What are unsubsidized loans?

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A new semester can bring all sorts of possibilities for college students, including new class schedules, opportunities to make friends, and extracurricular involvement. And yet while these aspects are exciting, new semesters also mean something else: tuition payments. If you are unable to pay for your schooling out-of-pocket, you may seek out other options, such as student loans, to pay your bill.

For those new to the student loan process, there are many foreign concepts, such as unsubsidized loans. In short, unsubsidized loans are those given by the federal government to both undergraduate and graduate students regardless of financial aid status.

Subsidized loans, on the other hand, are given based on a student's financial need and are open exclusively to undergraduate students. Unsubsidized loans aren't as exclusive, given that they are open to all college students and don't require financial need.

One thing to be aware of, however, is that students begin accumulating interest on their unsubsidized loans immediately. Since subsidized loans are given to students who qualify for financial aid, interest doesn't accrue until after the student has graduated college. Unlike subsidized loans, unsubsidized loans accumulate interest right after you take them out, regardless of whether or not you are still in school.

When preparing to take out unsubsidized student loans for college, students should pay attention to all of the steps in applying for and paying back their direct unsubsidized loans. One great way to do this is to visit the Federal Student Aid website, which gives information about both subsidized and unsubsidized loans as well as other aspects of financial aid that students can utilize. Before taking out federal student loans, it's important to understand the process.

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Do you have to pay back unsubsidized loans?

Loans, whether subsidized or unsubsidized, must be paid back. Unlike scholarships, which are essentially free money to help pay for college, student loans are borrowed money from the federal government. They must be paid back through loan payments over time.

The longer it takes to pay student loans off, the more interest accumulates over time. In the case of unsubsidized loans, that interest begins accruing immediately. When planning to take out an unsubsidized loan, remember that while subsidized loans do not begin acquiring interest immediately, unsubsidized student loans do.

Depending on how your loan repayment plan is structured, you will likely have about a decade or two to make your loan payments. These payments begin following your graduation, after a six-month grace period. This is the case for both subsidized and unsubsidized loans.

The primary difference between the payments of the two is that the interest generated by the student loans is paid differently depending on the loan type. For a subsidized loan program, the government pays for the interest while the students are still earning their degrees. Once they graduate, however, the student will take on the loan payments and associated interest.

In the case of unsubsidized loans, loan cost rises via interest immediately after being taken out. This means that if a student with an unsubsidized loan and a student with a direct subsidized loan took out student loans at the same time that lasted for the same amount of time, the student with the unsubsidized loans would pay more in the long run.

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How does an unsubsidized loan work?

For unsubsidized loans, you do not need to demonstrate financial need in order to borrow money. At the same time, both undergraduate and graduate students are eligible for direct unsubsidized loans. Both subsidized and unsubsidized loans come from the federal government. However, with unsubsidized loans, students begin accruing interest right away.

After applying for federal student aid and other scholarships, there may still be an amount remaining. For students unable to cover those costs on their own, there are options, including private student loans as well as direct subsidized loans and direct unsubsidized loans. In the case of unsubsidized loans, as we have been discussing, students can take out the money needed to pay for their education, with fewer limits than subsidized loans, which aren't open to everyone.

Upon taking out an unsubsidized federal student loan, interest will accumulate right away after acquiring the loan. For example, if the loan was for $100,000 and the interest rate was 1% a year, the new total to pay back the loan after a year would be $101,000. Over time, interest accumulates, making payments increase if students delay paying off their federal loans.

This may sound intimidating when looking at such large scales, but not all loans are that big and many students are able to pay off their debt. Despite the type of federal loan a student chooses, the bottom line is the same: all money borrowed needs to be repaid to the government. Specific interest payments vary between different federal loans, which is why students planning to take out unsubsidized loans are encouraged to pay close attention to their interest rates.

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What is the benefit of an unsubsidized loan?

Unsubsidized loans are beneficial for a wider range of students since they aren't as specific. Direct subsidized loans are only for students who demonstrate financial need and are specifically for undergraduate students. This means that not all students in need of loans are eligible for subsidized loans.

This is where unsubsidized loans come in. For students who do not show sufficient financial need but still must take out loans to cover the cost of college, unsubsidized loans can cover those expenses. This works for graduate and professional students as well, allowing more than just undergraduate students to receive federal loans.

When determining which federal direct loan program is best for you, keep in mind that unsubsidized loans disbursed to both undergraduate and graduate students are able to provide student loans to students struggling to pay for college. If you have more questions about applying for unsubsidized loans or if these are the best type of loans for you, speak with the financial aid office at your school about the options available to you.

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Frequently asked questions about unsubsidized loans

The term "unsubsidized loan" seems long and complicated. However, while there's a lot to understand about the federal loan process, these questions can help clear up any other doubts you might have about unsubsidized loans.

How long do you have to pay back unsubsidized loans?

According to the website for Federal Student Aid, subsidized loans can be paid back over the course of 10 to 25 years. This is dependent on the type of loan you get and how much you borrow.

How much can I get in unsubsidized student loans?

This is largely dependent on each person's situation. Not everyone has the same costs for schooling, and therefore the amount students have available to use for school can vary. For undergraduate students, unsubsidized loans can be given in a range of amounts from $5,500 to $12,500. The unsubsidized loan limit for graduate students is higher, at $20,500 annually.