What Is An Unsubsidized Loan?

College student sitting on the floor in the library stacks studying

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Perhaps you are aware that differences exist between federal and private student loans, but there are different types of federal student loans as well. Before borrowing money for college—using any type of loan—it's important to understand the terms of the loan.

The differences can be especially crucial when it comes to student loans because different types of terms and varying interest rates can impact the amount of money you will be required to repay upon graduation, as well as the types of repayment plans for which you might qualify.

Defining an Unsubsidized Loan

When you apply for student loans through the FAFSA process to fund your college experience, you may receive two different types of loans: unsubsidized and subsidized. The federal government pays for the interest on a subsidized loan while you're in school at least half-time, during the loan's grace period, and during any authorized deferment period. You must have a demonstrated financial need to qualify for a subsidized loan.

Conversely, you can receive an unsubsidized loan without having to demonstrate financial need, but you are also responsible for paying all of the interest on the loan until the balance is completely paid off.

Starting the Process

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 became available online on October 1, 2017, and must be filed at the latest by June 30, 2019, to receive funding for the fall 2019 semester. The deadlines are about the same each year, so the FAFSA for the 2019-2020 academic year became available online on October 1, 2018. Upon completion of the FAFSA, you'll receive 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 take advantage of any scholarships and grants which do not have to be repaid and then use student loans which do have to be repaid or have some kind of subsidization. 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.

Key Loan Details

The following are some points to consider when borrowing money using federal student loans.


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. The interest rate for subsidized and unsubsidized undergraduate student loans for the 2018-2019 academic year is 5.05 percent.

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, 2017, and before October 1, 2018, are 1.062 percent.

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. 

You may also see a common misspelling of the term as "unsubsidised" loans