Definition
A federal student loan available to undergraduate and graduate students regardless of financial need, on which interest accrues from the day the money is disbursed, including while the student is in school and during the grace period. Any interest unpaid when repayment begins is capitalized, meaning it is added to the principal and starts earning interest itself.
Why it matters
Unsubsidized loans quietly grow during school, so the amount on the first bill is larger than the amount borrowed, and the capitalized interest raises every monthly payment for the life of the loan. Paying just the interest while enrolled, when it is affordable, prevents the balance from compounding.
Example
A graduate student borrows $15,000 in unsubsidized loans at the start of each of two years at an assumed 6% rate. Interest accrues on $15,000 in year one and on $30,000 in year two, then on $30,000 through a six-month grace period: about $3,600 in total. It capitalizes, so repayment starts on $33,600 rather than $30,000, and paying the $75 to $150 of monthly interest during school would have avoided it.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.