Unsubsidized Loan: Is it the Right Student Loan for you?

An Unsubsidized loan or Federal Direct Unsubsidized Loan are frequent terms used when it comes time to think of options to pay for your college degree. As mentioned in previous posts, it gets quite confusion. Again, I cannot begin to tell you the amount of times that I have been in situations where the Pell Grant, Financial Aid, and Student Loans have all been confused by potential students and viewed as practically the same thing.

Let’s think about it like this. You have exhausted the potential to receive College Grants, and now need to explore the option of taking out student loans. You are unsure as to which options are the best or that there are even different types.

There will be some mention of the different types here however, I want to focus on the Unsubsidized Student Loans.

Let’s digest this together as there’s going to be some important aspects to take in.

What are Unsubsidized Loans?

What is an unsubsidized loan? Not to be confused with Subsidized Loans (which will be covered on the next post). This is what you need to know about Unsubsidized Student Loans:

  • They are for both undergraduate and graduate students
  • Eligibility is not based on financial need
  • The school determines the amount of the loan based on Cost of Attendance.
  • YOU are responsible for the interest even while attending school.
  • Unpaid interest is added to the principle.
  • Currently the interest is at 4.53% (2019-2020 aid year).

Subsidized Loan vs Unsubsidized Loan Which is Better?

A subsidized loan vs unsubsidized loan which is better? I’ve never been a fan of that question to be honest with you. Why you ask? Well for starters if we are thinking “big picture” here then neither of the, are ideal. Sure there are some benefits to one over another however, in some students situation, they need both of these loans to pay for their college.

Nevertheless, there are differences and the table below highlights just what those differences are.

Why Unsubsidized Student Loans?

Based on the above graphic, then why would you borrow the unsubsidized student loan? Very simple, it’s because you may have to in order to pay for college. In some students situations (and I’ve seen this before), they need the unsubsidized portion otherwise they would never have enough funding. We’ve seen the limits with grants and not all students start off with a clean slate. Some have borrowed before and chipped away that their allotted amounts. The may not have a choice with regards to the unsubsidized student loan.

 Unsubsidized Loan Eligibility

To receive either one of the loans, you must adhere to the following:

  • Be enrolled at least half-time at a participating school (at least 6 credits)
  • Must be enrolled in a program that leads to a degree or certificate
  • Show financial need

How do you apply for the Unsubsidized Loan?

To apply for the Unsubsidized (or subsidized) loan, you must complete our good friend known as the Free Application for Federal Student Aid (FAFSA) form.  The completion of the FAFSA will determine you need and eligibility for the loan. Once you complete the FAFSA form then your school can break down your semesters for you.

How much can you borrow?

Like with any loan, it’s super important to know what you can borrow. The amount you can receive is going to be based on if the FAFSA determines if you are a dependent student or an independent student. And depending on how you are coined, then there are limits to each of those.

Dependent and Independent Student Loan Limits

Dependent Students – are defined as undergraduate student sunder the age of 24 as of December 31st of the award year. (Unless you are married, have dependents (kids), are an orphan, or are a veteran or active military member.

Independent Students – are those students over the age of 24.

So what does this mean for the amount of money you can borrow? The chat below highlights all the amounts each is able to obtain based on their year (first, second, and third and beyond).

Aggregate Student Loans Limits

In my opinion, this is one of the most important details to remember about student loans. If the total loan amount you receive over the course of your education reaches its aggregate limit, then you are unable to receive additional loans.

Now you can repay some of your loans to bring your outstanding loan debt down and then borrow again. However, I really haven’t seen anyone do this often in my professional career.

It’s vital to know these limits and be aware of them when you meet with your financial advisor at your school.

Subsidized and Unsubsidized Aggregate Loan Limit

Dependent Students: $31,000—No more than $23,000 of this amount may be in subsidized loans.

Independent Students: $57,500 for undergraduates—No more than $23,000 of this amount may be in subsidized loans.

I’m just talking about the undergraduate loans now as Graduate loans are a whole other ballgame.

For graduate students (they are considered independent), they can receive up to $138,500. No more than $65,000 of this may be in subsidized loans. These limits include all federal loans received for your undergraduate degree.

To put things in perspective, the annual cost of tuition at Columbia University in New York is $53,430 a year (just tuition alone) and on average for a four year institution hovers around $23,890.

For Dependent students if your aggregate limit is $31,000 and then how are you supposed to make a dent in the cost of a four year degree? Well that is why we are here to talk about this…to let it be known it’s a problem and think of ways beyond ways to someone alleviate this for people. You can also see why there is a crisis in student loan debt land.

Professional Advice on Unsubsidized Loans

In my professional career, this is something that often is confused. Financial Aid to some means help which then can potentially mean it’s something you don’t have to pay back. This is where financial education and borrowing responsibility comes into play.

I personally don’t feel this should be under that umbrella as “aid” however it is what it is Unsubsidized Loans are student college loans via the government.

I say these examples in an attempted to educate those. I’ve seen too many times where students are unaware and the surprise due to lack of knowledge or lack of the school educating them properly hinders their future and I personally hate to see that.

Unsubsidized Loan Interest Rate

Another import number to remember is the interest rate for unsubsidized loans. Most federal student loans have loan fees that are a percentage of the total loan amount. The loan fee is deducted proportionately from each loan disbursement you receive while enrolled in school. This means the money you receive will be less than the amount you actually borrow. You’re responsible for repaying the entire amount you borrowed and not just the amount you received.

Below are the interest rates:

  • Direct Subsidized and Direct Unsubsidized Loans for undergraduate students – 4.53% (these are for loans disbursed on or before 7/1/19 and before 7/1/20
  • Directed Unsubsidized Loans for graduate students – 6.08%

How is the Interest Calculated?

There is a daily interest formula as to how the interest accrues on your loans between your monthly payments. The formula consists of the multiplication of your loan balance by the number of days since your lay payment and then multiplying that result by the interest rate factor (I know).  

The interest rate factor is what is used to calculate the amount of interest that accrues on your borrowed loan.

So here’s the best way to put it:

Interest Amount – (Outstanding Principle Balance X Interest Rate Factor) X the Number of Days since Last Payment.

Other Loan Fees

Other than the interest are there other fees associated with the Unsubsidized Loan (and Subsidized)? Why yes there are!!! The loan fee is a percentage of the loan amount and regularly subtracted from each of the loan disbursements. This percentage now will vary depending on when the loan with first disbursed. See below:

  • On or after October 1st, 2018 and before October 1st, 2019 – 1.062%
  • On or after October 1st, 2019 and before October 1st, 2020 – 1.059%

How is Unsubsidized Student Loan Received?

Okay so you need to opt to borrow the unsubsidized student loan but how is it received? Does it get sent to the student or does the school handle it? If your financial aid package includes federal student loans, you school will contact you and inform you how to accept the loan.

For those whose first time it is borrowing these loans, two things will need to be completed:

  1. Entrance Counseling – This is to help those thoroughly understand the obligation to repay the loan.
  2. Mastery Promissory Note – This is where you agree to the terms of the loan.

The school then will apply your fund to your school account which will pay for tuition, fees, room and board, and any additional school charges. If any additional funds remain (known as excess funding), they will be returned to you (or kept on account depending on account settings). Those funds must be used for educational expenses.

Excess Funding Caution

Some may be thinking additional funds….yay! You’re going to school and hitting the books hard. Sometimes you don’t even know what day it is. Then you check your account (or the mailbox) and you see you got a nice sized check. Naturally the immediate thought is what can this be spent on? (Remember educational expenses only). New laptop, tablet, etc…

Keep in mind that excess funding from your borrowed loans still needs to be paid back. The failure to be meticulous with where your funding is coming from can lead to a big surprise knowing that the money you have received in excess will need to be paid back. I’m seen this one too many times where students (and parents) assume that it’s “free money.” Federal Grants are “free money” not federal loans.

For those students who are aware of where their funding is coming from you have some options. You can leave that money on account and have it satisfy terms where you may be short or you can even put it in another account and then pay as you fall short. Its little strategies like this that go a long way and more importantly do not cause a setback in your studies.

When Do You Need To Pay Back Loan Your Student Loans?

A student will need to pay back the loans that have borrowed after:

  • Graduation
  • Leave school
  • Drop below half-time status (less than 6 credits)

There is a six-month grace period before you are required to start making payments. During that time period, the loan serviced will contact you and provide options that are available with notification of first payment date (which are normally monthly).

Types of Student Loan Repayment Plans

Commonly, you will have 10-25 years to repay your loan. The way to find out the options is to contact your loan servicer. Your loans servicer is assigned to you by the U.S. Department of Education. Much like a mortgage on a house, the servicer can change at any time.

If you want to get a look at what your loan repayment plan may look like, you can check out a Repayment Estimator here. Repayment Estimator.

Loan servicers typically offer the following types of repayment plans:

  • Standard repayment plan
  • Graduated repayment plan
  • Extended repayment plan
  • Pay as your earn
  • Income-based repayment
  • Income-contingent
  • Income-sensitive

All these plans will be discussed in more detail in future posts.

Loan Cancellation and Forgiveness

Federal student loan cancellation or forgiveness means that you are no longer required to repay a portion or all of your loan. You can contact your loan servicer to see if you qualify for loan cancellation or forgiveness. An application would then be submitted and reviewed for an approval or denial.

If approved, you are then no longer required to make payments on your loan. If only approved for a portion of the loan then you are responsible for repaying the balance. If denied, then you will remain responsible for repaying your loan according to the terms of the promissory note that you signed.

Student Loan Information Data

If you ever want to check and retrieve the status of your student loan you can visit the National Student Loan Data System (NSLDS). It’s the U.S. Department of Education’s database for student aid. The system receives data from schools and you can view your loan, grants, any over-payments, and loan status.

Final Thoughts

The common thread you are going to hear me say and reinforce is the importance of knowing what you are getting into. Taking out unsubsidized loans is a big responsibility. If the details are not paid attention to then it can really present some headaches in the future. Although not ideal to borrow, sometimes it must occur. If it does, then I encourage everyone to know the ins and outs and be proactive with every penny you borrow.

Tuition Drop Podcast

You can check out our episode of the Tuition Drop Podcast on Unsubsidized Loans below.

Tuition Drop Podcast – Unsubsidized Loans
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