Subsidized and Unsubsidized Student Loans

Obtaining student aid can be more complicated than playing the stock market. There are literally hundreds of possible scholarships, loan programs and other forms of assistance. But for the overwhelming majority a Federal student loan program is the most likely source of funds to help pay for school.

Most of that money loaned is associated with one of only half a dozen programs. Stafford (for students) and PLUS (for parents) with a couple of variations cover most circumstances. But beyond the program names/types themselves, there are two common categories that those seeking funding should be aware of. Which you choose can have a substantial financial impact down the road.

The two categories are: subsidized and unsubsidized college student loans. Students generally make no payments on either type until six months after leaving school whether they graduated or not. But because of the fact that interest amounts are calculated on the outstanding principle (the loan amount), it can add up to a substantial sum over a period of years.

Subsidized loans are a type in which the government pays on behalf of the student any interest accumulated on the loan during the years attended. Neither the student nor any co-signer, such as parents, accumulate interest on the principle while the student is in school. The clock only starts ticking six months after leaving.

Unsubsidized loans are the opposite. Though payments may or may not be due during school years, the interest is calculated from the day the loan is funded. Even at a modest amount, say $1,000, at 6% per year a student can incur an additional debt of $60 the first year. That doesn’t sound like much, but that $60, if left unpaid is added to the principle. The following year the interest is %6 of $1,060 or $63.60.

The example is greatly oversimplified, since interest is calculated monthly not annually and so the amount actually rises much faster, in fact exponentially. The interest amounts are typically much larger, too, since loan amounts can easily be 20 times or more than the example. A simple loan calculator will allow the prospective borrower to run through some sample scenarios.

Many loans are a mixture of subsidized and unsubsidized and funds may come partly from a Stafford loan, partly from a PLUS loan, or a number of other possible types and sources. Some students may not qualify for certain Federal student loans, because of parents’ income or other reasons. In that case, private loans and other funding sources have to be relied on.

The only way to know for sure is to fill out the standard FAFSA (Free Application for Federal Student Aid) application, available at: http://www.fafsa.ed.gov/

Using that, in conjunction with the required accompanying documentation - showing parents and student income, credit histories, current debt loads and other information - loan officers make a decision about whether or not to grant the loan.

Most students will qualify for at least some aid.



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