What Is an Unsubsidized Loan and How Does It Work?
Navigate the specifics of unsubsidized federal student loans to understand their unique financial implications.
Student financial aid plays a significant role in enabling individuals to pursue higher education. Many students rely on various forms of financial assistance to cover college or career school costs. Loans are a common component of these aid packages, providing funds that must be repaid. Understanding the different types of student loans available is important for navigating educational finances.
Defining Unsubsidized Loans
Unsubsidized loans are a type of federal student loan available to both undergraduate and graduate students. These loans are not based on the borrower’s financial need, making them accessible to a broader range of students. Eligibility for an unsubsidized loan is determined by the cost of attendance at an institution, minus any other financial aid received.
Interest on unsubsidized loans begins accruing from the moment the loan funds are disbursed. This means interest accumulates even while the student is enrolled in school, during grace periods, or during periods of deferment. The borrower is responsible for all interest that accrues on the loan until it is paid in full.
Key Differences from Subsidized Loans
The primary distinction between unsubsidized and subsidized loans lies in how interest accrues and who is responsible for it. For subsidized loans, the federal government pays the interest while the student is enrolled in school at least half-time, during the six-month grace period after leaving school, and during approved periods of deferment. This means the loan balance for subsidized loans does not increase due to interest during these specified periods.
In contrast, with unsubsidized loans, the borrower is responsible for paying all accrued interest during all periods. Subsidized loans are exclusively available to undergraduate students who demonstrate financial need, whereas unsubsidized loans are open to both undergraduate and graduate students without a financial need requirement.
Managing Interest and Repayment
The immediate accrual of interest on unsubsidized loans has implications for borrowers. If accrued interest is not paid while the student is in school, during the grace period, or during deferment, it will be added to the principal balance of the loan. This process is known as capitalization, and it increases the total amount owed.
When interest capitalizes, future interest calculations are based on this new, higher principal balance, leading to a greater overall cost of the loan over its lifetime. Repayment of unsubsidized loans generally begins after a six-month grace period, which starts once the student graduates, leaves school, or drops below half-time enrollment. During this grace period, interest continues to accrue.
Borrowers have the option to make interest-only payments while still in school or during the grace period to prevent capitalization. Paying down the accrued interest before it is added to the principal can help reduce the total amount repaid over the life of the loan. Contacting the loan servicer can facilitate setting up such payments.