How Do Unsubsidized Loans Work?

by Matthew Schieltz ; Updated July 27, 2017

Undergraduate, graduate and professional-degree students can borrow money directly from the U.S. Department of Education under the Direct Loan Program. The two types of Direct Loans -- subsidized and unsubsidized -- differ based on who pays the interest that accrues on the loans while you're attending school. Direct Loans, whether unsubsidized or subsidized, offer flexible repayment and consolidation options after you graduate. Since this is money that must be repaid, you should be cautious to borrow no more than you need.

Financial Need

Financial aid administrators typically offer unsubsidized loans to students not based on financial need, unlike subsidized loans. Instead, your school's cost of attendance, which typically includes items such as tuition and fees, books and room and board, is deducted by the amount of federal grants and subsidized loans you're offered. Unsubsidized loans can cover the remaining amount of your school's cost of attendance. For dependent undergraduate students, the school usually offers a Direct PLUS loan to the student's parents before awarding unsubsidized loans; if the parents are ineligible or refuse to take the PLUS loan, unsubsidized loans replace it.

Interest

Interest accrues on unsubsidized loans from the time they are disbursed to your student account at the school you're attending. Interest accrues while you're in school, in periods of deferment and grace periods. If you choose not to make interest payments while you're attending college, the accrued interest gets capitalized or added onto the balance of your unsubsidized loan. For military borrowers, no interest accrues while on active duty. Unsubsidized loans, disbursed on or after July 1, 2006, have fixed interest rates of 6.8 percent.

Eligibility

To be eligible for unsubsidized loans, you first complete the FAFSA, the free application for federal student aid. In addition, you must meet the criteria for at least half-time enrollment at your school. You must also not be in default on any other federal student loans. Anytime you drop below half-time status, you're required to start repaying the loan following the six-month grace period unless you return to half-time enrollment during this period.

Loan Limits

Your dependency status, year of college enrollment and amount of subsidized loans you are awarded, if any, determines how much of the unsubsidized loans you're offered. Direct Loans have maximum annual and aggregate (total) limits. As of 2010, first-year independent undergrads can borrow up to $9,500 in Direct Loans, of which no more than $3,500 may be subsidized loans. Third- and fourth-year independent students can borrow up to $12,500 in Direct Loans. In total, you're allowed to borrow up to a maximum of $57,500 in Direct Loans to fund your undergraduate education.

About the Author

Matthew Schieltz has been a freelance web writer since August 2006, and has experience writing a variety of informational articles, how-to guides, website and e-book content for organizations such as Demand Studios. Schieltz holds a Bachelor of Arts in psychology from Wright State University in Dayton, Ohio. He plans to pursue graduate school in clinical psychology.

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