Unsubsidized Loan: Pros and Cons [Review]

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Unsubsidized Loan: Pros and Cons [Review]

With the exponential increase in the cost of education, more and more students are having to bear the burden of student loans (federal and private loans). Every other student is opting for either an unsubsidized loan or a subsidized loan to pay for college.

Today, the student loan crisis amounts to over 44.7 million people with active student loan debt. Out of those 44.7 million people, 28.7 million currently have unsubsidized student loans totaling almost $490 billion.

What is an Unsubsidized Student Loan?

An unsubsidized student loan is a federal government or organization-supported loan in which you need to pay your interest in full, yourself. It comes with a few repayment options. You can choose to not pay the interest during your studies and 6 months after graduating, but that interest is accrued in your principal amount over time. The maximum amount of loan you can borrow from the program depends on the aggregate loan limit.

People who can’t pay their tuition fees in full (but aren’t necessarily incapable of paying half of the fees) have to apply for unsubsidized student loans. This is because getting a subsidized student loan requires you to demonstrate financial need.

How Do Unsubsidized Student Loans Work?

If you can’t pay for college in full, you apply for an unsubsidized student loan to cover some, if not all, of the tuition fees for the time being. The original tuition fee is the principal loan amount, which has to pay along with interest, in small portions, every month.

However, as per your repayment plan, if you don’t pay the interest during your study period, and in the 6-month grace period that follows your graduation, that interest amount accrues into your principal loan funds. This means that the interest you now have to pay will be calculated based on the newly accrued principal amount.

This is why it’s best to pay interest from the start. Otherwise, you end up paying much more. This is also why student loan interest deduction techniques are very popular with students who have an unsubsidized student loan.

What is a Federal Direct Subsidized Loan?

A Federal Direct Subsidized Loan, otherwise known as a Stafford Subsidized Loan, is the most popular direct loan program in the US. These are government-backed loans that guarantee payment to the lender if a student defaults.

Federal Direct Subsidized Loans tend to have fixed interest rates and require no credit history or credit score to apply for. They also have lower interest rates. More importantly, the government pays your interest amount for the duration of your studies, and during your 6-month grace period and deferment periods. You can also go for student loan forgiveness programs during the loan period.

Elements of a Federal Direct Subsidized Loan

The following are the key elements of Federal Direct Subsidized Loans:

  • The subsidized loan isn’t available for graduate students.
  • There is a fixed interest rate of 4.45% for undergraduate students.
  • There is a six-month grace period after you graduate, in which the same rules apply.
  • The government pays the interest amount while you attend college, which lets the principal amount stay the same.
  • You have to provide proof of financial need. Dependent undergraduate students whose parents can afford to pay do not qualify.
  • There is a 1.069% loan origination fee, taken out of each disbursement.

A contrary option to this would be a Federal Direct Unsubsidized Loan, which is more readily available.

What is a Federal Direct Unsubsidized Loan?

A Federal Direct Unsubsidized Loan, otherwise known as a Stafford Unsubsidized Loan, works in the same way, except that it doesn’t offer additional financial assistance in the form of interest payments.

The U.S. Department of Education offers eligible students at participating schools Direct Subsidized Loans and Direct Unsubsidized Loans.

Students make interest payments in this type of loan. However, this isn’t necessary during studies or the six-month grace period following graduation. It’s important to note that if you choose to not pay the interest, it gets accrued in your principal amount, which brings the total loan cost up. Incidentally, this also increases the interest amount on the loan.

Elements of a Federal Direct Unsubsidized Loan

The key elements of a Federal Direct Unsubsidized Loan are as follows:

  • There is a fixed interest rate of 4.45% for undergraduate students and 6% for graduate students.
  • You are not required to provide proof of financial need.
  • There is a six-month grace period after you graduate, during which the same rules from your academic term apply.
  • The interest is capitalized during your studies and the six-month grace period.
  • There is a 1.069% loan origination fee taken out of each disbursement.

Unsubsidized loans act as a temporary solution to the immediate problem of high college fees. Today, most students tend to consolidate student loans with other loans to make the repayment process easier.

Also, there is a limit on the amount in subsidized and unsubsidized loans that you may be eligible to receive each academic year (annual loan limits).

Options for Unsubsidized Student Loans

The interest on your loan gets accrued over time, which is why it’s better to pay it off as soon as possible. How you pay your interest affects your loan total and your finances over the years.

To take off interest payments, try the ‘Pay-as-you-go’ option, in which you keep paying your interest amount as it shows up. Keeping up on your monthly payments ensures that you don’t end up with too much debt over time. It also helps you control and manage your finances properly.

Another option is interest capitalization, where interest payments are added to your total loan balance. Technically, you’re borrowing more, since you’re not making any payments, and the unpaid interest adds up to your total loan balance. This approach provides some short-term relief but can become a problem in the future when you have to make higher monthly payments, among various other costs.

Unsubsidized Student Loan Review

Unsubsidized student loans are generally available for all students. They don’t have many requirements either. Being government-supported means that the lenders are safe from defaulters, which is why there is no need for credit ratings.

Essentially, unsubsidized student loans act as general loans that aren’t strictly need-based, which is why they aren’t subsidized.

Pros of Unsubsidized Student Loans

Here are some of the benefits of opting for a subsidized student loan:

  • An unsubsidized loan is available for both graduate and undergraduate degree program students at all times.
  • Applicants don’t have to show any sort of proof or demonstration of financial need. Anyone can apply for the loan and receive it.
  • Compared to subsidized loans, the unsubsidized loan cap is at $31,000. This is mostly because the government doesn’t have to pay higher interest.

A lot of the students apply for a subsidized loan first, and when they receive it, apply for an unsubsidized loan to cover the rest of the tuition fee.

Cons of Unsubsidized Student Loans

Here are some of the problems with getting an unsubsidized student loan:

  • You, as a borrower, are technically taking out a general loan, which makes you liable to pay the entirety of it on your own, including all the interest payments.
  • You do have a 6-month grace period during which you don’t have to pay interest. However, that interest isn’t dissolved but is accrued in your principal amount. This is true for the interest accumulated during your studies, as well, provided you didn’t pay it at that time.
  • If you file for deferment or forbearance, you still have to pay the interest accrued during that time.

When figuring out how to pay for college, it’s best to prioritize your interest. The interest eventually appears in your monthly payments, therefore, not paying it at the will result in a greater principal loan amount. The increased principal amount will also result in higher interest payments in the future.

How to Apply for a Federal Direct Unsubsidized Loan

To apply for a Federal Direct Unsubsidized Loan, you first need to get a Free Application for Federal Student Aid form. That’s because direct loans are federal loans. In order to apply, you must be enrolled as an at least half-time student. After you fill out and submit the FAFSA form, the application will be used to determine the kind of federal direct loan you’ll receive. You can receive a Stafford Loan or a PLUS loan, among others.

However, it’s not a done deal when it comes to receiving federal student loans, seeing as they may make you ineligible for any federal student aid program. In that case, you’ll have to apply for private education loans to help pay for tuition.

If and when you receive your unsubsidized loan, it is handled by your college’s financial aid office. If you’re borrowing for the first time, you will need to go through entrance counseling, in which they will let you know the loan repayment obligations. You will also sign a terms and conditions agreement called the Master Promissory Note.

You will receive financial aid in two installments at the beginning of the semester/year. The first installment covers your basic tuition, college fees, and dorm costs. The second installment is transferred to your account or given to you as a check, which you can use to buy school supplies and books. However, you can also adjust that money into the following year’s tuition fees.

Are Unsubsidized Student Loans Worth it?

From the perspective of someone who simply cannot pay for college, subsidized student loans will be the answer.

For those who can partially pay for college or can’t pay for it at that particular time, an unsubsidized loan would be best, since in this case, they would probably be unable to demonstrate financial need.

Getting an unsubsidized loan means you don’t have to worry (immediately) about the rising cost of education (which includes tuition fees, college fees, dorm fees, costs for textbooks and supplies, etc.). It allows you to focus on your studies and build your career. There will be the issue of paying interest, which you can avoid during your studies, at the cost of a higher principal amount later on.

While you should avoid getting in debt whenever you can, with the current costs of education, taking out a loan is one of the few options that help you move forward. Getting a federal direct unsubsidized loan is one of the best options among the student loan variety.