Most of us simply don’t have the cash on hand to pay for college or graduate school out of our pockets. For the 2023-24 school year, the College Board estimates it costs $41,540 on average annually to attend a private non-profit four year university and $11,260 for in-state students at a public four-year school.
That means you might need to take out student loans to fund your education.To make sure you’re not in danger of defaulting on your loans or paying too much, you might want to understand some basics of student loans.
When you take out student loans, they’re either private or federal — meaning they either come from a private lender, like a bank, or are backed by the federal government.
Federal student loans are either subsidized or unsubsidized Direct Loans. There are also Federal Direct PLUS loans for parents or graduate and professional students. Interest rates for federal loans are set by Congress and stay fixed for the life of the loan. Federal student loans come with certain protections for repayment.
But what are the differences in the types of federal loans? When you’re weighing your options, you might want to understand some of the differences between a Federal Direct Unsubsidized Loan vs. a Direct Subsidized Loan vs. a private student loan, so you can evaluate all of your options.
Table of Contents
Key Points
• Federal Direct Unsubsidized Loans allow students to borrow without proving financial need, making them accessible to undergraduates, graduates, and professional degree students.
• Interest on Unsubsidized Loans begins to accrue immediately after disbursement, resulting in a higher total amount owed upon graduation compared to Subsidized Loans.
• To apply for a Federal Direct Unsubsidized Loan, students must complete the Free Application for Federal Student Aid (FAFSA), which determines eligibility for various financial aid options.
• The interest rates for these loans are fixed and set annually by Congress, with specific rates for undergraduates, graduate students, and PLUS Loans for parents.
• Advantages of Unsubsidized Loans include higher borrowing limits and income-based repayment options, while disadvantages involve responsibility for accruing interest and potential capitalization.
What Is a Federal Direct Unsubsidized Loan?
The federal government offers two umbrellas of Direct Loans: unsubsidized and subsidized. When you take out a loan, the principal amount of the loan begins to accrue interest as soon as the loan is disbursed (when the loan is paid out to you). That interest has to be paid or it is added onto the loan amount.
Subsidized Federal Student Loans
On a Federal Direct Subsidized Loan, the federal government (specifically, the US Department of Education) pays the interest while you’re in school, during the six-month grace period after you graduate, and if you temporarily defer the loans. On a Federal Direct Unsubsidized Loan, you are responsible for paying all of the interest on the loan from the moment it starts accruing.
Since the interest is paid for you while you are in school on a subsidized loan, it doesn’t accrue. So the amount you owe after the post-graduation grace period is the same as the amount you originally borrowed.
Unsubsidized Federal Student Loans
On a Federal Direct Unsubsidized Loan, the interest accumulates even while you’re in school and during the grace period — even though you aren’t required to make any payments while in school.
The interest is then capitalized, meaning it gets added to the total principal amount of your loan. That amount in turn accrues interest, and you end up owing more when you graduate than you originally borrowed.
Of course, you can make interest payments on your unsubsidized loan while you’re in school to save yourself money in the long run. However, you’re not required to start paying off the loan (principal plus interest) until six months after leaving school.
For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized Loans for undergraduates is 5.50%, the rate on Direct Unsubsidized Loans for graduate and professional students is 7.05%, and the rate on Direct PLUS Loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.
Origination fees for unsubsidized and subsidized loans is set at 1.057% for the 2023-2024 academic year.
Recommended: subsidized vs unsubsidized student loans
How Do You Apply for a Federal Direct Unsubsidized Loan?
The first step to finding out what kind of financial aid you qualify for, including Federal Direct Unsubsidized Loans and Subsidized Loans, is to fill out the Free Application for Federal Student Aid (FAFSA®).
Your school will then use your FAFSA to present you with a financial aid package, which may include Federal Direct Unsubsidized and Subsidized Loans and other forms of financial aid like scholarships, grants, or eligibility for the work-study program.
The financial aid and loans you’re eligible for is determined by your financial need, the cost of school, and things like your year in school and if you’re a dependent or not.
Who Qualifies for Federal Direct Unsubsidized Loans?
Federal Direct Subsidized Loans are awarded based on financial need. However, Federal Direct Unsubsidized Loans are not based on financial need.
To receive either type of loan, you must be enrolled in school at least half-time and enrolled at a school that participates in the Federal Direct Loan program. And while subsidized loans are only available to undergraduates, unsubsidized loans are available to undergrads, grad students, and professional degree students.
Pros and Cons of a Federal Unsubsidized Direct Loan
There are pros and cons to taking out federal unsubsidized direct loans.
Pros
• Both undergraduates and graduate students qualify for Federal Direct Unsubsidized Loans.
• Borrowers don’t have to prove financial need to receive an unsubsidized loan.
• The loan limit is higher than on subsidized loans.
• Federal Direct Loans, compared to private loans, come with income-based repayment plan options and certain protections in case of default.
Cons
• Federal Direct Unsubsidized Loans put all the responsibility for the interest on you (as opposed to subsidized loans). Interest accrues while students are in school and is then capitalized, or added to the total loan amount.
• There are limits on the loan amounts.
Recommended: Should I Refinance My Federal Loans?
The Takeaway
Federal Direct Unsubsidized Loans are available to undergraduate and graduate students and are not awarded based on financial need. Unlike subsidized loans, the government does not cover the interest that accrues while students are enrolled in school. Unsubsidized federal loans are eligible for federal benefits like income-driven repayment plans or Public Service Loan Forgiveness.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
SoFi Private Student Loans
Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.
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