Miranda is an award-winning freelancer who has covered various financial markets and topics since 2006. In addition to writing about personal finance, investing, college planning, student loans, insurance, and other money-related topics, Miranda is an avid podcaster and co-hosts the Money Talks News podcast.
As a 30+ year member of the AICPA, Nancy has experienced all facets of finance, including tax, auditing, payroll, plan benefits, and small business accounting. Her résumé includes years at KPMG International and McDonald’s Corporation. She now runs her own accounting business, serving several small clients in industries ranging from law and education to the arts.
Federal student loans are government-backed loans that help cover the cost of college or career school. They donât require a credit check, and Congress sets the interest rates. Students apply through the FAFSA and may receive either subsidized or unsubsidized loans depending on financial need.
Whatâs the difference between subsidized and unsubsidized loans?
Subsidized loans are need-based, and the government pays the interest while youâre in school at least half-time and during the six-month grace period after you leave school. Unsubsidized loans arenât tied to financial need and start accruing interest right away. Any unpaid interest is added to your loan balance after you finish school.
How does the FAFSA affect which loans you can get?
The FAFSA (Free Application for Federal Student Aid) determines your eligibility for all federal aid, including subsidized and unsubsidized loans. Schools use your FAFSA information to decide whether you qualify for a need-based subsidized loan or only for an unsubsidized loan. You must submit the FAFSA each year to keep receiving federal aid.
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Are you currently (or about to be) enrolled in college? Exciting, but also a bit scary, considering the finances involved. After all, just one year of schooling can cost tens of thousands of dollars. Applying for federal student aid and looking for scholarships and grants can help you get the funding you need to cover your costs.
When you receive your financial aid letter, you may see two federal student loan types on offer: subsidized and unsubsidized. Hereâs a breakdown of each loan type of loan and how they will affect you future student debt burden.
Key Points
The federal government covers subsidized loan interest while youâre in school.
Unsubsidized student loans accrue interest while youâre in school.
You must complete the FAFSA each year to qualify for either type of federal student loan.
What are federal student loans?
The government offers federal student loans to pay for school. The government is the lender, but it contracts with private companies to service the loans. Because the government is the lender, there arenât credit requirements for student loans.
According to the Department of Education, there is no income cutoff to qualify for federal student aid. A formula set by Congress determines interest rates, and everyone pays the same rate. For those who canât afford to pay for school from their savings or who donât get enough scholarships or grant money, federal student loans can help close the college funding gap.
Student loans are disbursed each semester, and interest rates are set yearly. As a result, the loan you receive for your first year in school might have a different interest rate than loans that cover subsequent years. Additionally, youâll pay a disbursement fee, so you wonât get your full loan amount in cash. Your total required payments will include the fee, and youâll pay interest on that fee.
Subsidized vs. unsubsidized loans
There are no income requirements to get an unsubsidized federal student loan, but if you demonstrate financial need, you might qualify for a subsidized student loan.
Subsidized student loans cost less overall because the federal government pays the interest while youâre in school and during the six-month grace period after you leave school.
Unsubsidized student loans accrue interest while youâre in school. You can pay the interest as you go, although itâs not required. Unpaid interest will be added to your total loan balance after graduation.
You must fill out the Free Application for Federal Student Aid (FAFSA) to get either type of loan. The updated FAFSA process uses a new formula (the âStudent Aid Index,â or âSAIâ) to assess financial need. Information from the FAFSA is sent to the schools you select, and they put together financial aid packages that include federal student loans. Youâll be told how much youâre eligible for in terms of both subsidized versus unsubsidized loans, along with other aid you might have been granted, including Pell Grants, scholarships, and state-based aid.
Itâs also important to note that there are different student loan limits based on whether youâre considered an independent student (such as an adult going back to get a college degree) or a dependent student (such as a teenager living at home with parents).
Overview of subsidized vs. unsubsidized loans (2025)
6.53% for undergraduate; 8.08% for graduate unsubsidized
Origination / disbursement fees
1.057%
1.057%
How subsidized student loans work
To qualify for subsidized student loans, you must show financial need. Information from your FAFSA determines whether your family meets the income threshold to qualify for subsidized student loans. If you qualify, youâll be offered subsidized loans as one of your student aid options.
While youâre in school, the government will pay your interest so it doesnât increase the amount you owe.
How unsubsidized student loans work
There are no income requirements in order to get an unsubsidized loan. Additionally, itâs possible to use unsubsidized loans for graduate school.
Unpaid interest on unsubsidized loans accrues while youâre in school. At the end of your grace period, the interest is capitalized, which means itâs added to your total loan balance. For undergraduate student loans disbursed between July 1, 2025 and July 1, 2026, the interest rate is 6.39%.
You can make interest payments during school to avoid adding that amount to your loan. Any remaining unpaid interest will increase your loan balance. And youâll pay interest on that interest as you repay your debt.
The bottom line
Fill out a FAFSA each year that you want federal aid, including student loans. Whether you get subsidized or unsubsidized loans will depend on your family situation each year. Make sure you fill out the form so you can see what federal aid youâre eligible for.
Depending on your situation, you might receive a mix of subsidized and unsubsidized federal loan offers. You can take both types of loans to help pay for your schooling. Chances are youâll need a combination of different types of financial aid, and using subsidized and unsubsidized federal student loans is part of the picture for many students.
Just make sure you understand the terms before moving forward, and consider other types of student aid before making your decision.
