Unsubsidized Loan: How to Apply and Pay Back Student Loans

Varvara April 04 2022

To cover the college expenses, students are offered different types of loans by the federal government. One of these types is the federal unsubsidized loan, which works so that interest starts to accumulate on the amount while a student is still in college. Be it the time when one is attending school or the grace period, the student getting the loan has to take full responsibility for the loan & interest from the very first day.

The student getting the loan can pay the interest every month. This can also be added upon the principal amount through which repayment would increase.

Subsidized vs. Unsubsidized student loans

The difference between both the types depends on the following factors:

  • Who are eligible?

Unsubsidized loans can be granted even to people who do not have a financial need, which is not the case with subsidized loans. The latter is only for financially unstable undergrad students.

  • How to qualify for eligibility criteria?

Graduate & professional students can get unsubsidized loans about different terms of interest in the agreement.

  • Terms of interest

Subsidized loans (also known as Stafford Loans) gets the borrower the privilege that the U.S. Department of Education pays the interest for the following periods:

  • during attending school
  • during the six-month grace period after finishing school
  • during deferment

So, once the borrower starts paying it back themselves, the government stops, and the repayment has to be done only for the outstanding loan amount plus the additional interest left.

What sort of loans should be repaid first?

Since the interest starts accumulating on unsubsidized loans, they should be prioritized. Thus, experts also suggest working out a payment plan after consultation with the loan servicer. Paying in installments is a better way to get rid of interests in the first place.

Applying for Unsubsidized Student Loans?

There is a particular form called FAFSA, an acronym for Free Application for Federal Student Aid. Students need to fill it out carefully to get an unsubsidized student loan. The information on FAFSA can also get you eligible for other types of loans. But only a citizen of the U.S. or a valid Social Security number holder can fill out FAFSA. There are some other formal requirements as well, which may include:

  • Registration of male students with Selective Service
  • Acceptance for enrollment as a regular student
  • At least a half-time enrollment
  • Above-average academic performance
  • Not being default on any federal financial aid
  • Having passed high school or holding an equivalent qualification

For submission of FAFSA, one needs to generate an FSA ID, username & password using one's SSN. Students who are dependent on their parents need their parents' SSN to sign the form electronically.

While filling out the FAFSA, one must have the following documents at one's disposal:

  • One's driver's license
  • Alien Registration Number (in case of a non-U.S. citizen)
  • Federal tax information of the family (spouse/parents), i.e., IRS W-2, IRS 1040, foreign tax returns
  • Untaxed income records
  • One's taxable assets like cash, savings, bank accounts, stocks, bonds, college 529, real estate, etc.

Eligibility for Receiving Unsubsidized Loans

A half-time student who attends a school that contributes to the federal direct loan program is eligible for Unsubsidized Direct Loans. These are offered to

  • Undergrad students (both independent & dependent)
  • Grad students
  • Students enrolled in professional degrees

Federal loans are to be accepted by first-time borrowers by following a two-step process:

  • Going through entrance counseling
  • Signing MPN (an acronym for Master Promissory Note)

Limits of Borrowing in Unsubsidized Direct Loans

Building on the total cost of attendance (COA) and the amount of financial aid, the amount that needs to be borrowed by a student can be evaluated and determined by the school. Besides that, the school's financial assistance office also informs the loan type and the maximum borrowing amount.

Undergrad & grad students also have aggregate loan limits depending on the academic year and dependency status.

Annual Loan Limits

Following are the annual loan limits in each academic year:

  • First-Year Undergraduate: Students have an absolute limit of $5,500-$9,500.
  • Second-Year Undergraduate: The absolute limit increases to be $6,500-$10,500.
  • Third-Year and Beyond Undergraduate: These students can get an absolute limit of $7,500-$12,500.
  • Graduate/Professional (Independent students): Students can get up to $20,500 per annum. 

Aggregate Loan Limits 

  • $8000 for dependent students (except those whose parents can't get PLUS Loans).
  • $34,500 for independent students (and dependent ones whose parents can't get PLUS Loans)
  • $73,000 for professional and grad students.

Accumulation of Interest on Student Loans

First of all, one needs to understand that if someone has a loan fee, it might affect the interest accrues. Direct loans have a daily-interest-accumulation policy, which means that one has a daily interest amount to pay failing, which might affect the outstanding principal amount. Interest rates, however, remain fixed till the time one pays the entire loan back. But they might be affected by factors like loan types, borrower, loan disbursement date, etc.

Methods to Pay Back Direct Unsubsidized Loans

An unsubsidized loan has to be paid back by the borrower starting after the six-month grace period after graduation, leaving school, or ceasing to be a half-time student. The loan servicer is bound to inform the borrower of the due date for the first payment during the grace period. Repayments are to be done monthly, but different plans are in place to facilitate the borrowers.

Why should one Borrow Federal Student Loans?

Everyone can either go for a private loan or choose a federal student loan. One must only borrow according to one's needs, be definitive on paying back and have a budget in mind. One should go for a federal student loan for the following reasons:

1. Cost less: Unlike private loans with varying interest rates, federal loans have fixed interest rates which be beneficial and may cost less.

2. Easier to repay: Unlike private loans with strict payment deadlines, federal loans are flexible and offer different repayment plans, making them comparatively easier to repay.

3. Don’t need a credit check: Private loans require a credit score check, often rendering one ineligible to apply for a loan, which is not the case in federal loans.

4. Offer more significant amounts: Direct unsubsidized loans can get professional or graduate students up to $20,500 per year, whereas undergrads can get $5,500 to $12,500 per year.