When it comes to paying for college, federal loans typically offer lower interest rates and flexible repayment options. If you qualify for subsidized student loans, you can take advantage of an interest-free period on your loan, making it an even more enticing option for financing your education.

Are you curious which loan type is best for you? Learn about the differences between subsidized and unsubsidized loans to see which might best fit your needs.

Overview of Federal Student Loans

Federal student loans are financial aid options backed by the government and designed specifically to help students afford the costs associated with getting a degree. They usually offer lower interest rates than private loans, as well as more flexible repayment terms and even forgiveness plans for those who are eligible. These loans help students bridge the financial gap between scholarships, grants, and out-of-pocket expenses. Federal student loans can help pay for tuition, fees, living costs, and educational materials.

Subsidized vs. Unsubsidized Federal Student Loans: Understanding the Differences

Federal student loans come in two main types: subsidized and unsubsidized. Both offer lower interest rates and flexible repayment options but differ in terms of who pays the interest while you're in school.

What is a Subsidized Student Loan?

Subsidized student loans are need-based federal student loans (that is, determined by your family’s income and financial situation). The U.S. Department of Education pays interest on your loan for as long as you're enrolled in an accredited school on at least a half-time basis. You can also get deferred payments during military service and for the first six months after graduation.

Subsidized student loans can save you money, given that you don’t have to pay interest for as long as you’re in school, in the military, or within the first six months after graduation. However, these loans can be hard to get since eligibility depends on financial need. Your Free Application for Federal Student Aid, or FAFSA® application, determines whether or not you’re eligible.

What is an Unsubsidized Student Loan?

Unsubsidized student loans are also federal loans. Unlike a subsidized loan, however, you’re responsible for paying interest as soon as your funds are disbursed (sent to your school for enrollment). You’re also responsible for making interest payments throughout the entire life of the loan — meaning you’ll make payments on interest until the loan is paid off. Unlike subsidized loans, your eligibility for unsubsidized loans is not based on financial need, meaning it’s unaffected by your FAFSA application.

Key Differences between Subsidized vs. Unsubsidized Federal Student Loans

The key difference between subsidized and unsubsidized federal loans lies in who pays the interest while you're in school. Yet that’s not the only differentiating factor. The table below helps break down the differences.

  Subsidized Loans Unsubsidized Loans
Qualification Requires a demonstrable need for financial assistance Does not require demonstrable need
Borrowing limits Limits are lower than unsubsidized loans, given the federal government makes interest payments while you’re in school, recently graduated, or are in the military. Limits are higher since you are responsible for paying interest throughout the life of the loan.
Interest accrual No interest charges while you’re enrolled in college or during your six-month grace period after graduation.  Interest will begin accumulating immediately from the date you receive the funds from your school.
Who can borrow Undergraduate students Undergraduate, graduate, or professional degree-receiving students

Interest on Subsidized vs. Unsubsidized Student Loans

With subsidized loans, the government picks up the tab on interest for as long as you qualify. Unsubsidized loans, on the other hand, begin to accrue interest as soon as the loan is disbursed. Since you are responsible for paying all interest on unsubsidized loans, this will increase your total repayment amount.

Note that for unsubsidized loans, your missed interest payments during school or military service, the unpaid interest gets added to your principal loan amount. This means you'll end up accruing interest on the interest, which can further inflate your total repayment costs.

Alternatives to Subsidized and Unsubsidized Loans

In addition to subsidized and unsubsidized loans, there are other ways to help fund your education. These options may not cover the full amount of your school-related expenses, but they can supplement your federal student loans.

Grants and Scholarships

Students often seek grants and scholarships to help reduce the amount of money they need to borrow. Grants are awarded to students to pay for college, often without strings attached and without needing to be repaid. They may be given according to need, merit, or other specific criteria determined by the grant-giver. Your FAFSA form can help you determine which grants you’re eligible for.

Like grants, scholarships aren’t necessarily based on financial need. In fact, many scholarships use academic performance, demographics, or the results of a competition (such as an essay contest). Any number of benefactors such as colleges, non-profits, social organizations, and employers may offer scholarships. You will also find some corporations, like PNC Bank, offer scholarships.

Work-Study Programs

Work-study helps you earn money while studying through part-time campus jobs, as well as approved off-campus jobs. These programs are sponsored by the government and are need-based. With work-study programs, you can gain work experience while also reducing the financial burden of higher education. Unlike loans, work-study program payments go directly to you, and can be used for educational expenses.

Private Student Loans

Unlike federal student loans, private student loans are issued by banks, credit unions, or other private lenders. These loans may come with higher interest rates and fewer borrower protections, such as income-driven repayment plans and loan forgiveness programs.

Private loans are an option if you have borrowed up to the maximum of your federal loan eligibility, or if you need additional funds to cover costs that your loans cannot. These loans should be considered as a last resort, given that borrowing costs are likely higher (and repayment less flexible).

What to Consider When Assessing Federal Student Loan Choices

Deciding between federal student loans, grants, scholarships, and private loans requires careful consideration, as each path has financial implications. A few potential pros, cons, and other factors should be taken into consideration.

Federal Student Loans (Subsidized and Unsubsidized):

  • Pros: May have lower interest rates versus private loans, flexible repayment options, and potential for loan forgiveness programs (in some cases).
  • Cons: Like with all loans, require repayment with interest, even when subsidized for a certain period of time. The total cost of repayment includes the initial loan amount and interest that accrues. 

Grants and Scholarships:

  • Pros: Offers money for school that need not be repaid, which can reduce overall student debt burden and offer more financial freedom after graduation.
  • Cons: Eligibility can be competitive, and award amounts often vary. Some scholarships may have restrictions on how the funds can be used as well, which may not always align with overall needs. 

Private Student Loans:

  • Pros: Can provide additional funding to cover costs not met by federal loans. May offer competitive interest rates, especially for borrowers with strong credit or a cosigner. These loans may come with flexible repayment options tailored to your budget and a quicker application process compared to federal aid.
  • Cons: Private loans may offer fixed and variable rate options. If the interest rate is variable, the rate may rise over time, increasing your monthly payment. Repayment plans typically offer less flexibility than federal loans, and income-driven repayment or loan forgiveness programs are usually not available. Cosigners are also responsible for the debt associated with the loan. As with federal loans, a private loan is a debt that must be repaid.        

Before deciding what the best option is for you, bear in mind your:

  • Financial Need: If you demonstrate financial need, you may qualify for need-based grants and subsidized loans with lower interest rates.
  • Academic Performance: Strong academic performance can open doors to merit-based scholarships that can significantly reduce your reliance on loans.
  • Future Earning Potential: If you are pursuing a career with a high earning potential, managing student loan debt may be more feasible. Minimizing debt is still the ideal, as it can allow you to keep more of your future income. 

The Long-Term Impact of Loan Choices

How you choose to finance your college education can impact your long-term financial health — even decades into the future. Federal and private loans come with interest, which can add debt that takes years to pay off. Alternatively, grants and scholarships offer money based on merit or need with no need for repayment. It’s recommended to find scholarships and grants first, and then determine how much to borrow afterwards.

If you and your family’s financial situation makes you eligible for subsidized loans, they’re an appealing option that can save you money in the long run. Federal student loans, whether subsidized or unsubsidized, are typically a less expensive option than private student loans. But, if you’ve exhausted these options, private student loans are available to make sure you can pay for your education.

Conclusion: Subsidized vs. Unsubsidized Student Loans

There are several factors to consider about your financial present and future before committing to student loan financing. Some options, such as subsidized loans, can offer major interest savings both during and after they’re deferred. Unsubsidized loans are often less expensive than private loans. Private loans can play a pivotal role in helping you bridge the gap between other financial sources. Scholarships and grants are an excellent way to tap into interest- and repayment-free cash, so long as you qualify.

Whether you’re looking into one or several financing sources, you’re bound to have questions. The team at PNC can help you assess your options and develop a plan that empowers you to pursue the education you’ve dreamed of.