Unsubsidized Loans and Subsidized Loans For Students: Which is Right For You?

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Direct unsubsidized loans are federal student loans designed to help you pay for college and offer low interest rates. It’s important to start planning your finances for college as soon as possible, as the average one year cost of attendance is at $22,432. If you or your child is attending college, unsubsidized loans can be a great way to cover the costs associated with higher education.

There will be several options available to you when it comes to paying for your school. After grants and scholarships, direct subsidized and unsubsidized loans make great options. Debt doesn’t have to be overwhelming, so become more familiar with their differences to make the right choice for you.

Unsubsidized Loans Vs. Subsidized Loans

While both unsubsidized and subsidized loans are designed to help you pay for college, they have different requirements and benefits that you should consider.

How Does a Subsidized Loan Work?

The main thing to know is that subsidized loans don’t accrue interest until after you graduate or drop below half-time enrollment. The government pays the interest as long as you are still in school. This benefit is the reason why subsidized loans require you to demonstrate that you have a financial need for them. Your school will determine financial need based on the overall expenses required at your institution and your parent’s yearly income.

Unfortunately, you cannot take out unlimited subsidized loan amounts, as there are yearly and lifetime caps, which are lower for unsubsidized loans. In addition, you cannot use unsubsidized loans to pay for graduate school.

How Does an Unsubsidized Loan Work?

Unsubsidized loans don’t require you to show need, and are a great option to bridge the gap between what you can pay and what you lack. However, interest accrues from the moment the loan amount is disbursed, and if unpaid, is added to the principal balance on a regular basis. You also have the option to pay the interest on the loan each month as it accrues to slightly reduce the total amount you pay. An unsubsidized loan may be the right choice for you if you are pursuing a graduate degree, are unable to demonstrate financial need, or need more than the subsidized loan amount available to you.

How to Apply For an Unsubsidized Loan

To get a federal loan, you must submit a FAFSA, or Free Application for Federal Student Aid. The deadline for this typically falls in the summer, and for the 2019–2020 school year it falls on June 30th. Mark this date on your calendar so you don’t miss out on vital funds for your education. Keep in mind you’ll need to renew your FAFSA each year of attendance in order to continue receiving loans.

The FAFSA requires you to first create a Your Federal Student Aid Identification number that will be used to sign into your student aid. In addition, you’ll need to provide demographic information and your parent’s income information, unless you’re determined to be an independent student. If you’re still applying to colleges, It’s important to select all the schools you’re applying to. You can choose up to ten schools at no cost.

Once you submit your FAFSA and get into a school, you’ll eventually receive a financial aid package. This may include grants or scholarships from the school. Accept these before taking out any loans. Take time to calculate exactly how much money you’ll need to attend college so you don’t incur more debt than you need to.

Interest Rates and Fees

Direct stafford loans have generally low interest rates, but with larger loans the interest can grow quickly. Be aware of how much over time you’ll be paying for your loans. The current rate for both subsidized and unsubsidized undergraduate loans is 5.05 percent. Over the last ten years, these rates have fluctuated as low as 3.4 percent and as high as 6.8 percent, so don’t plan on this rate remaining the same for every year you are in school. For graduate students, the rate is slightly higher at 6.6 percent. While these numbers seem small, they can add up over time. In addition to the interest rates, there is a fee of 1.062 percent charged for every loan taken. Paying back a $20,000 loan taken at 5.0 percent over ten years will mean you pay an additional $5,514 than the original loan amount. It’s easy to see how debt can quickly become hard to manage. That’s why it’s important to take out no more than you need.

Loan Limits

Both subsidized and unsubsidized loans set limits on how much can be borrowed, depending on your degree, year, financial need, and status as a dependent. Check out the below chart for the current loan limits for both unsubsidized and subsidized loans:

There are certain situations in which these loan limits could be increased. Most commonly, if you are a dependent student whose parent was denied a PLUS loan, you can qualify for the independent student cap. Other circumstances that affect your parent’s ability to qualify, borrow, or repay a PLUS loan may also make you eligible for higher limits. For example, if your parent is not a U.S. citizen or your parent’s only income is public assistance or disability, you may qualify for an increased loan amount.


You may not want to think about it — but eventually the loans need to be repaid. Thankfully, you have several options when it comes to when and how you repay them. After you graduate or drop below half-time enrollment, there is a six month grace period before you are required to start making payments to allow you time to find employment. Take this time to assess your finances and make a plan to pay back your loans.

Standard Repayment plans are fixed and ensure that your loans are paid off within 10 years, making them a great all-around option. If you want a plan that starts low and gets higher as you advance in your career, the Graduated Repayment Plan may be for you. Or if you want your payments to be tied more directly to how much you’re making, an Income-Based Repayment plan offers payments that are always 10 percent of your discretionary income. Your financial institution will be able to give you more specific information about the plans available to you, so be sure to do your research or talk to a financial advisor before selecting a plan.

Deferment and Forbearance

Don’t stress too much if you aren’t able to find a job immediately — you have the option to apply for a deferment or forbearance that pauses or reduces your payments. The main difference between deferment and forbearance is that during deferment, your unsubsidized loans still accrue interest while they do not under forbearance. It will be up to your financial institution which type of delay they grant. Situations that may qualify you for deferment or forbearance include:

  • Enrollment in graduate school
  • Enrollment in rehabilitation programs for a disability
  • Unemployment
  • Involvement in Peace Corps
  • Active duty military service
  • Up to 13 months after military service
  • Other reasons acceptable to your loan servicer

Loan Forgiveness

In some circumstances, your loans may be forgiven or discharged. The most common situation is with Public Service Loan Forgiveness. If you go into a career that services the public, like working for a nonprofit or teaching, you can qualify for loan forgiveness after 120 payments. In other cases, loans may be discharged due to a permanent disability, or the closure of the school where you received the loans. While this is an attractive way to deal with student loans, you should still make a realistic plan for repayment rather than hoping they will simply go away.

There are many intricacies to unsubsidized loans, and you should become as familiar with them as possible to set yourself on the right track financially. Taking out a loan may feel stressful, but as long as you make an effort to educate yourself financially, the opportunities you gain by getting a degree will be worth it.


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