Photography by Getty Images; Illustration by Bankrate
Key takeaways
- The U.S. Department of Education offers both unsubsidized and subsidized loans through the federal Direct Loan program.
- Subsidized loans don’t accrue interest while you’re in school, during the grace period or deferment — making them the more affordable option.
- Unsubsidized loans accrue interest immediately, regardless of your enrollment status.
- Subsidized loans require demonstrated financial need; unsubsidized loans are available to a broader group of students.
- Subsidized loans should be your first option, but if you don’t qualify, unsubsidized loans could still work since they are typically more affordable than private student loans.
If you’re borrowing federal student aid to pay for college, your two main loan options are Direct Subsidized Loans and Direct Unsubsidized Loans. Both are part of the federal Direct Loan Program, which provides low-interest loans to students through the U.S. Department of Education.
The main difference between the two lies in how — and when — interest accrues. Subsidized loans are need-based and offer more favorable terms, while unsubsidized loans are more widely available but accrue interest right away. Here’s how to decide which is right for you.
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Subsidized vs. unsubsidized: What’s the difference?
Both Direct Subsidized and Direct Unsubsidized Loans are part of the federal Direct Loan Program. When you submit the Free Application for Federal Student Aid (FAFSA), your school sends you a financial aid award letter that explains what you qualify for and how much you can borrow.
Here’s how they compare:
| Key points | Direct Unsubsidized Loans | Direct Subsidized Loans |
|---|---|---|
| Who pays interest? | The borrower | U.S. Department of Education during school enrollment, grace periods and deferment. The borrower during repayment and forbearances. |
| What’s the aggregate maximum limit? |
Dependent undergrads: $31,000 Independent undergrads: $57,500 Graduate students: $138,500 Medical students: $224,000 |
Undergraduate students (dependent and independent): $23,000 |
| What’s needed to qualify? | Does not require proof of financial need | Must demonstrate financial need |
| Who can borrow? | Undergraduate students, graduate students and professional degree students | Undergraduate students |
| Are there extra costs? | Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020 | Loan fee: 1.057% for loans disbursed on or after Oct. 1, 2020 |
Here’s a closer look at how these loans work:
Subsidized loans
A Direct Subsidized Loan is a type of federal student loan for undergraduate students with financial need. It’s less expensive than Direct Unsubsidized Loans because the government pays for the interest while the borrower is in school (at least half time) and during the six-month grace period after graduation (as well as deferment periods should they occur). Graduate and professional students can’t borrow subsidized loans.
The federal government sets federal student loan interest rates, and the rates usually change each school year. Undergraduate students will have a 6.39 percent interest rate on Direct Subsidized Loans for the 2025-2026 academic year.
Your school uses several factors to decide how much you can borrow:
- Cost of attendance
- Your demonstrated financial need
- Your year in school
- Other financial aid you receive
Unsubsidized loans
A Direct Unsubsidized Loan is a type of federal student loan that starts accruing interest as soon as money is disbursed to your school. You may choose not to pay this interest in school and during your six-month grace period, but any unpaid interest will be added to your total balance. Unlike subsidized loans, you do not have to demonstrate financial need to qualify for unsubsidized loans — these loans are open to all borrowers who are able to receive federal aid.
Direct Unsubsidized Loans for undergraduates have a 6.39 percent interest rate for the 2025-2026 academic year. Direct Unsubsidized Loans for graduate students have a 7.94 percent interest rate.
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Which is better: Subsidized or unsubsidized loans?
Subsidized loans are the best first choice for borrowers since the federal government temporarily covers the interest that accrues on your loans. This is especially true for borrowers who are unable to make interest payments while they’re in school, but if borrowers cannot demonstrate the financial need necessary to qualify, they may have to resort to unsubsidized or private loans.
Unsubsidized loans are still worth considering. Though interest will accrue immediately, these loans still have low interest rates and benefit from federal protections and eligibility for income-based repayment programs. If you’ve maxed out what you can from federal loans, you can look at private student loans to finance the remaining balance.
Bankrate’s take:
Private student loans often have higher interest rates if you or your cosigner have average credit, and they don’t offer the same benefits as federal loans. With that said, private student loans can be a useful tool if you’ve hit the loan maximum on federal loans or if you have exceptional credit.
Bottom line
If you’re eligible for subsidized loans, they’re your most affordable borrowing option thanks to their interest-free grace period and deferment terms. If you don’t qualify, unsubsidized loans still offer worthwhile federal protections. Explore all your grant and scholarship options first, and when it comes time to borrow, start with your federal options and resort to private only if you have to.
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