What is an Unsubsidized Student Loan?
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By Mark Kantrowitz

February 23, 2021

A direct unsubsidized loan is a type of student loan available through the federal government. 

Unsubsidized student loans are the most accessible type of student loans, since anyone can borrow them for any level of higher education, regardless of their financial need. 

They’re a valuable tool for students of all economic backgrounds. 

Unsubsidized loans are generally more expensive than the direct subsidized loans that the federal government offers, since they accrue interest immediately.

In this article, we’ll explain what a direct unsubsidized loan is, how it works, and how it compares to a direct subsidized loan.

What is an Unsubsidized Loan?

An unsubsidized student loan (aka direct unsubsidized loan) is a type of federal loan available to help students pay for higher education. 

Students can take out this type of loan for any schooling, such as four-year university, two-year college, trade school, technical school and graduate school.

Unsubsidized student loans aren’t based on a borrower’s financial need. Instead, all qualifying undergraduate and graduate students can use them. 

The amount of money that one student can borrow depends on the cost of tuition at their school and whether the student is considered dependent or independent.

The limits on federal direct loans increase each year you are in college. For example, a dependent undergraduate student may borrow up to $5,500 for their first year, up to $6,500 for their second year and up to $7,500 for their third year and beyond.

The defining characteristic of unsubsidized loans is that interest starts to accrue immediately and accrues the entire time the borrower is in college. Students don’t have to make payments on their principal or interest while in school. But once the grace period after school ends, the interest is capitalized, meaning it’s added to the principal of the loan. 

Once loan interest capitalizes, it too begins to accrue interest.

What is the Difference Between an Unsubsidized and Subsidized Loan? 

A direct subsidized student loan is another type of loan the federal government offers to help students pay for their higher education. Subsidized loans come with more favorable loan terms and tend to be cheaper in the long-run. 

But the federal government doesn’t make subsidized loans available to everyone — borrowers have to demonstrate a financial need.

Interest accrual

Unsubsidized loans begin to accrue interest as soon as they’re disbursed. If students don’t make interest payments while they’re in school, they’ll graduate with a sizable amount of interest already built up. 

Then, once the grace period ends, the interest capitalizes and becomes a part of the principal balance.

In the case of a subsidized student loan, the U.S. Department of Education pays the interest (known as a “subsidy”) while the student is at school (as long as they’re at least part-time students) and for a six-month grace period afterward. 

The loans start to accrue interest once the grace period ends. As a result, the loan amount after the grace period is equal to the amount the student borrowed, minus anything they paid off early.

Eligibility

Both undergraduate and graduate degree students are eligible for unsubsidized student loans. Students don’t have to demonstrate financial need. Students can borrow up to the maximum annual amount, which depends on their year in school and whether they are dependent or independent.

Subsidized loans are a bit more challenging to get. First, only undergraduate students can use subsidized loans. Graduate and professional school students aren’t eligible.

Subsidized loans are also only available to those students who can demonstrate a financial need. A financial need is the difference between the cost of attending the student’s school and their expected family contribution (EFC)

The Department of Education determines someone’s expected family contribution using the information provided in their Free Application for Federal Student Aid (FAFSA).

Loan limits

For both subsidized and unsubsidized student loans, the federal government limits the amount a student can borrow during each year and overall.

Subsidized loans have lower annual limits than unsubsidized loans. Once a student borrows their maximum subsidized loan amount, they can borrow up to the limit in unsubsidized loans. For example, a first-year student who qualifies for a $3,000 subsidized loan may borrow up to $2,500 in unsubsidized direct loans. ($3,000 + $2,500 = $5,500 annual federal student loan limit for first year students).

Federal direct loan limits are:

Dependent Students

Independent Students (and dependent students whose parents are ineligible for a PLUS Loan)

First Undergraduate Year

$5,500

(maximum $3,500 subsidized)

$9,500

(maximum $3,500 subsidized)

Second Undergraduate Year

$6,500(maximum 4,500 subsidized)

$10,500

(maximum $4,500 subsidized)

Third Undergraduate Year and Beyond$7,500 (maximum $5,500 subsidized)$12,500 (maximum $5,500 subsidized)
Total Loan Limit Undergraduate $31,000
(maximum $23,000 subsidized)
$57,500
(maximum $23,000 subsidized)

Graduate or Professional School Annual Limit

N/A

$20,500

Total Loan Limit

Graduate or Professional

N/A

$138,500* (maximum $65,500 subsidized)

*Graduate total limit includes loans received as an undergraduate.

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 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. 

Private student loans may offer fixed payments to manage accruing interest while in school, but this varies with the lender.

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 don’t offer these options.

Eligibility for Unsubsidized Student Loans

There are fewer eligibility requirements on unsubsidized student loans than subsidized loans. Because borrowers don’t have to demonstrate a financial need, they’re available to just about everyone, including wealthy students or the children of wealthy parents. 

The only financial requirement is that the borrower not be in default on a previous student loan.

To qualify for unsubsidized student loans, a borrower must be enrolled at least half-time as a regular student in a degree or certificate program at a college or university that’s eligible for federal student aid. 

Some private student loans will lend to continuing education students who are enrolled less than half-time. The student must have a high school diploma, GED (General Educational Development), 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.

To qualify for unsubsidized student loans, 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’s consistent with graduating within 150% of the expected timeframe.

Loan Limits on Unsubsidized Student Loans

The limit on a federal loan depends on the type of loan and whether a student is dependent or independent. 

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.

Are There Fees for Unsubsidized Student Loans?

Unsubsidized student loans incur fees as a percentage of the loan amount. The fee is deducted from each loan disbursement, meaning students receive slightly less than the amount they actually borrow.

The fee for a direct unsubsidized loan disbursed between October 1, 2019 and October 1, 2020 was 1.059%. 

For those unsubsidized loans disbursed between October 1, 2020 and October 1, 2021, the fee is 1.057%.

When Do You Pay Back an Unsubsidized Student Loan?

After leaving school, whether it be due to graduating, dropping out of school, or dropping below part-time status, students go through a six-month grace period. During this time, students don’t have to make payments on their loans. At some point during the grace period, borrowers can expect to receive repayment information and due dates from their loan servicer.

Once the grace period ends, borrowers are expected to make monthly payments on their loans for anywhere from 10–25 years. 

The amount they’ll pay each month depends on the amount they borrowed and the repayment plan they select.

Federal student loan repayment plans:

  • Standard repayment: Borrowers make fixed monthly payments for 10 years.
  • Graduated repayment: Borrowers make payments over 10 years that start low and increase every two years.
  • Extended repayment: Borrowers with more than $30,000 in student loans can opt for an extended version of the standard or graduated repayment plans designed to repay the loans within 25 years.
  • Revised Pay As You Earn (REPAYE): Borrowers make monthly payments equal to 10% of their income. Unpaid loan amounts remaining after making payments for 20 years for undergraduates and 25 years for graduate students may be forgiven.
  • Income-based repayment (IBR): Borrowers with a high debt-to-income ratio make monthly payments equal to 10–15% of their monthly income. Loan amounts after 20-25 years of making payments may be forgiven.
  • Income-contingent repayment (ICR): Borrowers make monthly payments of less than 20% of their discretionary income or the amount they would be on a repayment plan with fixed payment over 12 years, adjusted for income. Loan amounts after 25 years of making payments may be forgiven.
  • Income-sensitive repayment: Borrowers make monthly payments based on their income, with the loan to be paid off within 15 years.

Borrowers who have a hard time paying off their loans have the option of changing their payment plan. Borrowers can also enter a temporary deferment or forbearance, which pauses their monthly payments. 

It’s important to note that interest capitalizes after deferments and forbearance, meaning it becomes a part of the principal balance and accrues interest.

What Are Unsubsidized Student Loan Rates in 2020?

In addition to fees, borrowers also pay interest on direct unsubsidized loans. The interest rate someone pays depends on the year in which they borrowed the money and whether the money was for undergraduate or graduate school.

Undergraduate borrowers between July 1, 2020 and July 1, 2021 will pay an interest rate of 2.75%. Graduate or professional borrowers during the same period will pay 4.30% interest.

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 isn’t 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 letter 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 an 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 is living in college-owned or operated housing, the funds will also be applied to room and board. The student will receive a refund of the credit balance 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 website.

Conclusion

Unsubsidized loans are a type of student loan the federal government offers to help pay for college. 

Unsubsidized loans are usually more expensive in the long-run, since interest starts accruing immediately rather than waiting until after you leave school. 

But unsubsidized loans are far more accessible. 

You don’t have to demonstrate any financial need, and the federal government makes them available to graduate and professional students. Plus, you have access to all of the same flexible repayment options that come with other federal student loans.

A good place to start:

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