Taye Petterson

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Subsidized and unsubsidized student loans, offered by the federal government, are two of the most popular forms of financing. The most notable benefit of subsidized loans is that the interest is deferred while the borrower is attending school at least part time. Interest payments on unsubsidized loans however, begin as soon as the funding is awarded.

But these are only a few of the differences between the two types of borrowing.

Subsidized loans are designed solely for undergraduate students who are able to establish financial need. These loans do not accrue interest as long as the student is attending school at least part-time. In order to be eligible for subsidized loans, student applicants must complete a Free Application for Student Aid (FAFSA) application, which is used to determine how much aid you may be eligible to receive.

Unsubsidized loans are available to undergraduate students, as well as graduate students. Similar to the subsidized loans, applicants must complete the FAFSA to be eligible. However, unsubsidized loan awards are not based on financial need.

“Schools determine how much aid students receive for unsubsidized loans. These decisions are based on the cost of attendance and other financial aid received,” says Meagan McGuire, Student Loan Planner, the largest student loan consulting company in the nation.

Here’s a deeper look at the two different loan types and their pros and cons to keep in mind.

Subsidized loans, which are also referred to as Direct Subsidized Loans and Stafford Loans, are awarded to undergraduate students based on financial need. To qualify, borrowers must complete a free FAFSA application online. They account for about 18.6% of federal student debt.

There are many positive features associated with subsidized student loans, but the most significant is that while a student is in school at least half-time, the loan does not accrue interest. In addition to the interest tab being picked up by the U.S. Department of Education during school, it will also be paid for the first six months after you complete school. This is known as the grace period, according to the U.S. Department of Education website.

“That is the largest benefit of a subsidized loan because…you’ll have less to pay back later,” says Jeff White, financial advisor with Saving for College, an online informational resource focused on saving and paying for college.

Yet another benefit associated with these loans is that the interest rate is often lower than unsubsidized loans. It’s also worth noting that if you’re having trouble repaying the loan after school, there are programs available that allow for deferment, longer-term forbearance, or income-based repayment.

Here’s a closer look at how to obtain a subsidized loan and how they work once awarded.

While there are many benefits to subsidized loans, there are also a few drawbacks to consider.

The U.S. Department of Education also provides unsubsidized loans. These are sometimes referred to as Direct Unsubsidized Loans and Stafford Loans and are loans available to both undergraduate and graduate students to cover the cost of college. Because the awards are not based on financial need, more applicants tend to qualify for unsubsidized loans.

The interest on these loans begins accruing immediately after the funds are made available. “Instead of the interest being paid for you, you’ll be in charge of the interest from the moment the loan dollars hit your account or are sent to your school,” says White. “You won’t necessarily have to make payments right away while you’re still attending school, but the interest will continue to accumulate.”

Similar to subsidized loans, qualifying for an unsubsidized loan requires completing a FAFSA application. Though these loans are not awarded based on financial need. Here are some of the facts about how these loans work:

Similar to subsidized loans, there are pros and cons to unsubsidized borrowing. Here’s a look at some of the considerations:

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