized Loans are available to undergraduate, graduate and professional students — regardless of financial need. Annual borrowing limits range from $5,500 to $20,500 depending on your year in school and degree — much higher than those offered for subsidized loans.

However, unlike federal Direct Subsidized Loans, the government doesn’t cover interest while you’re in school, during your grace period or when you’re in deferment. This means any interest that accrues during this time is capitalized and added to your loan principal, so you’re essentially paying interest on interest. This makes unsubsidized loans more expensive than their subsidized counterparts.

  • Available to undergraduate, graduate and professional students
  • Not based on financial need
  • Larger loan amounts than subsidized loans
  • Government doesn’t cover interest while you’re in school, during your grace period or if you go into deferment
  • Higher interest rates for graduate and professional students
  • More expensive than subsidized loans

How federal Direct Unsubsidized Loans work

Which loan is right for me?

Many students may qualify for both types of loans, so compare your options before deciding to take out one over the other.

Consider a Direct Subsidized Loan if …

  • You don’t want interest to accrue while you’re in school.
  • You only need to borrow a small amount.
  • You don’t need funds for graduate school.

Consider a Direct Unsubsidized Loan if …

  • You don’t meet the financial need requirement.
  • You need to borrow a large amount.
  • You may need funds for graduate or professional school.

Case study: Kellye’s experience

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Kellye Guinan

When it came time to pay for college, I needed extra funds to pick up the slack where my scholarships fell short. So I turned to the most well-known option: federal student loans.After filling out the FASFA, I was only offered a Direct Unsubsidized Loan. Meanwhile, my boyfriend at the time was offered both subsidized and unsubsidized loans. I was annoyed that I was going to have to pay interest while in school, and he wasn’t. But apparently according to my FASFA, I could afford it.

Regardless, I knew that this was the best deal I was going to get since private student loans were so much more expensive, so I took it. It’s not so bad now that I’ve been in the workforce for a few years, but I do wish I’d done things differently and tried to push for subsidized loans by talking to my school’s financial aid office. It certainly would have saved me on interest in the long run.

Federal loans fall short? Cover the gap with private student loans

Name Product APR Min. Credit Score Loan amount Loan Term
EDvestinU Private Student Loans
4.092% to 8.609% with autopay
$1,000 - $200,000
7 to 20 years
Straightforward student loans for undergraduate and graduate students.
CommonBond Private Student Loans
3.74% to 10.74%
$5,000 - $500,000
5 to 15 years
Finance your college education through this lender with a strong social mission and terms that fit your budget.
Edvisors Private Student Loan Marketplace
Varies by lender
Varies by lender
Varies by lender
Varies by lender
Quickly compare private lenders for your school and apply for the right student loan.
Credible Labs Inc. (Student Loan Platform)
Starting at 0.99% with autopay
Good to excellent credit
Starting at $1,000
5 to 20 years
Get prequalified rates from private lenders offering student loans with no origination or prepayment fees.

Compare up to 4 providers

Should I pay off a Direct Subsidized or Unsubsidized Loan first?

In general, the most cost-effective way to tackle your student loan debt is to pay off your unsubsidized loans first. Although both have the same fixed interest rate for undergraduates, interest accrues on unsubsidized loans while you’re in school, during your grace period and if you go into deferment. This means you’re better off tackling these debts first, especially if you plan on going back to school.

How to decide which student loan to pay off first

Bottom line

Direct Subsidized and Unsubsidized Loans have the same interest rates and fees for undergraduates, but the amount you can borrow — and how your interest accrues during school — varies. If you’ve been offered both options, you should exhaust your subsidized loans first before moving on to unsubsidized funding.

Did you take out both and still have gaps in funding? Explore other ways to pay for college with our guide to student loans.

Frequently asked questions

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