What is an Unsubsidized Student Loan?
An unsubsidized loan is a type of federal student loan for college or career school. The unsubsidized student loan means once loan funds are in a borrower's account, the interest starts accruing while you're in school and after you leave. Borrowers are responsible for the whole amount from day one through the life of the loan. This includes when you're in school and during grace periods.
As far as repayment options go, a borrower may choose to pay the interest charged each month. You may also allow it to add onto the outstanding principal amount in which case it adds to the total cost of the loan. A recent Sallie Mae study found that 3 in 10 students use loans from the federal government to pay for college.
What are the differences between subsidized and unsubsidized student loans?
Subsidized vs unsubsidized student loans differ in who they are for, how to qualify and the interest payments.
Who they are for: Unlike Subsidized Direct Student Loans, unsubsidized loans (also federal loans) do not require a borrower to have financial need to qualify. Financial aid may be available to those who qualify. However, only undergraduate students with financial need may be eligible for a Direct Subsidized Loan.
How to qualify: Unsubsidized loans are typically available to graduate and professional students too. Because they do not use financial need as a criteria, they have different terms regarding interest.
Different terms regarding interest. A Federal Direct Subsidized Loan is also called subsidized Stafford Loans. The U.S. Department of Education may pay the interest for you for the following periods:
- while you’re in school (at least half time)
- for the first six month grace period after you leave school
- during a period of deferment
This effectively could waive the need to pay back the interest during those time periods. Once you start your repayment plan the government may stop paying that interest. As a result, you must repay the original loan amount plus interest which begins to accrue from that moment.
Should I pay off unsubsidized or subsidized loans first?
Your priority should be to pay the direct unsubsidized loans first because the interest accrues over time. For instance, let's say you don't pay the interest while you are in school. Then, each new month of interest starts to add to the loan balance. As the balance grows, the amount you pay interest on also goes higher. If you are a recipient of an unsubsidized loan, you may want to contact your loan servicer to set up a payment plan. Making these smaller installments is a way to keep the interest from adding to the principal balance of the loan.
How Do You Apply for Unsubsidized Student Loans?
To apply for an unsubsidized student loan, you may need to fill out a Free Application for Federal Student Aid. Once it's submitted, schools use the information from the FAFSA to make any financial aid package that they send you. To be eligible to fill out the FAFSA, you must be a U.S. citizen or eligible non citizen with a valid Social Security number. You also must meet other requirements:
- Registered with the Selective Service if you're a male student
- Be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program
- For Direct Loan Program funds, be enrolled at least half time
- Maintain satisfactory academic progress
- Attest you are not in default on any federal aid (including loans and grants)
- Have a high school diploma or equivalent
When you are ready to complete the FAFSA, you typically use your Social Security Number to create an FSA ID, username and password. If you are a dependent student, you also need your parents' SSNs in order to electronically sign the form.
You must also have the following documents ready when filling out the FAFSA.
- Your driver's license
- If you are not a U.S. citizen, you must be an eligible non citizen and provide your Alien Registration number
- Federal tax information for you and your spouse if married or for your parents if a dependent (IRS W-2, IRS 1040, foreign tax returns)
- Records of any untaxed income (child support, interest income, veterans non education benefits for you and for your parents if a dependent)
- Information on cash, savings and checking accounts (stocks, bonds, college 529, real estate with the exception of the home you live in.)
Who is Eligible to Receive Unsubsidized Loans?
Direct Unsubsidized Loans are for eligible students enrolled at least half time at a school that takes part in the federal direct loan program. Unlike subsidized loans, the unsubsidized student loan are available for
- Undergraduate students
- Graduate students
- Professional students
- Dependent undergrad students (if your parents are ineligible for a Direct PLUS Loan)
Let's say your financial aid package includes federal loans, your school could tell you how to accept the loan. For first time borrowers this is a two step process. First, you go through entrance counseling. This is a tool to ensure you understand the obligation to repay the loan. Second, you sign a loan contract called a Master Promissory Note agreeing to the terms of the loan.
How Much Can You Borrow in Direct Unsubsidized Loans?
Your school determines the amount you may borrow based on your cost of attendance and other financial aid you receive. The school also sets the loan type(s) if any as well as the maximum amount you are eligible to borrow in any academic year.
That said there are annual loan limits and total amounts that one may borrow for undergraduate and graduate study (aggregate loan limits). These limits reflect what year of school you are in and your status as a dependent or independent.
Unsubsidized Annual Loan Limits
The following loan limits may vary over time according to the Federal Student Aid.
First Year Undergraduate: Ranges from $2,000 to $6,000 with a total limit of $5,500 to $9,500.
Second Year Undergraduate: Ranges from $2,000 to $6,000 with a total limit of $6,500 to $10,500.
Third Year and Beyond Undergraduate: Ranges from $2,000 to $7,000 with a total limit of $7,500 to $12,500.
Graduate/Professional (Independent students): You may borrow up to $20,500 each year.
Unsubsidized Aggregate Loan Limits
Dependent (except students whose parents are unable to obtain PLUS Loans): $8,000
Independent undergrads (and dependent undergraduates whose parents are unable to obtain PLUS Loans): $34,500
Professional and grad students: $73,000
How Does Interest Accrue for Student Loans?
First off, interest (which you pay to a lender) is the cost of borrowing money. It is calculated as a percentage of the unpaid principal amount. Any loan fees associated with your account may also impact the interest that accrues. Direct loans are daily interest loans which means that interest accumulates or accrues daily. Any unpaid interest you are responsible for and do not choose to pay may add to the principal (capitalized). As for interest rates, these are fixed for the life of the (federal) loan. But, do vary by type of borrower and loan as well as the loan disbursement date.
The following shows the interest rates for federal loans first disbursed on or after July 1, 2020 and before July 1, 2021.
- Undergraduate borrowers: 2.75% for Direct Subsidized Loans / Direct Unsubsidized Loans
- Graduate and professional borrowers: 4.30% Direct Unsubsidized Loans only
- Parents, graduate and professional borrowers: 5.30% Direct PLUS Loans
All variable and fixed rates may vary over time.
How Do You Pay Back Direct Unsubsidized Loans?
Once you graduate, leave school, or are no longer enrolled half time, you may have a six month grace period before you begin to pay back your unsubsidized loan. During this period, your servicer should notify you of your first payment due date. Payments are usually due monthly. However, there are a number of different repayment plans available. We go into more depth on that topic on our Federal Student Loan Repayment Plans.
Why You Should Consider Borrowing Federal Student Loans?
If you must take out a student loan for college, you are likely determining whether to borrow federal vs private student loans. Keep this in mind, remember to borrow only what you need, be clear on what you have to pay back and set a budget. Here are a few things to consider as you make this important choice.
1. Federal loans tend to cost less.
According to the Consumer Financial Protection Bureau private loans from a bank tend to have variable interest rates which means interest and payments may go up over time. In contrast, the interest rate on federal loans is fixed.
2. Federal loans may be easier to repay.
When it is time to repay, private loans may not offer as many options to reduce or delay payments. You don’t have to begin repaying your federal loans until after you leave college or drop below half time enrollment. There are also various repayment options if you are having trouble making a payment.
3. Federal loans typically don't need a credit check.
In order to receive a private loan you are likely to need a cosigner or credit check. If you don't have a cosigner or a great credit score, you may not qualify.
4. Federal loans may offer larger amounts.
If you are a qualifying graduate or professional student, you may borrow up to $20,500 each year in Direct Unsubsidized Loans. For qualifying undergrads, the maximum amount you may be able to borrow each year in Direct Unsubsidized / Subsidized Loans ranges from $5,500 to $12,500 per year.