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Comparing Subsidized vs. Unsubsidized Student Loans

November 08, 2019 · 5 minute read

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Comparing Subsidized vs. Unsubsidized Student Loans

Many students end up borrowing money to pay for their college education, and many rely on student loans—federal, private, or both.

During the 2017-18 academic year, 36% of families turned to student loans to help cover the costs they couldn’t, according to the “How America Pays for College 2018” survey published by the lender Sallie Mae.

Unfortunately, some students and their families are unfamiliar with the various types of student loans available, how interest works, how that interest can affect the amount they end up paying over the life of the loan, and how they can best manage repayment.

Because so many students start their quest for tuition help by applying for federal student loans, it’s important to understand the differences between the subsidized and unsubsidized loans offered by the U.S. Department of Education. Here are some basics:

What is a Direct Subsidized Loan?

Direct Subsidized Loans are available to undergraduate students only, and they’re awarded based on financial need, so the terms are a little more lenient than those for other federal student loans.

The U.S. government pays the interest on federal Direct Subsidized Loans as long as the student is enrolled in classes at least half-time.

It also pays the interest for a six-month grace period after the student leaves school or graduates and if the student’s loan is in a period of deferment.

The federal help is meant to give students a chance to get on their feet financially before the debt starts accruing interest they’ll have to pay.

What is a Direct Unsubsidized Loan?

With a Direct Unsubsidized Loan, the government still lends a student money, but the terms are stricter in some ways.

Because the loans aren’t awarded based on financial need, borrowers are responsible for making interest payments from the day their funds are disbursed. If a student chooses not to pay the interest while in school, it just keeps adding up.

It also adds up during the grace period, or during a deferment or forbearance period. And the interest will “capitalize”, meaning it will be added to the principal balance, and the borrower will be charged interest on the higher balance, further increasing the overall cost of the loan.

Unsubsidized student loans can cost more in the long run than subsidized loans because of the accruing interest, but they have some benefits of their own:

•  They’re available to both undergraduate and graduate students.

•  Borrowers don’t have to demonstrate financial need, so it can be easier to qualify for the money.

•  Annual and aggregate loan limits are higher for Direct Unsubsidized Loans than for Direct Subsidized Loans.

•  The “maximum eligibility period” for Direct Subsidized Loans doesn’t apply to Direct Unsubsidized Loans.

How Are the Loans the Same?

Obviously, there are some big differences between these two types of federal loans. But they also share many similarities, including:
Each school determines how much its students can borrow during an academic year, but the amounts they offer can’t exceed the government’s predetermined loan limits.

Those limits vary depending on whether the borrower is a dependent or independent student, and what year they are in school. (For example, students in their first year of school typically get less federal loan money than those who are further along. And, of course, financial need is taken into account for Direct Subsidized Loans.)

Generally, borrowers must be enrolled in a program that leads to a degree or certificate from the school.

The interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans for undergraduates is the same for undergraduates, and both are fixed rates. (The rate for graduate or professional students receiving Direct Unsubsidized Loans is typically higher.)

A loan fee is charged on both types of loans. It’s a percentage of the loan amount, and that percentage may vary depending on when the loan was first disbursed.

Repayment for both types of loans begins six months after the borrower graduates, leaves school, or drops below half-time enrollment. (Again, students are responsible for paying the interest on Direct Unsubsidized Loans once they’re disbursed.)

Most borrowers will have 10 to 25 years to pay back a federal student loan, depending on their chosen repayment plan.

How Do I Get a Federal Student Loan?

The process to receive federal financial aid begins when the student completes the Free Application for Federal Student Aid (FAFSA
®). The form asks for information about the student (name, date of birth, address, financial information from tax forms and bank statements). If the student is a dependent, there will be similar questions about support from home that will help determine financial need.

Borrowers who don’t demonstrate enough need may not qualify for subsidized loans. Or they may be awarded a combination of both subsidized and unsubsidized student loans, or a combination of loans, grants, and work-study.

Based on the results of the FAFSA® form, the schools the student listed on the application will send a financial aid offer to the student, and the school will explain how to accept all or part of the federal financing. (Students can get an estimate of their eligibility for federal aid by using the FAFSA4caster .)

Most students qualify to receive some form of financial aid from the federal government to help pay for school. It doesn’t matter if they’re old or young, or what their major is.

But every applicant will have to cross a lot of T’s and dot a lot of I’s to qualify. And there are deadlines for filing the FAFSA. The FAFSA deadline is typically June 30, but each college and state may have its own deadlines.

What If Federal Loans Aren’t Enough?

If a student doesn’t qualify for federal student loans—or if more funding is required—there are other options for financing a college education.

SoFi strongly believes borrowers should exhaust all federal grant and loan options before going with a private loan lender. But private student loans can help fill the gaps if federal loans don’t cover all the costs of attending school.

These loans are offered by private lenders, including banks, credit unions, and online financial institutions, so the terms vary from one to the next—and the qualifications and terms will be different from federal loans.

Private student loans can have fixed or variable interest rates, and some lenders offer more competitive rates than others. (All federal loans have fixed interest rates.)

A borrower’s credit rating and income, among other factors, will be used to determine the interest rate and how much may be borrowed. (Those who need help qualifying could consider tapping a trusted student loan cosigner.)

Repayment terms on private loans also differ from lender to lender—and they’re generally less forgiving than the repayment plans offered for federal student loans. It’s important to understand what’s expected before signing for any type of loan.

Borrowing for School

If you need some extra help paying for your education, a SoFi loan could serve as a supplement to your federal aid.

SoFi student loans are fee-free—there are no origination fees, no application fees, no late fees, and no insufficient fund fees.

There’s even an interest rate reduction when borrowers sign up to make automated payments.

SoFi offers loans for undergraduates, graduate students, and parents. And pre-qualifying is quick and easy—so you’ll know where you stand and what different loan terms look like within minutes. If you’re looking at a shortfall in paying for classes or other costs of attendance, you’ll have an idea about your options.

When it’s time to figure out how you’ll pay for school, it pays to understand all the options—starting with what’s available through the government and then looking at what private student loans have to offer.

Need some help paying for college? Check out how a SoFi private student loan could help.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see


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