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Subsidized student loans vs. unsubsidized student loans — which is right for you?

You need to decide how quickly you can begin making payments.

Hill Street Studios | Digitalvision | Getty Images

The offer mentioned below for SoFi Student Loans is no longer available.

There are approximately 43.5 million federal student loan borrowers in the U.S., according to 2022 data from the Department of Education. But despite the prevalence and importance of these loans, they still remain difficult to understand for many.

One of the most important choices students borrowing from the federal government face is whether to take subsidized or unsubsidized loans. CNBC Select breaks down the difference between the two options so you can decide which will work best for you.

How do subsidized student loans work?

Subsidized student loans allow you to borrow a specific amount of money with the promise that you'll pay it back over time with interest. The main draw of subsidized loans, though, is that the interest doesn't start accruing until after you've graduated or you've dropped below half-time enrollment.

The U.S. Department of Education actually pays the interest on your loan while you're still in school. Even after graduation, you typically receive a six-month grace period where you won't have to make any principal or interest payments.

After that six-month period, though, you'll have to start making payments. If you're financially unable to begin payments, you'll want to reach out to your student loan servicer to request a personal forbearance or deferment period or to set up an income-driven repayment plan.

It's important to note that subsidized loans are only available to undergraduate students and typically carry a slightly lower interest compared to other loan types. These loans also have lower borrowing limits that depend on the student's year in school. For instance, first-year undergraduates can only borrow up to $3,500 in subsidized loans; second-year students can borrow up to $4,500 and third-year students (as well as those studying for longer than three years) are limited to $5,500.

How do unsubsidized student loans work?

Similar to subsidized loans, unsubsidized student loans are loans from the federal government you have to pay back with interest. However, the main difference between the two is that the interest on unsubsidized student loans begins accruing immediately — even while you're still in school.

That doesn't necessarily mean you'll be required to make payments while you're still in school, though. Just be aware that those interest charges will keep building even if you don't have to start paying them down yet, which adds to your overall loan balance.

Unsubsidized loans are available to both undergraduate and graduate students. They also have higher lending limits: Undergraduate students can borrow anywhere from $5,000 to $12,500 and graduate students can borrow up to $20,500.

Because unsubsidized loans accrue interest immediately, it makes sense to start paying down the loan or pay the interest as soon as possible (even if it's not yet required) to avoid dealing with an overwhelming loan balance after you graduate. This loan may not be the best option for students who don't plan to work during school and would be unable to start making payments immediately.

How do you qualify for a student loan?

Any student who wants to receive federal aid — whether it's a student loan, grant, or work-study — must submit a FAFSA application. Although many families mistakenly believe that their income is too high to qualify for financial aid, no income limits exist that determine eligibility. That's why experts recommend anyone planning on attending college submit a FAFSA application — it's free, and you never know what you might receive.

If you happen not to receive any federal assistance but still need to cover tuition, you can consider private student loans. These loans are provided by private lenders, like banks and credit unions. Unlike federal student loans, private loans require a credit check, which might necessitate a co-signer if the student applying doesn't have a sufficient credit history yet.

Private student loans typically carry higher interest rates compared to federal loans, but borrowers may choose to refinance their loan in the future for a potentially lower interest rate.

CNBC Select ranked SoFi Student Loan Refinancing as the best overall option since it offers many payment protections, including unemployment protection (where forbearance is offered in 3-month increments, capped at 12 months) and loan deferment, which haven't been offered by many other private lenders. Citizens Student Loan Refinancing is another very solid option for students who may need a co-signer and doesn't charge any origination fees with the refinancing.


  • Eligible borrowers

    Undergraduate and graduate students, parents

  • Loan amounts

    $150,000 maximum, or cost of attendance, whichever is lower

  • Loan terms

    Range from 5 to 15 years

  • Loan types

    Variable and fixed

  • Borrower protections

    Forbearance options available

  • Co-signer required?


  • Offer student loan refinancing?

    Yes - click here for details

Terms apply.

Most private loans usually don't carry federal protections such as loan forgiveness or deferment options, but you may be able to speak with a specific borrower for guidance in the event that you're unable to continue making payments.

And while loans can help many attain a college education, students should exhaust all other tuition funding options before taking on debt. This means applying for both external scholarships and scholarships offered by their university (also known as institutional aid), accepting grants and even seeing how much their families can reasonably afford to pay out of pocket.

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Bottom line

Student loans can be a crucial part of any student's plan to pay for college but it's important to know the differences between two common types of loans: subsidized and unsubsidized loans. They each come with their own set of appealing features but before resorting to loans of any kind, students should be sure to turn to all other funding options first.

Catch up on CNBC Select's in-depth coverage of credit cardsbanking and money, and follow us on TikTokFacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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