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What Is an Unsubsidized Loan for College?

Most student loans are unsubsidized for students and parents, meaning that it’s up to you to cover the cost of accruing interest.

Written by Ben Luthi / September 9, 2022

  • If a loan is unsubsidized, it means that the federal government is not paying interest that accrues while a student is in school, or the loans are in deferment for other reasons.
  • Most federal and all private student loans are unsubsidized.
  • Undergraduate college students may qualify for subsidized loans if they exhibit financial need.

College students have a unique opportunity to borrow money at a relatively low cost with few or no credit requirements to pay for school. When it comes to interest, federal student loans can come in two forms: unsubsidized and subsidized. 

With an unsubsidized loan, you’re responsible for the interest that accrues while you’re in school and during future periods of deferment. You don't necessarily need to pay it as it accrues, but if you don't, a federal loan servicer capitalizes the interest when repayment begins, enlarging your outstanding balance.[1]

Most federal student loans are unsubsidized loans, and while the term isn't used to describe private student loans, those are all technically unsubsidized as well. Federal unsubsidized loans are the only option for graduate and professional students and also for parents. In contrast, undergraduate students may have access to both unsubsidized and subsidized loans.[1] More on subsidized loans in a bit.

Inside this article

  1. Federal direct unsubsidized
  2. Types of unsubsidized loans
  3. Unsubsidized vs. subsidized
  4. Frequently asked questions

How does a federal direct unsubsidized loan work?

Whether you're an undergraduate, graduate or professional student or a parent borrowing on behalf of your child attending college, unsubsidized loans work the same. 

Once the U.S. Department of Education has disbursed your loan, interest will start accruing based on your loan's balance and interest rate.[2] While you’re not required to make payments during at least half-time enrollment—parents can request deferred payment on Parent PLUS loans—the interest continues to pile up.[1, 3] At that point, the loan servicer will take all of the accrued interest and add it to your loan balance, resulting in a higher loan balance and monthly payment.[3]

You might choose to make voluntary interest-only, partial or full payments while enrolled to avoid having the accrued interest capitalized—but first consider whether there’s room in your budget.[3, 4]

Types of unsubsidized student loans

There are three types of unsubsidized federal student loans that college students and parents can qualify for:

  • Direct unsubsidized undergraduate loans: Students can borrow up to $12,500 each year, depending on their dependency status and year in school. The limit may also depend on whether or not you also receive subsidized loans.[1]

  • Direct unsubsidized graduate and professional loans: Students can borrow up to $20,500 each year.[1]

  • Direct PLUS loans: Graduate and professional students as well as parents can borrow up to the cost of attendance for school minus any other financial aid received.[3-4]

Unsubsidized vs. subsidized student loans: What's the difference?

Unsubsidized student loans function similarly to most other federal and private loans in that any interest that accrues is the responsibility of the borrower.

With a subsidized loan, interest still accrues on your loans while you're in school and during future deferment periods. But the federal government pays it as it accrues, so you don't have to.[1] 

Subsidized federal loans are available only to undergraduate students with financial need, which is determined by your Free Application for Federal Student Aid (FAFSA) and the school. 

"Completing the FAFSA shows future students the aid and loans they are eligible for based on the school they are attending, their estimated family contribution and other financial factors," says Aaron Smith, co-founder of Savi, which helps borrowers manage and pay off student loan debt.

Students may receive up to $5,500 in subsidized loans annually, depending on their financial need and year in school.[1]

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Frequently asked questions

Which is better to accept, subsidized or unsubsidized loans?

If you're an undergraduate student and you qualify for both subsidized and unsubsidized student loans, start with subsidized loans to limit your borrowing costs over time. If you still need funds to cover your education costs, use unsubsidized loans to bridge the gap.

Is it a good idea to get an unsubsidized loan?
When do students pay back unsubsidized loans?
Article Sources
  1. "Subsidized and Unsubsidized Loans," Federal Student Aid (FSA), https://studentaid.gov/understand-aid/types/loans/subsidized-unsubsidized.
  2. "Federal Interest Rates and Fees," FSA, https://studentaid.gov/understand-aid/types/loans/interest-rates.
  3. "Parent Plus Loans," FSA, https://studentaid.gov/understand-aid/types/loans/plus/parent.
  4. "Grad PLUS loans," FSA, https://studentaid.gov/understand-aid/types/loans/plus/grad#when-do-i-begin-repaying-my-loan.
  5. "Federal Versus Private Loans," FSA, https://studentaid.gov/understand-aid/types/loans/federal-vs-private.

About the Authors

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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