What Is an Unsubsidized Student Loan?

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Mark Kantrowitz

By Mark Kantrowitz

December 29, 2022

An unsubsidized student loan is a type of loan that is not subsidized by the federal government. Interest begins accruing on the date of disbursement, and the accrued interest is capitalized and added to the loan balance until repayment begins. The borrower is responsible for paying all of the capitalized interest.

In order to minimize the amount of student loan debt you’ll need to take out for college, it’s wise to open a 529 plan as quickly as possible. This allows you to save money in a tax-advantaged account specifically for college expenses. The more you save, the less you’ll repay in loans later. Plus, you can now roll over any balances to your IRA.

Unsubsidized vs. Subsidized Student Loans

The key differences between an unsubsidized loan and a subsidized loan are the interest, loan limit and eligibility.

Unsubsidized student loans are more expensive than subsidized loans because interest starts accruing sooner on unsubsidized loans. The borrower is responsible for the interest that accrues on unsubsidized student loans during in-school and grace periods, as well as deferments and forbearances. Borrowers can choose to pay the interest as it accrues or to defer paying the interest until the student loans enter repayment. All federal student loans have a fixed interest rate.

If the borrower does not pay the interest as it accrues, the interest will capitalize and be added to the principal loan balance when the loan enters repayment. This can increase the size of the loan by as much as a tenth to a quarter. It also leads to interest compounding, since interest will be charged on the capitalized interest.

However, with a subsidized student loan, the government pays the interest while an eligible borrower is in school (at least half-time), during the 6-month grace period after graduation and during periods of deferment.

Since you will pay more in interest for an unsubsidized direct loan, you should borrow subsidized loans first. However, not all borrowers are eligible for subsidized loans, and the amount you can borrow is limited per academic year. Here are some things to consider before you take out an unsubsidized student loan.

Subsidized loans are awarded based on financial need. Unsubsidized loans are available to all students, regardless of need.

Examples of Unsubsidized Student Loans

Unsubsidized loans include the unsubsidized Federal Stafford Loan, the Federal Grad PLUS Loan, the Federal Parent PLUS Loan, private parent loans and loans that consolidate and refinance these loans.

Private student loans and parent loans give borrowers more options than unsubsidized federal loans for making payments on student loans during the in-school and grace periods. The most common of these are full deferment of principal and interest, interest-only payments and immediate repayment of principal and interest.

Slightly more than a quarter of the private student loans offer fixed payments per loan per month, with $25 as the most common monthly payment amount.

Federal student loans provide for full deferment during the in-school and grace periods. An immediate repayment is an option on federal parent loans. There are no prepayment penalties on federal and private student loans, so nothing stops a borrower from making interest-only or fixed payments on unsubsidized loans that don’t offer these options.

About four-fifths of all student loans are unsubsidized.

Eligibility for Unsubsidized Student Loans

Eligibility for an unsubsidized student loan does not depend on financial need. More students will qualify for an unsubsidized student loan than for a subsidized student loan. Everybody, including wealthy students, may qualify for an unsubsidized student loan.

The borrower must be enrolled at least half-time as a regular student in a degree or certificate program at a college or university that is eligible for federal student aid. Some private student loans will lend to continuing education students who are enrolled less than half-time. For federal student loans and most private student loans, repayment begins six months after the borrower graduates or drops below half-time enrollment.

Eligible students must have a high school diploma, GED or the equivalent.

For federal student loans, the student must be a U.S. citizen or permanent resident. Some private student loans will lend to international students if the borrower has a creditworthy cosigner who is a U.S. citizen or permanent resident.

The student must be in good academic standing with at least a 2.0-grade point average (GPA) on a 4.0 scale and make progress toward a degree that is consistent with graduating within 150% of the normal timeframe.

The borrower must not be in default on a previous student loan. Also, most private student loans will require a credit check and a creditworthy cosigner.

Loan Limits on Unsubsidized Student Loans

Unsubsidized loans generally allow higher loan limits than subsidized loans, letting students borrow more money.

An independent undergraduate student will qualify for a higher loan limit than a dependent undergraduate student on an unsubsidized federal student loan. Dependent undergraduate students may qualify for the same limits as independent students if their parent was denied a Federal Parent PLUS Loan due to an adverse credit history.

Federal student loans have an annual loan limit per academic year, and an aggregate loan limit, which is the total amount a student can borrow for their education.

How to Apply for an Unsubsidized Student Loan

There are three main steps to applying for an unsubsidized student loan. Those three steps are:

Step 1: Federal student loans require the student to have filed the Free Application for Federal Student Aid (FAFSA), even for unsubsidized loans. You do not need to complete the FAFSA to apply for a private student loan.

Step 2: After submitting the FAFSA, the college financial aid office will send the student a financial aid award letter or notification. This will specify the amount of subsidized and unsubsidized federal student loans for which the student is eligible.

Step 3: The student will need to complete entrance counseling at studentaid.gov and sign a Master Promissory Note (MPN). Parent borrowers will also need to sign an MPN.

What to Know About Applying for an Unsubsidized Loan

If the student is a first-time, first-year borrower, there may be an automatic 30-day delay before the federal student loans are disbursed.

Funds will be credited to the student’s account at the college and applied first to tuition and fees. If the student will be living in college-owned or operated housing, the funds will also be applied to room and board. A credit balance will be refunded to the student within 14 days to pay for other college costs.

Students and parents can apply for private student loans and private parent loans through the private lender’s website.

The Bottom Line

An unsubsidized loan, which most student loan borrowers end up receiving, is a loan where the interest isn’t paid while you’re in school. Instead, the loan interest accumulates and compounds on top of the original loan balance. Borrowers should be careful about these types of loans because they can become expensive even before you enter a repayment period.

Frequently Asked Questions (FAQs)

Are unsubsidized loans good?

Unsubsidized loans are not the worst loans you can borrow in terms of pure cost and the interest rate that you’ll receive. However, the interest accumulates and compounds on top of your loan balance even before you hit repayment. This means you should be mindful of how much you’re borrowing and what you’ll need to repay.

Do you pay back an unsubsidized loan?

Yes, you will always repay an unsubsidized loan. It is a federally-backed loan that goes into repayment when you graduate, start attending school less than half-time, or leave school. When one of those things is triggered you’ll receive a 6-month grace period to prepare for repayment.

Is it better to accept subsidized or unsubsidized loans?

It’s typically a best practice to accept subsidized loans first because there won’t be as much interest to repay on those loans compared to unsubsidized loans. It’s best to only accept as much as you actually need to attend school and to find ways to pay for the rest of your expenses.

A good place to start:

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