How do unsubsidized federal loans work

However, with a subsidized student loan , the government pays the interest while an eligible borrower is in school at least half-time , during the 6-month grace period after graduation and during periods of deferment. Since you will pay more in interest for an unsubsidized direct loan, you should borrow subsidized loans first. However, not all borrowers are eligible for subsidized loans, and the amount you can borrow is limited per academic year. Here are some things to consider before you take out an unsubsidized student loan.

The key differences between an unsubsidized loan and a subsidized loan are the interest, loan limit and eligibility. Unsubsidized student loans are more expensive than subsidized loans because interest starts accruing sooner on unsubsidized loans. The borrower is responsible for the interest that accrues on unsubsidized student loans during in-school and grace periods, as well as deferments and forbearances. Borrowers can choose to pay the interest as it accrues or to defer paying the interest until the student loans enter repayment.

All federal student loans have a fixed interest rate. If the borrower does not pay the interest as it accrues, the interest will capitalize and be added to the principal loan balance when the loan enters repayment. This can increase the size of the loan by as much as a tenth to a quarter. It also leads to interest compounding, since interest will be charged on the capitalized interest. The government pays the interest on them while a student is in school and during the six-month grace period after graduation.

However, subsidized loans are only available to students who demonstrate financial need, and you can use them for undergraduate studies. You can pay back your subsidized loan anytime. Still, most students begin paying their loans back after they graduate, and the loan payment is required six months after graduation, known as the "grace period" when the government continues to pay the interest due on the loans.

When your loan enters its repayment phase, your loan servicer will place you on the Standard Repayment Plan, but you can request a different payment plan at any time. Borrowers can make their loan payments online via their loan servicer's website in most cases.

Both direct subsidized and unsubsidized loans can help pay for college. Just remember that either type of loan eventually must be repaid and with interest. Department of Education: Federal Student Aid. The White House. Department of Education. Internal Revenue Service. Student Loans. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

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Types of Student Loans. What Loans Cost. Decoding Student Aid Offers. Subsidized: Interest is paid by the Education Department while you're enrolled at least half time in college. Unsubsidized: Interest begins accruing as soon as the loan is disbursed, including while students are enrolled in school. Subsidized: No payments are due in the first six months after you leave school. The Education Department will continue to pay interest during this time.

Unsubsidized: Loan payments are not due in the first six months after you leave school, but interest will continue to build. Subsidized: Interest is paid by the Education Department during deferment, which lets you temporarily pause payments. Unsubsidized: Interest continues to collect during deferment and will be added to your principal loan amount.

Taking on too much student loan debt may make repayment difficult after you graduate. Borrow federal loans first: Private student loans often carry higher interest rates and require a co-signer if a student borrower has no credit history. Both unsubsidized and subsidized federal loans also offer more borrower repayment plans and forgiveness options than private loans.

Consider private loans only if you still need to fill a payment gap to meet college costs. Compare all private loan options, including their interest rates as well as repayment and forbearance options, before you borrow.

What you need to qualify. Must demonstrate financial need. How much you can borrow. Education Department pays interest. Subsidized loans are available to undergraduate students only, and the government reserves them for students who demonstrate financial need.

The U. Department of Education offers the best terms on these loans, paying the interest while you're attending school at least half time, during the six-month grace period after leaving school, and during any loan deferment periods. Unsubsidized loans, on the other hand, can be obtained by both undergraduate and graduate students and don't require demonstration of financial need.

Interest accrues on unsubsidized loans while you are attending school, during the grace period and during deferment. If you do not pay the accrued interest before you must start paying back the loan, that interest gets added to the loan's total.

Pros and Cons of Unsubsidized Loans Unsubsidized loans have several benefits and drawbacks to consider before you take one on. The amount you can borrow with an unsubsidized student loan is determined by your school and is based on your year in school and dependency status. The following chart shows the annual and aggregate limits for unsubsidized loans as determined by the federal government. First, make sure you meet the following criteria to qualify for an unsubsidized student loan.

You must:. Yes, unsubsidized loans come with a percentage-based loan fee that's deducted proportionately from each loan disbursement you receive. The fee rate depends on when you took out the loan: If it was first paid out on or after Oct. If the loan was first disbursed on or after Oct. You'll also pay interest in exchange for the benefit of borrowing. For undergraduate unsubsidized loans, the current interest rate is 4.

These rates are for loans disbursed on or after July 1, , and before July 1, Fortunately, these interest rates are fixed and stay the same for the life of the loan.

When to Start Paying Off Unsubsidized Loans Once you graduate from school, or you drop below half-time enrollment, you'll get a six-month grace period before you're required to start repaying your unsubsidized loan. During that time, your loan servicer will provide information on repayment and will let you know when you need to begin making your payments.