What is an Unsubsidized Student Loan?
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.
If the borrower does not pay the interest as it accrues, the interest will be capitalized by adding it 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.
Examples of Unsubsidized Student Loans
Unsubsidized student loans include the unsubsidized Federal Stafford Loan, the Federal Grad PLUS Loan, the Federal Parent PLUS Loan, and private parent loans, as well as loans that consolidate and refinance these loans.
Private student and parent loans give borrowers more options than unsubsidized federal loans for making payments on the 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. 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 do not 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.
The student 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 making 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.
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 on subsidized loans, letting students borrow more money.
Independent undergraduate students qualify for higher loan limits than dependent undergraduate students on unsubsidized federal student loans. 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.
How to Apply for an Unsubsidized Student Loan
Federal student loans require the student to have filed the Free Application for Federal Student Aid (FAFSA), even for unsubsidized loans. A FAFSA is not required for private student loans.
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.
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 a MPN.
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 lender’s web site.