What's the difference between subsidized and unsubsidized federal student loans?

Figuring out how to pay for college can be a headache, especially as tuition costs increase every year. Many people turn to loans for assistance, but there are many types, including some that only make you pay back exactly what you borrowed and others that make you repay with interest.

About 34 million people borrow federal loans from the U.S. government, and these loans make up 92% of the country’s student loan debt. If you combine the amount of federal loans with those from private lenders, student debt surpassed $1.76 trillion in 2022, according to the Federal Reserve. Americans have an average federal student loan balance of $35,210.

“That’s what used to be a down payment on a house,” said Samantha Ghanie, a personal finance expert with COOP Careers, a nonprofit that helps BIPOC and first-generation graduates navigate their careers. “Students are exiting school (with this debt) on average … for a bachelor’s degree. Once upon a time, that could buy you a brand-new car.”  

It’s not just a young person's problem either. There are four generations involved in student loan debt, Ghanie said. “You might have a family where you cross-generationally have student loans or you may be the first person to try to figure it out and you’re not getting help on student loans.” 

Here, we break down the difference between subsidized and unsubsidized loans and which one may be right for you. 

Learn more: Best private student loans

What is the difference between subsidized and unsubsidized loans?

To put it simply, unsubsidized loans accrue interest while subsidized loans do not because the interest is covered by the government. The government will pay interest for the subsidized loan for the first six months after you graduate, called a grace period, and during deferment, the term for when you’re postponing loan payments. 

“One is based on need, one is not,” said Leslie Tayne, a debt-relief attorney and founder of Tayne Law Group. Only undergraduate students who are enrolled in school at least half-time and prove financial need are eligible for a subsidized loan.

Both Tayne and Ghanie recommend people look into subsidized loans before anything else. To see if you qualify for a subsidized loan, you need to apply for the Free Application for Federal Student Aid (FAFSA) and input your family’s income. Through FAFSA, you can also apply for Pell Grants, work-study programs and other types of loans to help pay for your education. 

Unsubsidized loans are offered to both undergraduate and graduate students and not based on showing your financial need, and the borrower pays interest at all times. During times of deferment or forbearance periods, interest will still accrue. Note, if you choose not to pay the interest while you are in school and during grace periods and deferment or forbearance periods, your interest will accumulate and be added to the principal amount of your loan.

The type of loan and amounts for subsidized and unsubsidized loans you receive depend on your school, what year of schooling you’re in and if you’re a dependent or independent student. Unsubsidized loans also have a higher lending limit than subsidized loans. 

How do you know which loan is right for you?

Paying for college:How can I pay for school? Complete FAFSA. What FAFSA is, who's eligible and when to do it.

Most people tend to have a combination of both subsidized and unsubsidized loans. “The thing that really matters between them is really the amount,” Ghanie said. “I don’t want to take away from subsidized or Pell Grants but they don’t pay for a semester. So most people are going to have all of the above.” 

Here are the annual loan limits for subsidized loans for undergraduate students:

• $3,500 for the first year
• $4,500 for the second year
• $5,500 for the third year and beyond

For the 2023-24 school year, Pell Grants award up to $7,395. Students who are in graduate school, professional students or parents of undergraduate students can also apply for a Direct PLUS Loan, which is unsubsidized and based on credit history instead of financial need.

Ghanie recommends students exhaust federal loans before moving onto private lenders. “Private loans are a pretty murky world,” Ghanie said, adding that they can often be “predatory.” For younger students or those whose English isn’t their first language, the legalease can be especially confusing. 

Typically, even unsubsidized federal loans will have lower interest rates than private loans. “With federal loans, you can reach out to the government if you’re unemployed or going through a period of hardship, and they will work with you,” Ghanie said. 

“The cost of borrowing is much higher right now,” Tayne said, adding that interest rates continue to increase. Those who plan to go to graduate school should especially look into reducing their borrowing for undergraduate studies, since those loans compound. 

What are the interest rates for subsidized and unsubsidized loans?

The interest rates for subsidized and unsubsidized loans first disbursed on or after July 1 and before July 1, 2024 are fixed for the life of the loan at:

• undergraduates subsidized and unsubsidized loans: 5.50%

• professional and graduate unsubsidized loans: 7.05%

If you do go with a private loan, take the paperwork and sit down to carefully read it and avoid a variable loan rate, which may start off lower than fixed rate loans but fluctuate over time. “Because we have so much uncertainty around deferment, my first word of advice is to look at the loan details,” Ghanie said. 

“If you can’t make the payments they’ll come after you for the rest of your life,” Tayne added. 

Are there other costs to subsidized and unsubsidized loans?

Yes, there is a loan fee on all subsidized and unsubsidized loans. The loan fee is a percentage of the loan amount and is proportionately deducted from each loan disbursement. The percentage for all subsidized and unsubsidized loans first disbursed on or after Oct. 1, 2020, is 1.057%. Loans first disbursed before that date had different loan fees.

Tayne recommends families sit down and go over all the expenses that come with going to college, including transportation, living expenses, even down to the little things like needing a special computer. Keep in mind that choosing a school in a high-cost of living area like New York or Miami means your overall expenses will increase. 

That being said, it’s not always easy to plan. For many families, it’s a whole new world out there. Tayne said to reach out to an expert in student loans who can tell you what will happen if you default or speaking to a school’s financial aid office. 

What else can you do to help pay for school?

As daunting as it seems, there are alternative methods to support your education. “There are ways to go to school,” Tayne said. “There are so many ways to be creative.” 

• Consider being a resident advisor while in school to eliminate living expenses 
• Students who excel in high school can sometimes earn credits to use in college
• Tutoring
• Work-study programs

You can also get strategic with the way you pay off your loans. Ghanie recommends people pay off the highest interest loan first so that the interest and principal rates drop. “It’s not just about having the loan but how you apply money to our loan,” she said. “You can throw the same amount of money at your loans and be out of there sooner.” 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning. 

Kathleen Wong is a travel reporter for USA TODAY based in Hawaii. You can reach her at kwong@usatoday.com