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What Is an Unsubsidized Loan? Definition and Explanation


You have a general idea of what it means to take out a loan, but calling a loan "unsubsidized" makes it sound a bit suspicious. What is an unsubsidized loan, and how are they different from subsidized loans? Are they good options if you're considering taking on student debt?

Here's the unsubsidized loan definition: a Direct Unsubsidized loan is one type of financial aid provided by the US federal government, or more specifically, the US Department of Education. You can also receive Direct Subsidized loans as part of your financial aid package.

In this post, I'll discuss why these loans exist, before talking in more detail about how loans usually work. With this information, you'll be able to get a full understanding of the details of Direct Unsubsidized loans and whether they may be a good option for you.


A Brief History of Federal Student Loans

In the 1950s, the US government started taking serious measures to encourage the pursuit of post-secondary education. The Department of Education started offering government-backed loans under the National Defense Education Act, or NDEA - as more people pursue college educations, these loan programs have expanded. As of 2012, almost 70% of students graduating from 4-year colleges have taken out some amount of student loans.

Because federal loans are government-backed (that is, you're essentially borrowing and repaying taxpayer money to fund your education), interest rates tend to be better than those of private loans. We'll go more into why interest rates are important in the next section.


What Does It Mean to Take Out a Loan?

The decision to take out a loan is a very personal one, but you should know there's nothing inherently bad about being in student debt. Here, I'll address the logistics of taking on student debt. I hope that with this information, you'll be able to make educated decisions about taking out loans. (If you are already familiar with this information, just jump to the next section).

The way that loans work is pretty standard, no matter where you're getting the loan from. You borrow a sum of money, or principal, from some lender - usually a bank (in the case of Direct Unsubsidized loans, the lender is the federal government). You also agree to particular loan terms, including interest rates and length of repayment. 

When you make loan payments, which usually happens on a monthly basis, you pay back a portion of the principal plus extra money: the interest, or a percentage of the principal that's accrued (accumulated). The longer you take to pay back the loan, the more interest accrues. The bigger your principal, the more interest accrues. 

You can think about interest as a charge or a fee that you pay to your lender. Interest is how lenders make money on loans. It usually starts accruing as soon as the loan is disbursed (when the money is given out, or provided to you. 

Sometimes, the interest that has accrued on your loan is added to your principle. When new interest accrues, it will be on this new, larger principle. This is called capitalization - when this happens, you start paying interest on more than your original loan amount, which means more interest

Loans can be really helpful when it comes to paying for school, but as you may have guessed, people generally don't love being in student debt. When thinking about how much student debt you can afford, it may be helpful to consider the amount of debt you plan on taking out in relation to your expected earnings post-graduation. 



The more questions you have answered about taking out student loans, the more likely you are to make a decision that's right for you. 


Direct Unsubsidized Loan Details

There are some standardized limits, restrictions, and repayment terms for all students who take out Direct Unsubsidized loans. They don't have some of the perks of Direct Subsidized loans, but they do offer more flexibility.  

First, there are limits to how much money you can take out in subsidized loans. These annual maximums depend on your year in school:  


Dependent Students

Independent Students

1st Year Undergrad Annual Limit



2nd Year Undergrad Annual Limit



3rd Year Undergrad & Beyond Annual Limit



Graduate/Professional Student Annual Limit

Not applicable


Total Loan Lifetime Max (includes subsidized loan amounts)


$57,500 for undergrads

$138,500 for grad/professional students (includes any federal loans received for undergrad study)

A few notes on these maximums:
  • The vast majority of undergraduate students are classified as dependent. You can read more about dependent/independent classifications here.
  • These loan maximums include any money you take out in Direct Subsidized loans. For example, if I take $3,500 in subsidized loans my freshman year as a dependent student, I could take out a maximum of $2,000 in unsubsidized loans that year. These maximums do not include any private loans, or loans that your parents may take out. 

Unlike Direct Subsidized loans, there's no maximum eligibility window or period for Direct Unsubsidized loans. 

Interest rates are generally pretty competitive, and are standardized (so, personal credit history doesn't affect interest rates). Rates are slightly higher for graduate/professional students than they are for undergraduates. For 2015-2016, the interest rate is 4.29% for undergraduates, 5.84% for graduate/professional students.

Finally, repayment plans (including details about the amount you owe every month, and the amount of time you have to pay back your loans) can be customized, and will depend on variables such as your principle balance and your income. Standard repayment plans set up monthly payments so that you pay off your principle + interest in 120 months, or 10 years. 


How Are Unsubsidized Loans Different From Subsidized Loans?

If you've looked into private loans to help pay for school, you probably recognize that Direct Unsubsidized loan terms are pretty good. Subsidized loans are a bit of a different animal, in that they offer certain perks that you won't find elsewhere. I'll use an example here to demonstrate the long-term financial outcomes of a subsidized vs. unsubsidized loan

Say I take out a $3,500 loan to pay for school my freshman year, at an interest rate of 4.29%. The chart below outlines different outcomes based on loan type if I don't make any payments while still in school. 




Amount Borrowed



Interest Rate



Interest Accrued During School (4 years)



Balance Owed at Graduation



Time to Payoff at $50/month (Interest accrues for both subsidized and unsubsidized loans during this period)

99 months

81 months

Total Amount Paid





Standard repayment plans for federal student loans set a timeline of 120 months until payoff, but the minimum monthly payments are $50. In this example, it would take me much less time (81 months vs. 99 months) and much less money ($4,050 vs. $4,950) to pay back a subsidized loan vs an unsubsidized loan. 


Many students have some combination of subsidized and unsubsidized loans. If you decide to take out federal student loans, you should max out your Direct Subsidized loan eligibility before taking out any Direct Unsubsidized loans


Who's Eligible for Direct Unsubsidized Loans?

If you're looking for aid to bridge the gap between what you have and what you need to pay for college, unsubsidized loans are good options if you meet all the eligibility requirements.

Eligibility requirements are not as strict for Direct Unsubsidized loans as they are for Direct Subsidized loans. They're open to both undergraduate and graduate students, and you don't need to demonstrate financial need to be eligible. 

You do, however, need to meet all federal financial aid requirements. The following charts list these requirements.

You must do all of the following:

Have a high school diploma, GED, or approved homeschool education

Be enrolled or accepted to enroll in an eligible degree/certificate program

  • You can check with your school/program’s financial aid office if you want to confirm eligibility

Be registered with Selective Service, if you are male and between 18-25 years old

Have a valid Social Security Number (unless you’re from the Marshall Islands, Federal States of Micronesia, or the Republic of Palau)

Sign statements on the FAFSA stating that (1) you’re not in default, and do not owe refund money, on a federal student loan, and (2) you’ll only use federal aid money to help pay for your education

Maintain “satisfactory” progress in school

  • If you’re concerned about your academic performance, or have questions about what is considered “satisfactory,” set up a meeting with your dean or other school administrator.


In addition to the requirements listed in the chart above, you must be able to check one of the following options:

Be a US citizen or US national

Have a green card 

Have an arrival-departure record

Have battered immigrant status

Have a T-Visa


How Do You Apply for a Direct Unsubsidized Loan?

All things considered, eligibility requirements aren't too stringent for unsubsidized loans. The next step after meeting requirements would be to actually apply for this great financial aid resource.

You can apply for all types of federal financial aid, including Direct Subsidized loans, by submitting a Free Application for Federal Student Aid, or FAFSA. The federal submission deadline to receive aid for the 2015-2016 academic year is June 30, 2016. You can find detailed instructions on submitting a FAFSA here.


What's Next?

You can get an estimate of your federal aid eligibility, including the amount you could take out in Direct Subsidized loans, by following steps listed in our Pell Grant Calculator guide.

Want more information on federal aid that you don't have to pay back? Learn more about how to get a Pell Grant, and check out our guide on Pell eligibility requirements.



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Francesca Fulciniti
About the Author

Francesca graduated magna cum laude from Harvard and scored in the 99th percentile on the SATs. She's worked with many students on SAT prep and college counseling, and loves helping students capitalize on their strengths.

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