This article provides some valuable insights into the important characteristics of unsubsidized loans.
Loans can be broadly classified into several categories, based upon their different features, such as secured loans, unsecured loans, high interest, low interest, fixed interest, variable interest, etc. They can also be subsidized or unsubsidized. Of late, these terms have been used in context of student loans.
Features of Unsubsidized Loans
In simple words, it is a loan which is not subject to any kind of subsidy. A subsidy is basically a cost which is borne by someone else viz. the government, another company, agency, a nonprofit organization, or another individual. The cost needs to be officially borne by the third-party. In some cases, the lender himself bears the cost and provides the subsidy. The subsidy is usually provided for the interest rate i.e. the interest levied is discounted right from the start or in some cases, the amount that is borne by a third-party is later recovered from the person. This kind of loan is most common e.g. an average auto loan which is provided without any benefit.
The reason that the terms, subsidized and unsubsidized loans are being used in context of student loans is that government funding, such as Stafford and Perkins loans, is provided in both forms. The feature that differentiates both types is the way in which the interest rate is levied on the loan. Here, the interest calculation starts immediately after the loan is disbursed to the educational institute.
There is, however, one good concept that has been introduced by the government called ‘Capitalization’. It means that the interest does not become payable immediately, but only after the education of the student is completed. The accrued interest is added to the principal amount of the loan. The Stafford loan limits for such a kind of mechanism go up to USD 20,500 per year. The conventional interest rate for all Stafford federal loans is 6.8% with no payment due in the period when the student is enrolled in the educational course.
Here’s a quick summary of unsubsidized loans:
- Direct unsubsidized loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need.
- The school determines the amount the student can borrow based on cost of attendance and other financial aid received.
- The student is responsible for paying the interest on the loan during all periods.
- If the student chooses not to pay the interest while in school and during grace periods and deferment or forbearance periods, the interest will accrue (accumulate) and be capitalized (that is, the interest will be added to the principal amount of the loan).
Hopefully, this short summary has helped you understand this subject better.