Subsidized or Unsubsidized? Know Before You Borrow
As another school year begins, students are finalizing financial aid packages and making decisions about how to pay for tuition, books and living expenses. For many, this means borrowing federal student loans. And while loans are a valuable tool for accessing higher education, it’s essential to understand how they work—particularly the difference between subsidized and unsubsidized loans. Knowing this distinction can help students save hundreds, if not thousands, of dollars over time.
What Are Subsidized Loans?
Subsidized loans are the most affordable type of federal loan. With subsidized loans, the government pays the interest on the student’s behalf while they are enrolled at least half-time, during the grace period after leaving school and during any periods of deferment.
This means that if a student borrows $5,000, that’s exactly what they will owe when repayment begins because no interest accrued while they were enrolled. In short, subsidized loans ensure that the principal balance (the original amount borrowed) stays the same until repayment starts.
What Are Unsubsidized Loans?
Unsubsidized loans work differently and can be much more costly if not managed carefully. With these loans, the student, not the government, is responsible for paying interest which begins accruing as soon as funds are disbursed.
Let’s say a student borrows $10,000 in unsubsidized loans with a 6% interest rate. From the moment that loan is released, interest begins accumulating. If the borrower attends school for four years and doesn’t make any interest payments during that time, they will accrue roughly $2,400 in interest. That interest is then added, or “capitalized”, to the balance after graduation. Instead of owing $10,000, the new balance owed will be around $12,400.
When repayment begins, payments first go toward interest, not the original balance. This means borrowers may make payments for months or even year before the original balance goes down.
Managing Unsubsidized Loans Wisely
The good news is that students borrowing unsubsidized loans do have options. The smartest step is to pay the interest on the loan while still enrolled. Setting up a small monthly payment with the loan servicer, often through a simple ACH transfer, can prevent interest from ballooning.
Currently, students must actively opt in to make these payments. If no action is taken, interest accrues and is capitalized after graduation, leaving borrowers with a larger balance.
A more effective system would reverse this default by automatically requiring in-school interest payments unless a student chooses to opt out. This approach would reduce capitalized interest, lower total loan costs and make repayment more manageable.
Practical Next Steps
Understanding the difference between subsidized and unsubsidized loans is a practical step toward a more secure financial future. One of the smartest financial moves students can make is to stay informed now and save themselves from unnecessary debt later.
Know your loan type. Students should always check whether the loan they are accepting is subsidized or unsubsidized. This will directly affect how much is owed after graduation.
Pay interest on unsubsidized loans while in school. Students are notified of their loan servicer once they receive their first disbursement of funds. At that point, they should contact their assigned servicer to opt in to interest-only payments. Even small payments can save hundreds or even thousands of dollars.
Be proactive. Don’t wait for loan servicers to reach out. Students should set up a plan and take control of their repayment strategy.
Consider system change. Instead of requiring students to opt in, Federal Student Aid should require students to opt out of interest-only payments for unsubsidized loans.
