What Is a Direct Unsubsidized Loan? [Definition, Eligibility & More]


The current trend of inflation of college tuition prices has a lot more students borrowing money in order to cover their educational expenses. Those who aren’t eligible to take a subsidized loan (which doesn’t accrue interest while you’re in school) can still apply for another kind of federal loan, known as a direct unsubsidized loan, which isn’t based on financial need. For more details about what is a direct unsubsidized loan, how much money you can borrow, and why you should consider it, keep reading.

What Is a Direct Unsubsidized Loan

A direct unsubsidized student loan is a fixed-rate, low-cost federal loan offered by the US Department of Education to help students cover their higher education costs without having to demonstrate financial need. It’s available for both graduate and undergraduate studies at four-year colleges and universities, but students who attend career, technical, or trade schools could also benefit from them.

This type of loan is not subsidized by the federal government, and the whole interest has to be paid by the borrower.

Here’s what you should know:

  • The interest of the direct unsubsidized loan accumulates continuously, meaning that it’s accrued even while you’re attending college and during the grace period.
  • After this period, the interest gets capitalized, meaning that it’s added to the total amount of your loan.
  • In turn, that amount accrues interest, and you end up owing more than you initially borrowed.

The good thing is, the interest rate is fixed for the life of the loan, so you won’t have to worry about increasing rates. In addition, even though you’re not required to, you can pay the interest even while you’re attending school. However, you’re not obliged to start paying off the loan until six months after you leave school.

DID YOU KNOW: The current interest rate of the direct unsubsidized loan for the 2021-2022 school year is set at 3.73% for undergraduate studies. On the other hand, the interest rate for graduate and professional studies is set at 5.28%.


As we already mentioned, these loans are available for both undergraduate and graduate (or professional) degree students and are not approved based on the demonstrated financial need or credit score. However, there’s still a list of eligibility requirements that the student has to meet for this type of federal student aid:

  • The student has to be a US citizen (or an eligible non-citizen)
  • They must have a high school diploma or equivalent (e.g., GED)
  • They have to be enrolled at least half-time at a school/program that leads to a degree or certificate
  • How do unsubsidized loans work is that students are required to show satisfactory academic progress
  • They mustn’t be in default on any previous federal loans

How Much You Can Borrow

The actual loan amount you can expect to receive each academic year is determined by the school you’re attending, and is subject to both annual and aggregate limits, where:

  • Annual limits – how much a student can borrow each academic year
  • Aggregate limits (also known as cumulative limits) – how much students can borrow through the loan program

What is the exact amount of a federal direct unsubsidized loan would depend on what academic year you are, and whether you’re an independent or dependent student? The amount of money you receive may be less than the annual loan limit. 

The following table will show you the annual and aggregate limits for both kinds of federal loans (subsidized and unsubsidized):

Dependent Students Independent Students
First-Year Undergraduate Annual Loan Limit $5,500, no more than $3,500 of which may be in subsidized loans $9,500, no more than $3,500 of which may be in subsidized loans
Second-Year Undergraduate Annual Loan Limit $6,500, no more than $4,500 of which may be in subsidized loans $10,500, no more than $4,500 of which may be in subsidized loans
Third-Year and Beyond Undergraduate Annual Loan Limit $7,500, no more than $5,500 of which may be in subsidized loans $12,500, no more than $5,500 of which may be in subsidized loans
Graduate or Professional Student Annual Loan Limit *all graduate and professional degree students are considered independent* $20,500 – unsubsidized only
Health Professional Student Annual Loan Limit / $40,500 – unsubsidized only
Subsidized vs Unsubsidized Loans Aggregate Limit $31,000, no more than $23,000 of which may be in subsidized loans $57,500 for undergraduates, no more than $23,000 of which may be in subsidized loans

$138,000 for graduate and professional students, no more than $65,500 of which may be in subsidized loans

DID YOU KNOW: What is a federal direct unsubsidized loan fee? It’s an amount taken from each loan disbursement, leaving you with a smaller amount of unsubsidized loan than the total borrowed. The current fee percentage on Direct loans is 1.057% (from October 1, 2021, to September 30, 2022).

Key Takeaways

The direct unsubsidized loan was invented to help students cover their educational cost without having to demonstrate financial need.
These loans are available for both undergraduate and graduate, as well as professional degree students.
The annual loan limit mainly depends on whether you’re a dependent or independent student, as well as on your academic year.
What does unsubsidized mean? It means the respective loan isn’t subsidized by the federal government, and the whole interest is paid by the borrower.

How to Apply for Direct Unsubsidized Loan

The type and amount of financial aid you’re eligible to receive is determined by your financial need, your school’s cost, the academic year, and your dependency status.

There are several steps to follow when applying for a direct unsubsidized loan:

  • The first and most important one is to fill out or renew the Free Application for Federal Student Aid, also known as FAFSA;
  • Based on your FAFSA application, your school will present you with a package of financial aid forms you’re eligible for, such as scholarships, grants, federal loans, work-study programs, etc.
  • After considering all the given options, contact your financial aid office to accept the financial aid, as well as to get answers to all questions you might have, such as: ”Do you have to pay back unsubsidized loans?”
  • Fill out the necessary paperwork, such as the Master Promissory Note.

Subsidized vs Unsubsidized Loans

Both subsidized and unsubsidized loans are federal student loans designed to help eligible students in covering their higher education expenses. Many people also refer to these student loans as Stafford Loans, or Direct Stafford Loans.

Both types of loans offer students various benefits, some of them being:

  • Flexible repayment options
  • Low-interest rates
  • The option to consolidate loans
  • Forbearance and deferment programs

However, there are some key differences between subsidized and unsubsidized loans, the main one being that only students with financial needs are eligible for subsidized loans.

But do subsidized loans have interest? What’s unique about these loans is that they don’t accrue interest while you’re in school, and the amount you need to refinance is only the amount you borrowed.

Unsubsidized loans, on the other hand, don’t require students to demonstrate financial need or present their credit score, but do accumulate interest from the time of disbursement until the loan is paid in full.

DID YOU KNOW: Managing your student loan repayment is never a simple task, as depending on your situation, the interest rate of your direct unsubsidized loan could be very high. If you have a good credit score and a stable income, you should consider student loan refinancing and benefit from the lower interest rate.

Pros and Cons of Direct Unsubsidized Loan

As is the case with all student loans, the Direct Unsubsidized Loan has both positive and negative aspects. To learn what they are, check the following list of this loan’s pros and cons:


  • Higher Loan Limits

Compared to other types of loans, this one allows students higher loan limits, so they won’t worry about financing their higher education.

  • Designed for Graduate and Undergraduate Students

What do unsubsidized loans for both graduate and undergraduate students mean is that no matter your level of higher education, you’ll still be eligible for financial means to cover your tuition expenses.

  • Financial Need Proof Not Needed

Most students have low or no credit score at all, so having a loan option that doesn’t require them to provide information about their financial situation is very convenient.

  • Repayment Plan Option

Compared to private loans, federal loans come with repayment plans based on your income, as well as with certain protection in case of default.


  • Interest

Do subsidized loans have lower interest rates? Although the interest rate for unsubsidized loans is rather low, it must be paid by the borrower, in contrast to subsidized loans, the interest of which is covered by the Federal Government.

You can choose to pay the interest while attending school or wait until after you finish your education, when it will be capitalized (added to your loan’s total amount).

  • Limited Loan Amounts

Direct unsubsidized loans come with limited loan amounts, which may be considered a disadvantage for people in need of a large sum of money.


Now that you know how to do unsubsidized loans work, you have all the information you need to decide if they’re a good education-funding option to consider. Given that they have a fixed interest rate and high loan limits while not requiring you to demonstrate financial need, this type of student loan might work better for you than some types of private loans you’ve possibly been offered.


What does direct loan unsubsidized mean?

Direct unsubsidized loans are a type of federal student aid for covering higher education expenses that’s not based on financial need. The direct unsubsidized loan is widely accessible, meaning it’s available for both undergraduate and graduate students attending a four-year college or university, as well as trade, career, or technical schools.

What is better – subsidized or unsubsidized loans?

Both loans have their benefits, so it’s all up to students’ needs and preferences. Those that aren’t eligible for subsidized loans are advised to opt for unsubsidized ones, as the interest rate is fixed, in contrast to the variable ones on private loans.

What is the difference between subsidized and unsubsidized student loans?

The difference between what is a direct unsubsidized loan vs a direct subsidized one is that the former isn’t based on student’s financial need and its interest is paid in full by them, while the latter doesn’t accrue interest while students attend school and at least half-time during deferment periods.


I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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