Definition of Unsubsidized Loans

by Marie Huntington

Stafford loans are divided into unsubsidized and subsidized loans. Each type of loan is offered through the Federal Direct Student Loan Program with the United States Department of Education. Unsubsidized loans are student loans that accrue interest during the student’s college years until graduation, and therefore the student is responsible for paying the interest.

Unsubsidized Loans

Any student can apply for an unsubsidized loan without demonstrating a financial need. Although the student is responsible for paying the interest that accumulates with this type of loan, he may qualify for a deferment during enrollment in college. However, if the student obtains a loan deferment, she is required to pay the interest that accumulates on the loan after graduation. The interest is added to the principal balance until the full balance on the unsubsidized student loan is paid. For instance, a $10,000 unsubsidized student loan for four years will accumulate interest that increases the amount the student owes at the end of the four-year college term and after graduation or withdrawal from college.

Subsidized Loans

To obtain a subsidized student loan through the Federal Direct Student Loan Program, a student must demonstrate a financial need. Therefore, a student must meet certain qualifications to obtain this type of loan. Also, the government pays the interest that accrues on this loan throughout the student’s academic terms in college. In other words, the student pays no interest during enrollment in school. The student is required to pay the interest on subsidized student loans after graduation or withdrawal from college.

Distinction

The major difference between an unsubsidized loan and a subsidized loan is the student’s obligation to pay the interest. Also, the required conditions to qualify for an unsubsidized loan are less stringent than the conditions to qualify for a subsidized loan. Moreover, limits are placed on the amount a student can obtain each year with a subsidized loan.

Benefits of Unsubsidized Loans

Although the student is responsible for paying the interest on unsubsidized loans during enrollment in school, the student may have an opportunity to qualify for a higher loan amount each year than with subsidized loans. Even if a student obtains a subsidized student loan, the student may apply for an unsubsidized loan.

Warning

Some students opt to pay the interest on unsubsidized student loans during enrollment in school to avoid having to pay for the accumulation of interest on the loan after graduation.

About the Author

Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.