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Federal Unsubsidized Student Loans: What to Know

Although Federal Direct Subsidized and Unsubsidized loans offer similar benefits, you may pay more in interest for the latter based on how interest accrues.

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By Sarah Li-Cain

Written by

Sarah Li-Cain

Writer

Sarah Li-Cain is a personal finance journalist with work featured in major outlets such as Bankrate, CNBC Select, and NextAdvisor (in partnership with Time).

Edited by Jared Hughes

Written by

Jared Hughes

Editor

Jared Hughes is a personal loan editor for Credible and Fox Money, and has been producing digital content for more than six years.

Updated November 3, 2023

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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If you were given a choice between a Direct Subsidized Loan or Direct Unsubsidized Loan, you’d probably choose subsidized. The federal government pays the interest on subsidized loans while you’re in school, which makes it an appealing option.

But federal Direct Unsubsidized Loans have benefits too. Both loan types come with low, fixed interest rates and some valuable borrower benefits and protections. The main difference between the two is when you become responsible for the interest that accrues on the loans.

Subsidized vs. unsubsidized student loans

Here’s a quick overview of the difference between subsidized and unsubsidized student loans:

  • Subsidized loans: Available to undergraduate students with financial need. The federal government pays interest that accrues during deferment periods, while you’re enrolled in school at least half-time, or for the first six months after you leave school
  • Unsubsidized loans: Available for both undergraduate and graduate students, but loans for grad students are at a higher interest rate. You’re responsible for the interest that accrues as soon as the loan is disbursed

Unsubsidized loans carry the same interest rate as subsidized loans for undergraduate borrowers, but they come with a hidden cost: You pay more of the interest.

You can choose to pay the interest on an unsubsidized loan while you’re in school. Any interest that you don’t pay while you’re in school and during your grace period will be capitalized — added to the principal amount of your loan — when it’s time to start making monthly payments.

Plus, even during deferment, interest will continue to accrue on an unsubsidized loan.

Here’s an example of how interest costs can add up on a federal Direct Unsubsidized Loan, making it a costlier option than a Direct Subsidized Loan. Note that the table below assumes you’re an undergraduate student who’s qualified for the maximum per-year loan amount ($12,500) and will be repaying it on the standard 10-year repayment plan:

 

Direct Subsidized Loan
Direct Unsubsidized Loan
Loan amount
$15,000
$15,000
Interest rate
3.73%
3.73%
Who’s responsible for interest while in school
Federal government
Borrower
Interest you’ll owe at graduation (for a four-year degree)
$0
$1,197.60

Our student loan calculator can help you understand what your monthly payment might look like on a student loan and how much you’ll pay in interest over the life of your loan. Just plug in the amount you want to borrow, the interest rate and repayment term.

 

Current federal student loan interest rates

The U.S. Department of Education sets federal student loan interest rates annually, based on margins set by Congress. The table below shows federal student loan interest rates for the 2022-23 academic year, as well as rates for the previous three years:

 

Academic year
Direct Subsidized Loans
Direct Unsubsidized Loans
Direct PLUS loans
2022-2023
4.99%
Undergrad: 4.99% Graduate and professional: 6.54%
7.54%
2021-22
3.73%
Undergrad: 3.73% Graduate and professional: 5.28%
6.28%
2020-21
2.75%
Undergrad: 2.75% Graduate and professional: 4.30%
5.30%
2019-20
4.53%
Undergrad: 4.53% Graduate and professional: 6.08%
7.08%

Subsidized and unsubsidized student loan limits

The amount you can take out in federal subsidized and unsubsidized loans depends on the type of student you are, as well as your year in school. The table below shows the current federal student loan limits:

 

Year
Dependent students
Independent students (or dependent students whose parents can’t obtain PLUS Loans)
First-year undergraduate annual loan limit
$5,500 ($3,500 in subsidized loans)
$9,500 ($3,500 in subsidized loans)
Second-year undergraduate annual loan limit
$6,500 ($4,500 in subsidized loans)
$10,500 ($4,500 in subsidized loans)
Third-year and beyond undergraduate annual loan limit
$7,500 ($5,500 in subsidized loans)
$12,500 ($5,500 in subsidized loans)
Graduate or professional students annual loan limit
N/A
$20,500 (unsubsidized only)
Subsidized and unsubsidized aggregate loan limit
$31,000 ($23,000 in subsidized loans)
Undergrad: $57,500 ($23,000 in subsidized loans) Graduate or professional: $138,500* ($65,500 in subsidized loans)
Source: U.S. Department of Education. Note: Graduate aggregate limit includes all federal loans received for undergraduate study.

Eligibility requirements for unsubsidized student loans

Unlike subsidized student loans, unsubsidized loans don’t depend on your financial need. This means even if your parents make a certain income, you could still qualify.

Eligibility requirements include:

  • Being enrolled at least half-time in a certificate or degree program at an educational institution that offers federal student aid
  • Students need to be a U.S. citizen or permanent resident

You don’t need a credit check or cosigner to get a Direct Subsidized Loan or a Direct Unsubsidized Loan.

Good to know: Federal Direct PLUS Loans are an option for graduate students, professional students, or parents of dependent undergraduate students. But you’ll have to go through a credit check to qualify for these loans.

How to apply for a federal student loan

To apply for a federal student loan, you’ll first need to fill out the Free Application for Federal Student Aid, or FAFSA, on the StudentAid.gov website. Schools use this form to determine how much federal aid you may qualify for, including grants and work-study programs.

Information you may need to provide when you fill out the FAFSA includes:

  • A government-issued photo ID
  • Social Security number of borrower (and parents if applicable)
  • Income information
  • Details on assets for you or your parents
  • Federal tax information

 

Once you’ve filled out the FAFSA, your school will send you a financial aid letter that will tell you any types of financial aid you qualify for, including subsidized and unsubsidized loans.

Federal student loan repayment strategies

If you have unsubsidized student loans, one thing you can do to make repayment more manageable is to make voluntary payments on the interest that accrues while you’re in school, or in deferment or forbearance. Depending on your loan balance, you may be able to keep interest from accruing by paying just $20, $50, or $100 a month.

Once your grace period has expired and interest is accruing on all your loans, consider allocating more of your financial resources to paying down high-interest loans first. Note that if you choose to combine all your student loans into a federal Direct Consolidation Loan, you won’t be able to implement this strategy. Your federal Direct Consolidation Loan will have a weighted interest rate based on the rates of the loans you’ve consolidated.

Income-driven repayment plans can be a lifesaver for borrowers with enormous student loan balances and modest incomes, particularly if they expect to qualify for loan forgiveness after 10, 20, or 25 years of payments. IDRs base your monthly payment on your discretionary income, with the aim of making the payments affordable for you. But keep in mind IDRs stretch your payments over a longer period of time and will increase the total amount repaid. If you do qualify for loan forgiveness under an income-driven repayment plan, you may face a large tax bill.

If you want to know the type of student loans that are best for you, check out our student loan score tool to see how competitive it is.

 

Meet the expert:
Sarah Li-Cain

Sarah Li-Cain is a personal finance journalist with work featured in major outlets such as Bankrate, CNBC Select, and NextAdvisor (in partnership with Time).