If you are using federal student aid, you may be eligible for two different types of loans, based on the results of your FAFSA. Although you do not have to make payments on these loans while you are in school, it is always a good idea to do so if you can. The less debt you accumulate, the less you will owe in the future. Read on for more tips about how to manage each loan.
There are two types of Stafford Loans: subsidized and unsubsidized. The big difference between the two is that the government pays the interest on the subsidized loans while the student is in school, and during the 6 month grace period prior to repayment; they do not pay any interest on unsubsidized loans. Which one you receive is based on your Expected Family Contribution, or EFC, which is determined by completing the FAFSA. Here are more details on each:
1. Subsidized Stafford Loan
- Awarded to students who demonstrate need, based on FAFSA results.
- No interest while you are enrolled at least part-time, and during the 6 month grace period
- The interest rate is fixed, meaning it will stay the same for the life of the loan. The rate is preset by the federal government, so if you take out a new loan each year, you may have several different subsidized loans at different rates. Find out this year’s rate here.
2. Unsubsidized Stafford Loan
- Awarded to all students who complete a FAFSA, regardless of need.
- Interest will accrue (accumulate) on this loan from the day it is dispersed to the school. At the end of the 6 month grace period, the accrued interest will then be capitalized, meaning it will be added to the original amount of the loan, and interest will then be charged on the newly combined loan amount. (Tip – you can save yourself a LOT of money and repayment time by paying the interest on your loans as you go through school. Even if you can not pay all the interest, the less that has accumulated, the less there will be to capitalize at the end of your grace period! Contact your loan lender to make interest only-payments. Don’t know who your loan lender is? Visit www.nslds.ed.gov)
- The interest rate is fixed, meaning it will stay the same for the life of the loan. Unsubsidized Stafford Loans have a permanent 7.8% interest rate.
Tips for Stafford Loans
1. There is a limit to how much you can borrow! Once you have reached your borrowing limit, you will not be permitted to receive any additional Stafford loans. You may be able to avoid running out of loan money by borrowing only what you need (say NO to refund checks!), avoid dropping classes, and enrolling full time so you can progress quickly through your program!
2. We’ll say it again – if you have unsubsidized Stafford loans, pay the interest while you’re in school and during your six month grace period! See how putting aside $2 a day towards your loan interest (less than the cost of a latte) can save you over $4,000 in the long run. Isn’t that totally worth it?
3. Another tip worth repeating: avoid refund checks. Refund checks aren’t really refunds — they are just excess financial aid that was left over after your tuition was covered. You will pay that money back eventually, and with interest. You do not have to take the full amount of loans that are offered to. By borrowing only what you need for school, you will graduate with less debt, avoid reaching your borrowing limit, and pay less interest over the course of repayment. Just remember, if you live like a CEO while you are a student, you will live like a student when you are a CEO!