What are the Pros and Cons of an Unsubsidized Loan?

Jessica Ellis
Jessica Ellis

An unsubsidized loan is one in which the borrower is responsible for paying back the principal loan plus any interest accrued. Though most regular loans, such as home, auto, and private loans, are unsubsidized by nature, student loans from a government may be available in both subsidized and unsubsidized forms. Understanding the pros and cons of an unsubsidized loan can help a student decide whether to accept this type of loan from the government.

With an unsubsidized student loan, interest begins to accrue when the money is disbursed.
With an unsubsidized student loan, interest begins to accrue when the money is disbursed.

One of the biggest reasons to accept an unsubsidized loan is a high lending limit. Subsidized loans are usually have much lower limits, and may not provide enough funding to cover expenses. In order to ensure that tuition, books and other required expenses are covered, an unsubsidized loan may be the best bet.

In addition to high limits, unsubsidized student loans usually have a lower rate of interest than subsidized loans. While a subsidized loan provides the benefit of not accruing interest while the student is in school, an unsubsidized loan may sometimes work out to cost less in interest overall due to lower rates. The sooner a student can afford to pay off a loan, the lower the total amount owed will be, making an unsubsidized loan a cheaper option in some cases.

In many cases, an unsubsidized loan is easier to qualify for than a subsidized loan program. Though both types of loans have certain requirements, the allowed income for an unsubsidized loan is usually much higher, meaning that students who have parents with higher incomes may still be able to qualify for an unsubsidized loan. This can make an unsubsidized loan a good option for a student whose parents are not willing or able to contribute to tuition or living expenses, despite having a higher income.

The biggest disadvantage to an unsubsidized student loan is the interest that accrues while the student is in school. If possible, loan experts generally recommend making interest payments while in school, taking funds from savings or a job in order to do so, if necessary. Paying the interest during school means that the interest cannot capitalize, or be folded into the principal loan balance, upon graduation. If a student decides not to pay the interest during school, the principal loan balance may rise dramatically upon capitalization, which, in turn, will increase future interest payments.

For students who have no funding available for college and have not received scholarships or grants, unsubsidized student loans may be the only available option that allows for college attendance. Traditional wisdom suggests that students should accept any available funding in order to obtain a higher education, since college attendance is usually linked to higher lifetime salaries, but this long-standing belief has been challenged in the 21st century. With notable economic declines impacting many countries, some financial experts now warn against taking on loan debt unless a person will be highly likely to secure a viable career immediately following graduation.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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