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If you need financial aid to help pay for college, you’ll fill out the Free Application for Federal Student Aid (FAFSA®), which allows you to apply for federal unsubsidized student loans, subsidized student loans, work-study, and grants.
When your FAFSA has been processed, you’ll receive an aid offer that explains the types and amount of aid that a college is offering to you. If you’ve applied to multiple schools, you’ll receive an aid offer from each. You’ll be asked to tell them which forms of financial aid you would like to accept before they apply it to the amount you owe your school.
But you don’t have to accept all the aid on offer, including student loans, so consider your options carefully. Keep reading to learn more about the different types of student loans, which loans you should accept, and alternatives to federal student loans.
Key Points
• Completing the FAFSA allows students to apply for various forms of federal financial aid, including subsidized and unsubsidized loans, grants, and work-study opportunities.
• Subsidized loans offer benefits such as government-funded interest payments while enrolled at least half-time, while unsubsidized loans require borrowers to pay all accruing interest.
• Evaluating personal budgeting needs is essential to determine whether to accept the full amount of loans offered, as students may not need the entire amount.
• Students choosing to accept loans should prioritize subsidized loans first due to their favorable interest payment terms, while unsubsidized loans may still provide borrower protections.
• Alternatives to federal loans include private loans, personal loans, scholarships, and grants, which can help cover educational expenses without incurring debt.
What Are Subsidized and Unsubsidized Loans?
There are two basic types of federal student loans: Direct Subsidized Loans and Direct Unsubsidized Loans. They help eligible students cover the cost of four-year colleges, community colleges, and trade, career, and technical schooling. Here are the major differences between subsidized and unsubsidized student loans.
Subsidized Loans
Direct Subsidized Loans are student loans for undergraduates with financial need. Your school will determine how much you can borrow, and that amount cannot be more than your financial need.
The government pays all interest on Direct Subsidized Loans while you’re in school at least half-time, during the six-month grace period after you leave school, and during periods of deferment.
Unsubsidized Loans
Direct Unsubsidized Loans are available to undergraduates and graduate students. They are not awarded based on financial need.
Again, your school will determine how much you are able to borrow, and you are responsible for paying all interest on the loan amount at all times. If you choose not to pay interest while you’re in school, during the grace period, or if your loan is in deferment or forbearance, the interest will still accrue. At the end of the deferment period, the interest will be added to the principal of the loan.
Recommended: Comparing Subsidized vs Unsubsidized Student Loans
Federal Loan Interest Rates and Loan Limits
Interest rates for each type of loan are fixed. For example, for the 2026-27 academic year, the interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans is 6.52% for undergraduate borrowers. The interest rate for Direct Unsubsidized Loans is 8.07% for graduate or professional borrowers.
There are also limits to the amount of money that you can borrow, and the loan amount that you receive may be less than this limit. For dependent students, except those whose parents can’t receive PLUS loans, the aggregate loan limit is $31,000, of which no more than $23,000 can be in subsidized loans.
For dependent undergraduates whose parents can’t obtain PLUS loans, the limit is $57,500, of which no more than $23,000 can be in subsidized loans. For independent graduate students or professionals, the limit is $138,500, of which no more than $65,500 can be in subsidized loans.
When Might You Be Offered More Loans Than You Need?
You don’t have to accept all of the federal loans that are offered to you. To figure out if you’ve been offered more loans than you actually need, you’ll need to do a bit of budgeting.
Federal loans can be applied to tuition, fees, housing, supplies, transportation, and meal plans. Add up the costs to which your federal loan would apply and any extra expenses, such as eating out, to get a sense of the total cost of going to school.
Now figure out your total funding sources, excluding the sources in your offer letter. This might include money from your parents, scholarships, grants, and any money you may have saved on your own. If your total expenses exceed your sources of funding, you may need to accept the federal loans on offer. However, if they don’t, you might not need to accept all the funding.
Recommended: What Is the Cost of Attendance in College?
Which Loans Should You Accept?
If you don’t anticipate needing the amount of money offered to you through loans, you do not need to accept them. Schools will allow you to decline a loan, accept it, or even accept a portion of it.
That said, if you do decide to take on federal loans, it’s generally wise to accept subsidized loans first because they offer more benefits in the form of government interest payments.
Unsubsidized loans, on the other hand, put you on the hook for all of the interest that accrues on the loan. These loans, however, are still eligible for other federal benefits and borrower protections.
Can You Return Unused Student Loans?
If you accept a loan and realize that you don’t need it, the good news is you can cancel the loan, or a portion of it, within 120 days of disbursement. By canceling the loan, you’ll return the money you received, and you won’t owe any interest or be charged any fees.
Alternatives to Federal Student Loans
Federal student loans aren’t the only way to help pay for schooling. Here’s a look at three alternatives:
Private Loans
Students can apply for private student loans, which are offered by banks, credit unions, and online lenders. These lenders will determine the amount you can borrow, interest rates, and terms largely based on financial factors such as your income and your credit score, or that of a cosigner if you need to have one.
Private student loans are not subject to the same loan limits imposed on federal loans, so students can potentially borrow more to cover costs. However, this also means that private loans aren’t afforded the same borrower protections (such as income-driven repayment plans) as federal student loans. For this reason, they are generally considered only after a student has thoroughly reviewed all of their other options.
Personal Loans
Personal loans are also provided by private lenders who, again, set the loan amount, interest rates, and terms based on a person’s financial history. The terms of the loan do not dictate how the money must be used, so they may be a way to cover expenses outside of tuition, fees, room, and board.
Financial Aid
There are a variety of types of financial aid available from public and private sources that can help you pay for school.
Grants and scholarships are money given to you that you don’t need to repay. Scholarships are often given based on academic merit or talent, or they’re given to students wishing to pursue a particular area of study.
Students can also consider Federal Work-Study. The Federal Work-Study Program allows students to work part-time to earn money to pay for schooling.
The Takeaway
When you’re offered a student aid package by the federal government, it may include federal subsidized and unsubsidized student loans. You can accept or decline these loans, or even accept a small portion of them. Consider declining if your sources of funding exceed your expenses. Doing so may be cheaper in the long run, as it allows you to avoid making interest payments.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
Is it better to accept subsidized or unsubsidized loans?
When choosing between subsidized and unsubsidized loans, consider accepting subsidized loans first. This is because the federal government will pay your interest while you are in school at least half-time, during the six-month grace period after you leave school, and during periods of loan deferment.
Can you accept student loans and not use them?
You can accept student loans and not use them, but you’ll still be responsible for paying them back with interest. If you find you don’t need the loans, you can cancel them within 120 days of loan disbursement.
How are subsidized and unsubsidized loans different?
Subsidized and unsubsidized loans differ mainly in who they are available to and who must make interest payments. Subsidized loans are available to undergraduate students, and the government makes interest payments while you are in school at least half-time, during the six-month grace period after you leave school, and during periods of loan deferment. Unsubsidized loans are available to undergraduate, graduate, and professional students, and they start accruing interest immediately.
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