What Are the Disadvantages of Unsubsidized Student Loans?

by Michael Keenan
You're responsible for interest on unsubsidized student loans, even while you're in school.

The high cost of college often makes taking out student loans a question of "How much?" rather than whether they're needed, because they usually are. When you fill out the Free Application for Federal Student Aid, or FAFSA, you may qualify for subsidized loans based on your financial need. However, you may also be offered unsubsidized loans to cover the rest of your costs. Unsubsidized loans aren't a horrible deal but they have some disadvantages.

Loan 101

Federal student loans come in two types, subsidized and unsubsidized. The advantage to subsidized loans is the government pays the interest charges while you're in school. You're also covered during the six-month grace period between the time you graduate, leave school or drop below half-time enrollment and the time you start making payments. With an unsubsidized loan you're on the hook for the interest from the day you take out the loan.

Now or Later

While you're in school you can defer interest on unsubsidized loans until you graduate or quit. While this may sound tempting, especially if you're struggling to make ends meet, the interest you don't pay doesn't disappear. It's added to the amount you owe and starts piling up more interest. For example, you borrow $10,000 in unsubsidized loans at 6.8 percent for your first year. If you don't pay the $680 in interest your loan accrues interest on $10,680 next year instead of the original $10,000.

Default Dangers

If you default on an unsubsidized federal loan, the government has more aggressive tools to get repaid than if you took out a private loan. First, it can garnish up to 15 percent of your disposable income, while private banks need a court judgment to do that. It can also take your income tax refunds for payment. Keep in mind that there's no statute of limitations for federal student loans.

Numbers Game

Like all federal loans, you're limited as to the amount of unsubsidized loans you can borrow each year and over your lifetime. That means you might need loans from private leaders if you go to an expensive school. You're limited to borrowing $31,000 in total if you're a dependent undergraduate student as of the publication date. If you're an independent undergrad you can't borrow more than $57,500 in total. Graduate student borrowing is capped at $20,500 per year and $138,500 total. Any subsidized loans you take out count against the limits.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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