The rising cost of a college degree has more students than ever borrowing to cover their expenses. While some students opt for loans from private lenders, an estimated 44 million borrowers have taken out loans from the U.S. Department of Education. Of those, 32.1 million borrowers have Federal Direct Loans.

Federal Direct Loans may be subsidized or unsubsidized. Both types offer numerous benefits, including flexible repayment options, low interest rates, the option to consolidate loans, and forbearance and deferment programs.

Here is how the subsidized and unsubsidized loans compare.

Key Takeaways

  • Federal student loans can be either subsidized or unsubsidized.
  • A student's eligibilty for subsidized loans is based on financial need.
  • Both types of loans have to be paid back with interest, but the government makes some of the interest payments on subsidized loans.

Who Qualifies for Federal Direct Loans?

There are a few requirements you must meet to be eligible for a Federal Direct Loan. For both subsidized and unsubsidized loans, borrowers have to:

  • Be enrolled at least half-time at a school that participates in the Federal Direct Loan program.
  • Be a U.S. citizen or eligible non-citizen.
  • Have a valid Social Security number.
  • Maintain satisfactory academic progress.
  • Have completed a high school diploma or the equivalent.
  • Not be in default on any existing federal loans.
  • Be registered with the Selective Service System (for males ages 18 to 25).

Direct Subsidized Loans are only available to undergraduates who have a demonstrated financial need. Both undergraduates and graduate students can apply for Direct Unsubsidized Loans, and there’s no financial need requirement.

If you qualify for a subsidized loan, the government will pay the interest on your loan while you're in school at least half-time and continue to pay it during a six-month grace period after you leave school. It will also pay it during a period of deferment.

To apply for either type of loan, you’ll need to fill out the Free Application for Federal Student Aid (FAFSA). This form asks for information about your income and assets and those of your parents. Your school uses your FAFSA to determine which types of loans you qualify for and how much you’re eligible to borrow.

How Much Can You Borrow?

The Federal Direct Loan program has maximum limits for how much you can borrow annually through a subsidized or unsubsidized loan. There’s also an aggregate borrowing limit.

First-year undergraduate students can borrow a combined $5,500 in subsidized and unsubsidized loans if they’re still financially dependent on their parents. Of that amount, only $3,500 may be subsidized loans. Independent students—and dependent students whose parents don’t qualify for Direct PLUS loans—can borrow up to $9,500 for their first year of undergraduate study. Again, subsidized loans are limited to $3,500 of that amount.

The borrowing limit increases for each subsequent year of enrollment. The total aggregate subsidized loan limit is $23,000 for dependent students, with another $8,000 allowed in unsubsidized loans. For independent students, the aggregate limit is raised to $57,500, with the same $23,000 cap on subsidized loans.

Including their undergraduate borrowing, graduate and professional students have an aggregate limit of $138,500 in Direct Loans, $65,500 of which can be subsidized. Since 2012, however, graduate and professional students have been eligible only for unsubsidized loans.

If you’re a first-time borrower after July 1, 2013, there’s a limit on the number of academic years that you can receive Direct Subsidized Loans. The maximum eligibility period is 150% of the published length of your program. In other words, if you’re enrolling in a four-year degree program, the longest you could receive Direct Subsidized Loans is six years. No such limit applies to Direct Unsubsidized Loans.

Interest Rates on Subsidized and Unsubsidized Loans

Federal loans are known for having some of the lowest interest rates available, especially compared to private lenders that may charge borrowers a double-digit APR. As of 2019-2020, both Direct Subsidized and Unsubsidized Loans carry a 4.53% APR for undergraduate students. The APR on Unsubsidized Loans for graduate and professional students is 6.08%. And unlike some private student loans, those rates are fixed, meaning they don’t change over the life of the loan.

One other thing to note about the interest: While the federal government pays the interest on Direct Subsidized Loans for the first six months after you leave school and during deferment periods, you’re responsible for the interest if you defer an unsubsidized loan or if you put either type of loan into forbearance.

Income-driven repayment plans can mean lower monthly payments, but you might still be making them 25 years from now.

Repaying Subsidized and Unsubsidized Loans

When it's time for you to start repaying your loans, you'll have several options. Unless you ask your lender for a different option, you’ll automatically be enrolled in the Standard Repayment Plan. This plan sets your repayment term at up to 10 years, with equal payments each month. The Graduated Repayment Plan, by comparison, starts your payments off lower, then raises them incrementally. This plan also has a term of up to 10 years, but because of the way payments are structured, you’ll pay more than you would with the Standard option.

There are also several income-driven repayment plans for students who need some flexibility in how much they pay each month. Income-based repayment (IBR), for instance, sets your payments at 10% to 15% of your monthly discretionary income and allows you to stretch repayment out for 20 or 25 years. The advantage of income-driven plans is that they can lower your monthly payment. But there’s a catch: The longer it takes you to pay off the loans, the more you’ll pay in total interest. And if your plan allows for some of your loan balance to be forgiven, you may have to report that as taxable income. Note also that most of these plans are only available to repay federal student loans, not private loans.

The upside is that paid student loan interest is tax-deductible. As of 2019, you can deduct up to $2,500 in interest paid on a qualified student loan, and you don't have to itemize to get this deduction. Deductions reduce your taxable income for the year, which may lower your tax bill or add to the size of your refund. If you paid $600 or more in student loan interest for the year, you’ll receive a Form 1098-E from your loan servicer to use for tax filing.

The Bottom Line

Both Direct Subsidized and Unsubsidized Loans can be useful in paying for college. Just remember that either type of loan eventually must be repaid with interest. So think carefully about how much you’ll need to borrow and which repayment option is likely to work best for your budget.