Student loan terms can be complex. Have you heard of unsubsidized loans before? Probably not before you got one. It can be hard to find an unsubsidized loan definition that makes it easy to understand. Here’s our simple guide to understanding what unsubsidized student loans are.
Unsubsidized Loan Definition
An unsubsidized student loan is one in which the interest starts accruing the moment you or your school receive the loan funds. That means interest starts adding up the first day that the payment is made. The cost is then added to the principal of the loan, which is called capitalization. Capitalization can be risky because it can make your balance owed greater than the amount borrowed.
Compare this to the subsidized loan definition, which is a type of loan for undergraduate students with financial need. Subsidized loans do not accrue interest while you’re in school or during deferment periods.
Direct Unsubsidized Loan Definition
Direct unsubsidized loans are available to undergraduate, graduate, and professional students and they do not need to demonstrate financial need to qualify for the loan. PLUS, or parent loans, are also unsubsidized.
Eligibility for an Unsubsidized Loan
To receive a subsidized or unsubsidized loan, you must be enrolled at least half-time at a school that is part of the government’s Direct Loan program. The program needs to end in a degree or certificate given to you by the school. You can obtain an unsubsidized loan even if you don’t demonstrate any financial need.
How to Get an Unsubsidized Loan
First, you need to submit the FAFSA, which is The Free Application for Federal Student Aid. In this report, you’ll see how much federal aid you can receive. If there are grants or scholarships in the report, be sure to accept those first because you don’t have to pay them back. Then, take any work-study that’s offered and then the school will determine how much you can borrow on an annual basis.
If you are receiving a Direct Loan for the first time, you will also need to:
- Undergo entrance counseling, which is a tool to learn how to repay the loan
- Sign a Master Promissory Note, which means that you agree to the loan terms.
The financial aid office at your school will also have any additional steps required to obtain your loan.
When you loan is disbursed, the school applies it to tuition, fees, boarding, and any other school charges. Additional loan funds in excess of this amount will be returned to you.
Borrowing Limits on Unsubsidized Loans
For unsubsidized loans, the limits can vary, but they’re usually higher than the limits on subsidized loans. If you’re a dependent undergrad, your limit is $31,000 for the entirety of your time in school. For independent undergrads, the limits are $57,500 and $138,500 for graduate students.
|Third Year & Beyond||$5,500||$7,500||$5,500||$12,500|
|Graduate & Professional||None||$20,500||None||$20,500|
|Sub & Unsub Aggregate Limits Undergrad||$23,000||$31,000 (includes both sub and unsub)||$23,000||$57,500(includes both sub and unsub)|
For graduate students in health profession programs, they may be eligible to receive Direct Unsubsidized Loans beyond the limits written above. You can speak to the financial aid office at the school to determine your eligibility to take out more than the annual limit.
How Much to Borrow
You may be offered more than you need so assess your student loan offers carefully. You don’t need to borrow the entire amount because it could be more than you can afford to pay back. Have a frank and honest discussion with yourself and your family before you borrow money to find out how much is realistic for you to pay off after graduation. You cannot borrow more than the actual cost of attendance.
Canceling an Unsubsidized Loan
If you don’t need all or part of the loan any longer, you can cancel it by notifying your school if the loan hasn’t been disbursed yet. After it is disbursed, you only have a limited amount of time in which to cancel it. Check your promissory note for details on what you need to do to cancel your loan.
Origination Fees for Unsubsidized Loans
Other than knowing the definition of an unsubsidized loan, it’s important to learn the fees associated with these loans. Loans disbursed after October 1, 2016 and before October 1, 2017 have 1.069% in origination fees. For loans disbursed on or after October 1, 2017 and before October 1, 2018, the fee is 1.066%.
|Loan from October 1st, 2016 – October 1, 2017||1.069%|
|Loan From October 1st, 2017 – October 1st, 2018||1.066%|
Interest Rates for Unsubsidized Loans
The annual percentage rate (APR) for unsubsidized loans is 4.45% for undergraduate loans and 6% for graduate loans. These apply to all loans disbursed from July 1, 2017 through June 30, 2018.
|Loan Type||2017-18 Interest Rate||2016-17 Interest Rate||2015-16 Interest Rate|
|Direct Unsubsidized Loans (Undergraduate)||0.0445||0.0376||0.0429|
|Direct Unsubsidized Loans (Graduate)||0.0600||0.0531||0.0584|
How Interest Accrues for Unsubsidized Loans
Interest starts accruing as soon as the loan is disbursed (or paid). The entire time you’re in school, your loan amount is adding up. You have a grace period of six months after graduation to begin payments, but the interest is still accruing. If you defer your unsubsidized loans, interest collects and will be added to your principal, which increases the total amount owed.
How to Minimize the Amount Owed on Unsubsidized Loans
Repay the interest on your unsubsidized loans while you’re still in school in order to avoid owing a lot more than you borrowed. Even though it’s easy to ignore your loans while you’re in school, it’s wiser to start paying them down as soon as possible so you avoid too much capitalization. This method is also an effective way for students to get a grasp on how student loans work and avoid misunderstandings on repayments.
Federal student loans that are unsubsidized qualify for repayment plans such as standard, graduated, extended, and income-based repayments. Investigate which payment plan is for you and your financial situation.
Paying Off Unsubsidized Loans
Make your unsubsidized student loans a priority to pay off, because you want to avoid capitalization. If your loan has a fixed interest rate, you don’t have to worry about it fluctuating over time. Most federal student loans have fixed interest rates set by federal law. Remember to put any additional payments toward your principal so you can make your loan repayment terms shorter. You’ll need to contact your lender to ensure that the payments go toward principal and not the interest. There are lots of goods ways to get the loan paid off quickly, decide which will help you the most and put the plan into action.
Knowing the unsubsidized loan definition is yet another step in becoming financially knowledgeable and fully understanding your student loans. The more you know, the more capable you are of paying off your loans quickly and painlessly.
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.