There are a few different types of student loans available through the federal government. The Stafford loan is one that is most popular, and it is available in two forms – subsidized and unsubsidized. Whenever you hear of an unsubsidized loan, it is a federal Stafford loan. An unsubsidized loan simply means that the interest that builds up while a student is in school is added to the loan and must be repaid by the student once they graduate or stop attending classes.
Unsubsidized loans charge you interest starting at the time of disbursement and ending when the loan is fully repaid. It is also important to note that the interest on an unsubsidized loan is capitalized, so you pay interest on the interest that has already accumulated. By filling out a Free Application for Federal Student Aid, or FAFSA, it is determined which type of loan you receive. If you don’t qualify for a subsidized loan, you will receive an unsubsidized loan. The type of loan you get is based on your financial need.
- Repayment begins upon graduation or student stops attendance
- Loan approval not based on credit
- Receive money that can be used at your school of choice
- Money can be used on tuition, books and housing expenses
- Interest begins when money is dispersed
- Interest is capitalized (pay interest on the interest)
- Repayment can get very expensive with all of the interest adding up
Interest rates vary from year to year, which will affect how much students are paying. Each person’s repayment amount will vary depending on how much they borrow, what the interest rate is and how long they are in school accruing interest. The amount of time it takes to pay back the loan will also affect the total expense. The longer a student takes to pay back the loan, the more interest they accrue and the more expensive the loan becomes. The current interest rates are as follows (as of July 2010):
- Academic year 2010-11: 4.5% subsidized; 6.8% unsubsidized
- Academic year 2011-12: 3.4% subsidized; 6.8% unsubsidized
- Academic year 2012-13: 6.8% subsidized; 6.8% unsubsidized
Student loans are key in funding a higher education. If students are not properly educated on the different types of loans though, they can find themselves in a very bad financial situation when repayment time comes. Unsubsidized loans can be very expensive when you take into account the various ways that interest can add up. Getting a loan to finance your education is fine, but it’s important to know the details of that loan. When engaging in college student loans, it is important to only borrow as much as you need and have a plan for paying it back. Keeping those things in mind can make for a great college career that can also be affordable.
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