Student Loans: Subsidized and Unsubsidized

Woman reviewing financial documents.

Many college students need to borrow federal student loans to afford the cost of tuition, fees, housing, and books. These loans are issued by the Department of Education after students fill out the Free Application for Federal Student Aid, aka the FAFSA. There are also private loans available to students, but we’re only going to cover federal student loans in this article.

Subsidized versus Unsubsidized: What’s the Difference?

Federal student loans for undergraduate students come in two types: subsidized and unsubsidized. Let’s talk about how they’re different.

Subsidized: When you have a subsidized federal student loan, the bank or government pays the interest charges that accrue while you’re enrolled at least half-time in school; during the 6-month grace period after leaving or graduating; and during any other deferment. These loans are available to students who demonstrate financial need on the FAFSA.

Once it’s time to start paying your loans back, the government or bank stops covering your interest charges, and you’re responsible for the full original principal plus any interest that accrues moving forward.

Unsubsidized: This is the standard federal student loan that anyone can get, regardless of need. When you have an unsubsidized loan, the interest begins accruing immediately after it’s dispersed, and you’re responsible for paying all of it. After you graduate and begin making loan payments, the interest you accrued during school is added to your principal and that inflates your balance. This can be pretty costly. Some students pay the interest charges while they’re in school to avoid interest being added to their balance after they graduate.

There are no other differences between subsidized and unsubsidized student loans.

How to Apply for these Loans

You’ll need to fill out the FAFSA to access these loans. If you’re eligible for a subsidized loan based on your financial capacity or need, it will be included as part of your aid offer from your colleges. They’ll send out letters listing aid and scholarships you’re eligible for, and that will include federal loans – both subsidized and unsubsidized.

There’s typically a limit on how much you’re allowed to borrow on a subsidized loan (and unsubsidized loans too), but those limits are set individually by the schools.

What Determines your Eligibility for Each Loan Type

Because subsidized loans are awarded based on financial need, they’re typically reserved for students and families with lower incomes or those who can show that they need additional support to help pay for college. Eligibility depends in part on the cost of a particular college to your family. There are no needs-based eligibility requirements for unsubsidized loans. Just be sure to complete the FAFSA.

How Much You Can Borrow Each Year

The amount of any student loans offered is determined by the school and is based on your financial situation, the costs of the university, and other types of aid you might receive. You might receive the maximum loan amount each year, or you might be offered less if you get other kinds of aid.

There’s also an aggregate total you can borrow over your college career. This amount also depends on whether you’re a dependent or independent student. Besides your student status, there are a few other eligibility requirements you need to meet to be able to borrow.

Loan Limits for Dependent and Independent Students

It’s important to understand who qualifies as a dependent and an independent student. Dependent students must include parents’ financial information on the FAFSA, and that will determine the loan amount they’re eligible for. Even if you live on your own and pay your own way, it doesn’t mean you will technically qualify as an independent student. Until you’re 24, it’s pretty difficult to qualify.

First-Year Undergraduate Annual Loan Limit

  • Dependent students: $5,500 – No more than $3,500 may be subsidized. There are exceptions for students whose parents can’t qualify for PLUS Loans.
  • Independent students: $9,500 – No more than $3,500 may be subsidized. This limit is also for dependent students whose parents are unable to obtain PLUS Loans.

Second-Year Undergraduate Annual Loan Limit

  • Dependent: $6,500 – No more than $4,500 may be subsidized.
  • Independent: $10,500 – No more than $4,500 may be subsidized.

Third Year and Beyond Undergraduate Annual Loan Limit

  • Dependent: $7,500 per year -- No more than $5,500 may be subsidized.
  • Independent: $12,500 per year -- No more than $5,500 may be subsidized.

Graduate or Professional Student Annual Loan Limit

  • $20,500 per year (unsubsidized loans only are available). Note: all graduate and professional degree students are considered independent.

Students going into certain health professions (medical school, dental school, etc.) can receive more than the limit listed above. Talk to your school’s financial aid office about limits.

Subsidized and Unsubsidized Aggregate Loan Limit

  • Undergraduate dependent students: $31,000 over 5 years. No more than $23,000 of this amount may be subsidized.
  • Undergraduate independent students: $57,500 – No more than $23,000 of this amount may be subsidized.
  • Graduate/professional students: Usually, the aggregate limit is $138,500, and subsidized loans aren’t available. No more than $65,500 of this amount may be in subsidized loans (these would have been taken prior to 2012).

Generally, the graduate aggregate limit includes all federal loans received for undergraduate study. Again, students enrolled in certain health professions may not be subject to the limits and may be able to take higher loan amounts.

The important thing to remember about taking loans for college is to not lose track of how much you’ve taken out. You want to be able to afford to pay back your loans on your salary once you’re employed, and that means not getting too overextended on borrowing.

Need advice? We offer student loan counseling. Get in touch if you need help with finding the best payment plan for you.

Tagged in Advice for students, Loans

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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