Until the last moment with the choice of your options. Do I choose a subsidized student loan or an unsubsidized loan, or both? The difference between Subsidized and Unsubsidized is that the increase in interest on the borrowed money must be repaid by someone, either the borrower or the federal government.
o A bank, credit institution, or credit union lends money to a borrower with the intention of earning money. For the sake of simplicity, if someone were to borrow $ 1,000, the bank would require the borrower to repay the $ 1,000 plus “interest.” Interest is the profit the lender makes. For example, the borrower pays the lender $ 100 in eleven payments totaling $ 1,100. The original $ 1,000 is returned plus an additional $ 100. The original $ 1,000 is called the “principle.” The $ 100 is called interest.
There are two types of Subsidized and Unsubsidized student loans. They are also called subloans and not subloans. (There are other student loans, but we’ll only discuss these.) The rules for a subloan are that the federal government will pay the interest during a deferral period. The deferral period is while you are in school (up to 4½ years) and the student must be attending an accredited university at least part-time.
So if a student borrows $ 5,000 in a subloan at the end of the deferment period, the loan balance would be $ 5,000. After the deferral period, the borrower will pay the interest that accrues AFTER that point. If the loan is canceled before the end of the deferment period, nothing more will be owed. Unsubsidized loans do not have a deferral period. The borrower is responsible for paying both principal and interest.
Let’s say a student borrows $ 5,000 in an unsubsidized Stafford loan (unsubsidized means that the interest on the borrowed money accumulates). At the end of the deferral period, the loan balance (principal plus accrued interest) is $ 6,772.47. $ 1,772.47 is added to the principal balance of the $ 5,000 loan.
This means that at the end of the deferral period, the total owed on the money borrowed is $ 6,772.47. Interest will continue to accrue until the entire loan is paid off. And if the minimum payment is made each month at the end, the borrower would have paid a total of $ 9,352.80. The lender would receive the original $ 5,000 plus $ 4,352.80 in interest earnings. (These numbers are estimates and are used for illustrative purposes only.)
It is less expensive to pay off the loan early and / or pay more than the minimum monthly payment. It’s best to pay off Unsub loans first, as these loans get more expensive over time. And if you can, make payments during the deferral period.
Excerpt from the Guide to Federal Student Aid
Direct Subsidized Stafford Loan * or FFEL **
Loan: must be repaid Subsidized: Country interest from the US Department of Education While the borrower is in school and during grace and deferral periods; the student must attend at least part-time and have financial need; Fixed interest rate of 5.6% for loans to undergraduate students with a first disbursement date between July 1, 2009 and June 30, 2010; A fixed rate of 6.8% is established for loans to graduate students of $ 3,500 to $ 8,500, depending on the grade level.
Unsubsidized Stafford Direct * or FFEL ** Loan
Loan: must be repaid Unsubsidized: Borrower is responsible for all interest; It must be at least half time; no financial need required; 6.8% fixed interest rate for new borrowers $ 5,500- $ 20,500 (less any subsidized amount received during the same period), depending on grade level and dependency status.
Direct loan * or FFEL ** PLUS
Loan: must be repaid For parents of dependent college students and for graduate and professional students; students must be enrolled at least half time; no financial need required Borrower must not have adverse credit history. PLUS Loans are unsubsidized, borrower is responsible for all interest; the fixed interest rate is 8.5% for FFEL PLUS Loans and 7.9% for Direct PLUS Loans. The maximum amount is the cost of attendance minus any other financial aid the student receives; no minimum quantity.