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 $39,400 on average annually to attend a private non-profit four year university and $10,950 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 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 evaluate all of your options.
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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 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.
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
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.
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 5.50% for the 2023-2024 academic year.
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 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.
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 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.
After graduating, some students may consider refinancing student loans to secure a lower interest rate. One thing to know: When you refinance your student loans with a private lender, the 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.
Another option to consider is taking out a private student loan with SoFi. SoFi has options for both undergraduate and graduate student loans with an easy application, no fees, and flexible repayment options.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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