Most of us simply don’t have the cash on hand to pay for college or graduate school out of our pockets. The College Board estimates it costs $48,510 on average annually to attend a private undergraduate school and $21,370 for in-state students at a public undergrad university.
That means you might need to take out student loans to fund your education, whether they’re private student loans or Federal Direct loans. Most of us need to borrow in order to pay for school.
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. However, there are also certain restrictions on Federal Direct loans.
But what are the differences in all those types of 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 make the choice that is best for you.
What Is a Federal Direct Unsubsidized Loan?
The federal government offers two kinds 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.
On a subsidized loan, the federal government (specifically, the U.S. 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.
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.
But 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.
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 typically includes Federal Direct Unsubsidized and Subsidized Loans. 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. (Historically, for-profit colleges have been limited in the amount of direct funding they can draw from the federal government.) 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.
• Both undergraduates and graduate students qualify for Federal Direct Unsubsidized Loans.
• Borrowers also 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.
• Federal Direct Unsubsidized Loans put all the responsibility for the interest on you (as opposed to subsidized loans).
• There are limits on the loan amounts, and the interest rates are set by Congress. Private loans can, sometimes, offer better interest rates and terms.
Saving Money on Your Federal Student Loans
The current interest rate for the 2018-19 school year for undergraduate subsidized and unsubsidized loans is set at 5.05%, and the interest rate for graduate or professional unsubsidized loans is set at 6.6%. Those rates will remain fixed for the life of the loan.
However, it might be possible to get a lower interest rate if you refinance your Federal Direct Loans with a private lender. One thing to know: When you refinance your student loans with a private lender, your loan is no longer a federal loan, so you lose any potential default protections or repayment options that came with the federal loan.
It is possible to consolidate your loans into a federal consolidation loan and keep it as a federal loan, but it doesn’t necessarily lower the interest rate. (The rate would simply be the weighted average of your existing rates.) A lower interest payment means you could reduce the amount of money you spend over the life of the loan.
SoFi has both variable and fixed interest rates. Depending on how much you’re paying in Federal Direct loans, refinancing could be an option worth considering.
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.