Should I Take Out Unsubsidized Student Loans?

Quick Answer

While unsubsidized student loans are more expensive than subsidized loans, they also have some advantages compared with private student loans, including lower interest rates and more flexible repayment options. Here’s what you need to know to make a smart decision.

A college student wearing a yellow shirt sits down and studies in the library.

When you receive a student loan award, you may be offered subsidized loans, unsubsidized loans or both. Which should you accept?

Interest on subsidized loans is paid by the government, or subsidized, while you're in school and during any grace periods. That's not the case for unsubsidized loans. Whether you accept an unsubsidized student loan may depend on your educational costs, your financial resources and the other types of student loans you have. Here's how to decide if a subsidized loan is right for you.

Subsidized vs. Unsubsidized Student Loans

Subsidized and unsubsidized loans are two types of federal student loans. Disbursed by the federal government, these loans require no credit check and have fixed interest rates.

Compared with private student loans, federal student loans provide more flexibility should you have trouble repaying your loan. For example, they offer income-based repayment plans, loan forbearance and deferment, and may be eligible for loan forgiveness.

While subsidized and unsubsidized student loans have many similarities, there are also some important differences between the two.

Subsidized Loans

  • Subsidized loans are only available to undergraduate students. If you're attending graduate or professional school, you'll need to look elsewhere.
  • Students must show financial need to qualify for subsidized loans.
  • The federal government pays the interest on the loan while you're in college (provided you're attending at least half time), during the first six months after you leave school and during any student loan deferment periods.
  • There are both annual and total limits on the amount you can borrow through subsidized loans. For example, for the 2022-2023 school year, dependent first-year students are limited to $3,500 in subsidized loans. Depending on your expenses, you may need other sources of funding.

Unsubsidized Loans

  • Unlike subsidized student loans, unsubsidized loans are available to graduate and professional students as well as undergrads.
  • Unsubsidized loans have higher borrowing limits than subsidized loans. However, schools still set annual and total limits on borrowing based on federal government rules.
  • Interest on unsubsidized student loans begins accruing as soon as the loan is disbursed, and you're responsible for paying it. If you leave school without making any interest payments, the total accrued interest gets added to your loan principal, or capitalized, and starts accruing interest. Because this adds to your overall loan cost, it's best to make, at minimum, interest payments on an unsubsidized loan while attending school.

Pros and Cons of Unsubsidized Loans

Unsubsidized student loans have both positive and negative aspects.

Pros

  • Available to graduate and professional students as well as undergraduates
  • Larger loan limit than subsidized loans
  • Financial need isn't necessary to qualify
  • Lower interest rates than comparable private student loans
  • Flexible federal repayment plans to fit your needs

Cons

  • Loan limits may be smaller than private loans
  • Interest on the loan starts accruing immediately
  • The government does not pay the loan interest at any time
  • If you don't make interest payments while enrolled, the accrued interest is added to your loan principal when you leave school, increasing your total loan balance

Should You Take All the Student Loans You're Offered?

Student loan payments can eat into your after-graduation income, making it harder to afford the lifestyle you want or save for long-term goals such as buying a home. Having a lot of debt could also affect your ability to qualify for loans or credit cards. Lenders evaluate your debt-to-income ratio before extending credit, and if you have too much debt, they may worry you won't be able to make your payments.

Just because you're offered a student loan doesn't mean you have to take it. Before accepting a loan, consider your total college expenses: tuition and fees, room and board, books, supplies and transportation. Add up any other financial resources, such as savings, a 529 plan or scholarships. Your total student loans shouldn't exceed your expected earnings in your first year out of school, says the Consumer Financial Protection Bureau. Use the federal government's loan repayment simulator to estimate your loan payments under various payment plans and see how that will affect your post-graduation budget.

If the federal student loans you're offered don't cover your college tab, private student loans could help you make up the difference. Available from banks, other financial institutions and some colleges, these loans have a few downsides compared with federal student loans.

  • Interest rates for private student loans are typically higher than those for federal student loans. Rates may also be variable, so your payments could rise over time.
  • You'll need to undergo a credit check when applying for a private student loan.
  • Private loans may not offer grace periods after graduation; some even require making payments before you graduate.
  • Repayment terms can be as short as five years, compared to the standard 10 years for federal loans.

In general, private student loans are less desirable than federal student loans, so you should always apply for federal student loans before considering them. If federal student loans won't cover your college costs, investigate other ways to pay for college before adding a private student loan to your debt load.

Other Ways to Pay for College

Student loans aren't your only alternative. Here are some other ways to pay for college and avoid taking on debt.

  • Choose a less expensive school. For 2021-2022, average annual tuition and fees for a public four-year college was $10,740, compared with $38,070 for a four-year private college. While you may not be able to do much about it this year, transferring to a less expensive school next year could help ease the financial burden.
  • Consider community college. Want to save, but still have your heart set on a pricey school? Attend community college for your first two years and transfer to your dream school for your junior and senior years. Average tuition and fees for a two-year public college in 2021-2022 was $3,800—just 10% of the cost of a four-year private college.
  • Attend a school close to home. Live at home and eliminate the cost of on-campus housing and food, as well as travel back and forth to school.
  • Apply for college scholarships. Look for scholarships through local organizations and religious groups, your high school or online.
  • Get a job on or off campus. Work part time during school and dial it up to full time during school breaks to save more money. Students with financial need may find jobs through the school's work-study program.
  • Look for other ways to make money. Tutor other students, look for a paid internship, drive for a rideshare service or sell crafts or used items online. Many companies offer remote work options, giving you plenty of ways to earn money without neglecting your studies.

A Student Loan That Makes the Grade

Whatever types of student loans you have, making payments on time can help build your credit score so adult milestones like renting an apartment are easier to achieve. Don't miss a due date, though, or your credit score could suffer.

Considering a private student loan? Since lenders will check your credit, make sure your credit report is accurate before applying. If your credit score isn't high enough to qualify on your own, having a parent cosign on the loan can help.

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