What Is An Unsubsidized Loan?

Unsubsidized Loan: Definition (Student Loan)

College students at campus
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Perhaps you are aware that there are differences between federal and private student loans, but did you know that there are different kinds of federal student loans as well? Before you borrow money using any type of loan it is important to understand the terms of the loan, but the differences can be crucial when it comes to student loans. Different types of terms and different interest rates can impact the amount of money your student will be required to repay upon graduation, as well as the types of repayment plans for which they might qualify.

The first step in qualifying for any type of financial aid is completing the FAFSA or Free Application for Federal Student Aid. The FAFSA for the 2018-19 academic year will be online beginning October 1, 2017. Upon completion, you will be provided with a general idea of your Expected Family Contribution, or EFC. Your FAFSA information is then sent to your selected colleges, which each provide an individual financial aid award package. Students should first turn to scholarships and grants which do not have to be repaid and then to student loans which do have to be repaid.

Your financial aid award letter will list your eligibility for certain types of federal student loans. You might see wording like “Direct Subsidized Loan” or “Direct Unsubsidized Loan.”

Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. Because they are designed to help students with financial need, subsidized loans have slightly better terms and conditions. Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but in this case, the student does not have to demonstrate financial need to be eligible for the loan.

PLUS, or parent loans, are also unsubsidized. Here are some points you will want to consider when borrowing money using federal student loans:

  • Interest: The U.S. Department of Education pays the interest on a Direct Subsidized Loan while the student is in school at least half-time, for the first six months after leaving school, and during a period of deferment. Students are responsible for paying the interest on a Direct Unsubsidized Loan during all periods. They may choose not to pay the interest while they are in school, during grace periods, or in deferment, but the interest will accrue and be added to the principal amount of the loan. Whether interest is subsidized or unsubsidized makes a significant difference in the amount of money owed upon graduation, even when borrowing the same amounts of money. Interest rates for subsidized and unsubsidized undergraduate student loans first disbursed on or after 7/1/16 and before 7/1/17 are 3.76%.
  • The amount available: For most dependent undergraduate students, the aggregate loan limit is $31,000, of which no more than $23,000 may be in subsidized loans. For independent undergraduate students, and those whose parents do not qualify for PLUS loans, the aggregate loan limit is $57,500, of which no more than $23,000 may be in subsidized loans. Loan fees for subsidized and unsubsidized loans borrowed on or after October 1, 2016, and before October 1, 2017, are 1.069%.
  • Repaying interest: A popular technique of students and parents looking to eliminate the "sticker shock" of an unsubsidized loan is to attempt to pay off the interest as it is added throughout the college years. This will help students get in the habit of making their student loan payments. Students can start to see how interest accumulates, how their payments are applied, and what payment plan might be right for them after graduation.
    • Repaying principal: Both subsidized and unsubsidized federal student loans are eligible for various repayment plans including standard, graduated, extended and income-based.

    Your school will tell you how to accept any student loans offered. You do not have to borrow the entire amount that is available, so borrow only what you need. Families should hold pointed conversations about budgeting, learn everything they can about student loans before borrowing, and understand how student loan repayment will affect their future financial lives. Use a student loan repayment calculator to estimate payments after graduation. 

    Common Misspellings: unsubsidised loans