Uncle, Can You Spare A Trillion Dollars?

T.F. of Glen Cove, NY writes:

What's the difference between a direct subsidized Loan and a direct unsubsidized loan?

The College Whisperer responds:

Interest, my friend. Interest.

Direct student loans are low-interest federal loans (3.4% for subsidized; 6.8% for unsubsidized), the lender nowadays being the federal government through the Department of Education, private lenders having been legislated out of the Stafford loan market.

Aside from interest rates charged on such student loans, there's the benefit of deferment -- of payment, on subsidized loans (typically, repayment plans do not kick in until 6 months after the borrower is no longer attending school at least half-time), and (now hear this) of the accrual of interest while the student is in school. [Interest on subsidized loans, previously deferred for 6 months after graduation, will now begin to accure immediately upon graduation.]

On an unsubsidized loan, while repayment is deferred until after graduation, interest accrues from the date loan money is disbursed.

On a subsidized loan, both repayment AND the accrual of interest is deferred until after graduation. [Technically, the feds pay the interest that accrues on your subsidized loan while you are in school, but who cares, as long as the money does not come out of your pocket?]

In other words, if you are awarded a subsidized loan by your college of choice, the money is, in effect, INTEREST-FREE while you remain in school at least half-time.

Not bad, right? Like having a rich Uncle pay your college tuition tab, or at least a part of it, offering you the option to repay the loan, in full, without a penny in interest, upon graduation.

NOTE: Subsidized loans are no longer available to graduate students!

Should you take the federal direct loan, if offered as part of the school's financial aid package? Certainly, if you need it. Never borrow money needlessly, as the old saying goes, or recklessly, for that matter. Still, as concerns federal loans, there's no better bargain around. Interest rates are relatively low. The student builds credit-worthiness. Repayment, and interest on the subsidized loan, is deferred. The loan can, under certain limited circumstances, be forgiven.

Even students (and their parents) who don't necessarily need the money to cover tuition might consider taking the subsidized loan, if offered. [Subsidized loans are offered on the basis of financial need, which varies from school to school, based upon the computation of your EFC -- Expected Family Contribution.] The loan pays part of the tuition bill. There's no interest until six months after graduation. Your money stays in the bank, earning interest, for four years or more. You repay the subsidized loan upon graduation (or sooner, without penalty), interest-free.

Gee. You may actually make a dollar or two on the deal! Talk about a gift horse from your Uncle Sam... [Always consult with your financial advisor before taking on debt of any kind, including student loans.]

How does one apply for a federal direct loan? Simple. Complete and submit the FAFSA Online. Your school's financial aid office will consider the student for a Direct loan (subsidized, unsubsidized, or a combination of both) as part of the financial aid award.

Once offered by the school, and accepted by the student, you will be required to take online entrance counseling and complete an online Master Promissory Note (MPN).

To learn more about federal direct loans, and other college lending programs, visit StaffordLoan.com and The William D. Ford Federal Direct Loan Program. Also check out the detailed Q&A at http://studentaid.ed.gov/types/loans/subsidized-and-unsubsidized.

In these difficult economic times, with college costs continuing to rise substantially, thoughtful and creative financing is in order, and a strategic plan on just how you're going to pay for college, getting the most bang for your buck, is a must.

The views and opinions expressed in this blog are solely those of The College Whisperer.

Who knows what peril lurks in the college application and admissions process? The College Whisperer knows. . .

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