Subsidized or Unsubsidized?

Student Loans Escape BlogEver since Student Loans Escape confirmed that we could settle unsubsidized student loans, we have spent quite a bit of time explaining what the difference between the two types of loans are.

In short, subsidized student loans are when the Federal Government paid the interest on those loans while the individual was attending school.  The Federal Perkins Loans are an example of a subsidized student loan.  The interest rate is locked at 5% and the Federal Government  pays the interest while the student attends school, there is a 9 month grace period following graduation, and an additional grace period during deferments.

Perkins loans, however, are limited in dollars to those students who show the greatest need.

Most students then turn to the Stafford Loan program for additional funding, these loans fall into our two famous categories – Subsidized and Unsubsidized.  Again, the subsidized Stafford Loan is based on need, while the unsubsidized Stafford Loan is not.

Most Stafford Loans interest rates range from 4% to 6% depending on what year the student took out the loan.  As an example loans taken in 2009/2010 were fixed at 5.6 percent while loans this year are expected to be 4.5%.  For the subsidized Stafford the government pays all that interest during your education plus the 9 months discussed above.  Additionally, students receiving subsidized loans must be minimally enrolled as a half time college student to remain eligible for the funding

Those that did not qualify for subsidized loans AND those that needed more money would move on to unsubsidized Stafford Loans.  Neither subsidized nor unsubsidized loans obtained through financial aid require a credit check, no collateral was needed, what was most important is that you were somehow able to fill out the very complicated Free Application for Federal Student Aid, more commonly referred to as the FAFSA.

Here are the borrowing  guidelines so that you can can get a feel for the likelihood that
 you have unsubsidized loans ready to be settled by Student Loans Escape: That was the easy part, and should provide you with a basic understanding of the difference and borrowing guidelines between subsidized and unsubsidized student loans.  However, for those of you who wish to know a little more about the “education maze” read on.

Parents can sometimes take out federal loans to help pay for their dependent children’s education. The federal loans for parents are called PLUS Loans. They’re unsubsidized, meaning that the borrower is responsible for all accrued interest. The PLUS loans carry a higher interest rate than Perkins or Stafford Loans. For the 2010-2011 school year, the interest rate on PLUS loans is fixed at 8.5 percent [source: FinAid]. Parents applying for PLUS loans must pass a credit check. They’re not required to file the FAFSA to apply for a PLUS loan.

Unsubsidized PLUS loans also are available for students in graduate and professional programs. Those students must file a FAFSA; the school will consider the maximum loan limits they have under the Stafford Loan program.

Just to complicate things a bit more, prior to July 1, 2010 Stafford Loans were divided into two other categories, the Direct Loan program and the Federal Family Education Loan (FFELP) program. The difference is that in the Direct Loan program, you were borrowing directly from the federal government. In the FFELP program, you borrowed from a bank. Schools used to decide which loan program they wished to participate in. Some used to participate in both. The choice made little practical difference to the student, except that those who borrowed through FFELP had to choose a bank, usually from a list of approved lenders [source: Student Aid].  All new Stafford PLUS and Consolidation Loans will come directly from the Department under the Direct Loan Program.

Now that we've gotten to the bottom of all of this, aren't you happy you've  finally already graduated?

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