Definition and Examples of Unsubsidized Loans
An unsubsidized loan is a federal student loan in which interest is charged from the time that the loan is funded. When you apply for federal student loans through the Free Application for Federal Student Aid (FAFSA), you may receive two different types of loan options: unsubsidized and subsidized. In order to qualify for an unsubsidized loan, you do not need to demonstrate any financial need, and your school will determine the amount for which you qualify based on the cost of attendance, along with other scholarships and aid you have received.
With an unsubsidized loan, you are also responsible for paying all of the interest from the time you first receive the money until the balance is completely paid off. Any unpaid interest will be added to your total balance, which will increase the amount of ongoing interest you must pay.
How Unsubsidized Loans Work
An unsubsidized loan gets its name from the premise that the interest on the loan is not subsidized and that borrowers will pay interest on the loan from the day it's funded. These loans get their name because interest from funding until payback is subsidized by the government. Borrowers won't be charged interest until they start paying back the loan.
The first step in qualifying for any type of financial aid is completing the FAFSA. The FAFSA for the following academic year is usually available online on October 1 of the preceding year and must be filed at the latest by June 30 to receive funding for the following fall semester. Some schools may have earlier deadlines, and the earlier you apply, the better.
Upon completion of the FAFSA, you'll receive a general idea of your expected family contribution (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, then use student loans, which do have to be repaid and may 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 such as “Direct Subsidized Loan” or “Direct Unsubsidized Loan.”
Your loan offer will include information on how to accept the offer. It will likely include signing a promissory note to guarantee you'll pay back the loan. You may also have to go through entrance counseling if it's your first federal loan.
Unsubsidized Loan vs. Subsidized Loan
In contrast to unsubsidized loans, subsidized loans allow students to defer paying interest until after they have completed school. They also have more strict requirements.
|Unsubsidized Loans||Subsidized Loans|
|Available to undergraduate and graduate students||Available only to undergraduate students|
|No demonstration of financial need required||Must demonstrate financial need|
|Amount awarded based on school costs and other aid received||Amount awarded cannot exceed financial need|
|Interest must be paid beginning immediately||Interest paid by government while you are in school at least half time and for six months after you leave school or during periods of deferment|
What It Means for Student Loan Borrowers
The following are some points to consider any time you are considering taking out federal student loans.
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. If you don't pay interest on your unsubsidized loans until you graduate, your new loan balance will be much larger than it was originally. There is also a loan fee for any type of federal loan, which ranges from around 1.057% to 1.059%.
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.
One 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. That 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.
Both subsidized and unsubsidized federal student loans are eligible for various repayment plans including standard, graduated, extended, and income-based plans.
When you receive your loan offer, you do not have to borrow the entire amount that is available; 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.
- An unsubsidized loan is a federal student loan for which a student is immediately responsible for interest as it accrues.
- Any undergraduate or graduate student may apply for an unsubsidized loan using the FAFSA.
- Loan amounts are based not on financial need, but on costs of school and any other aid a student has received.
- Unsubsidized loans are different from subsidized loans, in which the government pays the student's interest until they leave school.