A recent article in the Chicago Tribune has detailed why it is important to understand the student loans that you have received.
“After tapping as much free money as possible, your next step is to choose student loans. You want to turn first to loans from the federal government rather than private loans that come from a bank or non government lender.”
Gail MarksJarvis goes on to write that “The paperwork from your financial aid office will probably give you a choice between subsidized Stafford loans or unsubsidized Stafford loans. There is a huge difference between them. If you qualify, take the subsidized Stafford loans, which carry a $19,000 limit for four years of undergraduate studies. Subsidized means the government reduces your costs by absorbing interest during in-school deferment and provides a very low interest rate, of 3.4 percent. That rate is for loans originated during the 2011-12 academic year.”
This is excellent information. It is important to understand that the subsidized loan you are taking out will not incur any interest costs while you are in school. You are also not required to repay that loan until 6 months after you graduate.
The unsubsidized loan is similar, in that you are not required to make any payments until six months after you graduate, but the interest does begin to accrue once the money is disbursed.
With unsubsidized, a smart financial decision is to pay the interest only portion of your loan while you are in school, thus reducing the balance you will pay once you graduate and officially begin repayment.
Parents also have the option of applying for a federally guaranteed PLUS loan. This is a student loan in the parents name at a fixed 7.9% interest rate.
The last student loan option is private loans as MarksJarvis does on to explain “Although federal loans all have fixed rates, or interest rates that will never increase during the 10 years you pay them off, that’s not the case with many private student loans. They might have a starter interest rate that looks attractive, but with a variable rate that can increase continually over 10 years. So the rate might climb well past the 7.9 percent on parent PLUS loans.”
As you can see, there are many different types of loans, and it is imperative that you understand the terms and conditions of all of them.
As always, you are the only one with your best interest at heart. Remember that knowledge is power, and squeeze every ounce of information you can from your college financial aid office.
Photo used under Flickr Creative Commons License: AMagill