Thinking about taking out a student loan to help cover the cost of college? If yes, you might want to consider federal student loans.
There are two main types of federal loans offered to students by the Department of Education: subsidized and unsubsidized loans.
Both the types of federal student loans are eligible for benefits such as Income-Driven Repayment and federal forbearance and deferment. Both of these programs also qualify for federal forgiveness programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness.
However, even though the two types of federal student loans bear quite a few similarities, they also have a few key differences between them which we shall explore below.
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What is an Unsubsidized Student Loan?
An unsubsidized loan is a federal student loan that is available to all students who are enrolled full-time and half-time in an eligible school. These loans are accessible to a large number of students unlike subsidized loans, making it the main difference between the two.
Unsubsidized loans do not require students to demonstrate financial need in order to qualify like subsidized loans do. Moreover, direct unsubsidized loans are the only type of Direct Stafford loans that you can use to help cover the cost of a graduate or professional degree.
However, where accessibility is one big benefit when it comes to unsubsidized loans, they also have a few disadvantages. One of the biggest being students having to pay the interest that accrues on them during all periods. But with subsidized loans, the government covers your interest charges while you are still in school and during your grace period of six months.
Now that we know the unsubsidized loan meaning, let’s look at what the unsubsidized loan interest rate looks like.
Interest Rates and Fees for an Unsubsidized Loan
The interest rates for unsubsidized and subsidized loans are the same for undergraduate students, which is 4.53%. However, the interest rate for graduate students is 6.08%.
All students are required to pay a 1.059% loan fee every time they take out a new unsubsidized student loan. This loan fee is deducted from your loan disbursement. This means the total amount borrowed will be higher than the actual money that is received during school.
How Much Can You Borrow in Unsubsidized Loans?
Another advantage of an unsubsidized student loan is that they have higher annual and aggregate loan limits compared to a subsidized loan.
For example, first year independent students cannot borrow more than $3,500 in subsidized loans. However, with unsubsidized loans, independent students are permitted to borrow up to $9,500. The school is what mainly determines how much you can borrow in unsubsidized students loans. This is done by comparing their cost of attendance to any additional financial aid that you may have the option of getting.
The reached aggregate student loan limit for dependent students is $31,000 and $57,500 for independent under-graduates whereas $138,500 for independent graduate or professional students.
When is Repayment on Unsubsidized Loans?
If you are still enrolled at school, whether it is full-time or half-term, just like subsidized loans, unsubsidized loans do not require you to make payments. You will also have an additional six month grace period before you are required to begin repayment after you leave school.
However, you should be clear that the interest on unsubsidized loan will continue to accrue even if there is a period of non-payment. If you fail to pay these interest charges, they will be added to your principal once repayment begins. This is also known as capitalization.
In order to avoid this, you could opt to pay the interest only while you are still in school. If this seems like a good option, talk to your loan servicer about how you can set up interest-only payments while you are still in school.
How do you Apply for Unsubsidized Loans?
There is no specific application you can fill out for a direct unsubsidized loan. Instead, the school that you are planning on attending will typically include them in their financial aid package. To qualify for a direct unsubsidized loan in your financial aid package, you will be required to fill out the Free Application for Federal Student Aid (FAFSA) form which, when submitted, will help your school decide how much student aid you should receive.
Before you apply, you can decide if it would be the best option for you using an unsubsidized loan calculator.
Direct Unsubsidized Loan Eligibility Criteria
To take out a direct unsubsidized loan, your family’s financial circumstances are not taken into consideration. You can choose to take out the loan even if you are from a wealthy family.
However, there are certain requirements that have to be met in order to take out a direct unsubsidized loan, which are:
- You have to be a U.S. citizen, national or eligible non-citizen.
- You should have received a high school diploma or an equivalent of a high school diploma.
- You should be enrolled at least half time in an eligible certificate program or degree.
- You should not have defaulted on any pre-existing federal student loans.
- You should meet the general eligibility requirements for federal student aid.
What you are not required to have is a:
- Credit check.
- Separate loan application.
Federal direct unsubsidized loans, or even subsidized for that matter, are the first loan types you should consider if you need a student loan to pay for school. They are the lowest-cost student loan option with generous repayment options if you end up qualifying.
So to answer the question, “what is an unsubsidized student loan?”, it is a cost effective way for undergraduate, graduate or professional students who are in school, regardless of the fact that they are half-time or full-time students.
However, if you need to fill a payment gap to meet college costs, you should consider private loans and compare all private loan options including the interest rates as well as repayment options before you decide to borrow.