Student loan terms can be complex. Have you heard of unsubsidized loans before? Probably not before you got one. It can be hard to find an unsubsidized loan definition that makes it easy to understand. Here’s our simple guide to understanding what unsubsidized student loans are.
Unsubsidized Loan Definition
An unsubsidized student loan is one in which the interest starts accruing the moment you or your school receive the loan funds. That means interest starts adding up the first day that the payment is made. The cost is then added to the principal of the loan, which is called capitalization. Capitalization can be risky because it can make your balance owed greater than the amount borrowed.
Compare this to the subsidized loan definition, which is a type of loan for undergraduate students with financial need. Subsidized loans do not accrue interest while you’re in school or during deferment periods.
Direct Unsubsidized Loan Definition
Direct unsubsidized loans are available to undergraduate, graduate, and professional students and they do not need to demonstrate financial need to qualify for the loan. PLUS, or parent loans, are also unsubsidized.
Eligibility for an Unsubsidized Loan
To receive a subsidized or unsubsidized loan, you must be enrolled at least half-time at a school that is part of the government’s Direct Loan program. The program needs to end in a degree or certificate given to you by the school. You can obtain an unsubsidized loan even if you don’t demonstrate any financial need.
How to Get an Unsubsidized Loan
First, you need to submit the FAFSA, which is The Free Application for Federal Student Aid. In this report, you’ll see how much federal aid you can receive. If there are grants or scholarships in the report, be sure to accept those first because you don’t have to pay them back. Then, take any work-study that’s offered and then the school will determine how much you can borrow on an annual basis.
If you are receiving a Direct Loan for the first time, you will also need to:
- Undergo entrance counseling, which is a tool to learn how to repay the loan
- Sign a Master Promissory Note, which means that you agree to the loan terms.
The financial aid office at your school will also have any additional steps required to obtain your loan.
When you loan is disbursed, the school applies it to tuition, fees, boarding, and any other school charges. Additional loan funds in excess of this amount will be returned to you.
Borrowing Limits on Unsubsidized Loans
For unsubsidized loans, the limits can vary, but they’re usually higher than the limits on subsidized loans. If you’re a dependent undergrad, your limit is $31,000 for the entirety of your time in school. For independent undergrads, the limits are $57,500 and $138,500 for graduate students.
| Subsidized(dependant) | Unsubidized(dependant) | Subsidized(independant) | Unsubidized(independant) | |
|---|---|---|---|---|
| First Year | $3,500 | $5,500 | $3,500 | $9,500 |
| Second Year | $4,500 | $6,500 | $4,500 | $10,500 |
| Third Year & Beyond | $5,500 | $7,500 | $5,500 | $12,500 |
| Graduate & Professional | None | $20,500 | None | $20,500 |
| Sub & Unsub Aggregate Limits Undergrad | $23,000 | $31,000 (includes both sub and unsub) | $23,000 | $57,500(includes both sub and unsub) |
For graduate students in health profession programs, they may be eligible to receive Direct Unsubsidized Loans beyond the limits written above. You can speak to the financial aid office at the school to determine your eligibility to take out more than the annual limit.
How Much to Borrow
You may be offered more than you need so assess your student loan offers carefully. You don’t need to borrow the entire amount because it could be more than you can afford to pay back. Have a frank and honest discussion with yourself and your family before you borrow money to find out how much is realistic for you to pay off after graduation. You cannot borrow more than the actual cost of attendance.
Canceling an Unsubsidized Loan
If you don’t need all or part of the loan any longer, you can cancel it by notifying your school if the loan hasn’t been disbursed yet. After it is disbursed, you only have a limited amount of time in which to cancel it. Check your promissory note for details on what you need to do to cancel your loan.
Origination Fees for Unsubsidized Loans
Other than knowing the definition of an unsubsidized loan, it’s important to learn the fees associated with these loans. Loans disbursed after October 1, 2016 and before October 1, 2017 have 1.069% in origination fees. For loans disbursed on or after October 1, 2017 and before October 1, 2018, the fee is 1.066%.
| Loan from October 1st, 2016 – October 1, 2017 | 1.069% |
|---|---|
| Loan From October 1st, 2017 – October 1st, 2018 | 1.066% |
Interest Rates for Unsubsidized Loans
The annual percentage rate (APR) for unsubsidized loans is 4.45% for undergraduate loans and 6% for graduate loans. These apply to all loans disbursed from July 1, 2017 through June 30, 2018.
| Loan Type | 2017-18 Interest Rate | 2016-17 Interest Rate | 2015-16 Interest Rate |
|---|---|---|---|
| Direct Unsubsidized Loans (Undergraduate) | 0.0445 | 0.0376 | 0.0429 |
| Direct Unsubsidized Loans (Graduate) | 0.0600 | 0.0531 | 0.0584 |
How Interest Accrues for Unsubsidized Loans
Interest starts accruing as soon as the loan is disbursed (or paid). The entire time you’re in school, your loan amount is adding up. You have a grace period of six months after graduation to begin payments, but the interest is still accruing. If you defer your unsubsidized loans, interest collects and will be added to your principal, which increases the total amount owed.
How to Minimize the Amount Owed on Unsubsidized Loans
Repay the interest on your unsubsidized loans while you’re still in school in order to avoid owing a lot more than you borrowed. Even though it’s easy to ignore your loans while you’re in school, it’s wiser to start paying them down as soon as possible so you avoid too much capitalization. This method is also an effective way for students to get a grasp on how student loans work and avoid misunderstandings on repayments.
Federal student loans that are unsubsidized qualify for repayment plans such as standard, graduated, extended, and income-based repayments. Investigate which payment plan is for you and your financial situation.
Paying Off Unsubsidized Loans
Make your unsubsidized student loans a priority to pay off, because you want to avoid capitalization. If your loan has a fixed interest rate, you don’t have to worry about it fluctuating over time. Most federal student loans have fixed interest rates set by federal law. Remember to put any additional payments toward your principal so you can make your loan repayment terms shorter. You’ll need to contact your lender to ensure that the payments go toward principal and not the interest. There are lots of goods ways to get the loan paid off quickly, decide which will help you the most and put the plan into action.
Knowing the unsubsidized loan definition is yet another step in becoming financially knowledgeable and fully understanding your student loans. The more you know, the more capable you are of paying off your loans quickly and painlessly.
