What's the difference between subsidized and unsubsidized loans?

The main difference between subsidized loans and unsubsidized loans is that the federal government pays the interest on subsidized loans during periods of authorized deferment, such as the in-school and economic hardship deferments, while the interest remains the responsibility of the borrower on an unsubsidized loan. This makes subsidized loans a less-expensive option for students.

During the in-school deferment, the obligation to repay a federal education loan is suspended while the borrower is enrolled at least half-time. Payments of principal and interest are deferred (delayed) until the end of the grace period after graduation, when the borrower enters repayment on the loan. With subsidized loans, the federal government pays the interest as it accrues. With unsubsidized loans, the interest is capitalized (added to the loan balance) if unpaid by the borrower as it accrues. This is in contrast with a forbearance, where the interest is the responsibility of the borrower on both subsidized and unsubsidized loans.

Examples of subsidized loans include the subsidized Federal Stafford Loan and the Federal Perkins Loan. Examples of unsubsidized loans include the unsubsidized Federal Stafford Loan and the Federal PLUS Loan. Eligibility for subsidized loans is based on demonstrated financial need, while eligibility for unsubsidized loans is not.

Subsidized and unsubsidized loans may differ in other ways, such as differences in interest rates and loan limits. For example, the subsidized Federal Stafford loan has annual loan limits of $3,500 during the freshman year, $4,500 during the sophomore year, $5,500 during the junior year and $5,500 during the senior year and subsequent years. The annual loan limits for the unsubsidized Federal Stafford Loan include any amounts not received as a subsidized loan up to the overall Federal Stafford Loan limit, which is $2,000 per year higher for dependent students. Thus, the sum of subsidized and unsubsidized Federal Stafford Loans can be no more than the overall annual loan limits shown in this table:

Overall Federal Stafford Loan Limits (Annual)
Year in School Dependent Student Independent Student
Freshman $5,500 $9,500
Sophomore $6,500 $10,500
Junior $7,500 $12,500
Senior $7,500 $12,500