Whether your loan is a subsidized loan such as a Stafford loan, an unsubsidized loan from the Department of Education or a commercial student loan, it’s still a loan. That means that, unlike scholarships or grants, you must pay off the balance at some point in your life as well as repaying the interest that accumulates on the loan’s principal. Because you’ll need to repay your unsubsidized loan after you graduate, you shouldn’t accept unsubsidized loans unless it’s vital to finance your education.
Subsidized and Unsubsidized Direct Stafford Loans
The U.S. Department of Education grants two types of Stafford loans, subsidized and unsubsidized. You must repay the principal with interest on both types of loan. The Education Department awards subsidized Direct Stafford loans purely on the basis of need, which is determined by information you provide on your Free Application for Federal Student Aid, or FAFSA. The department doesn’t charge interest against the balance on a subsidized loan as long as you are enrolled at least half-time in college. Unsubsidized loans aren’t awarded on the basis of need, although interest charges begin accumulating as soon as you receive the money, not when you graduate.
Perkins Loans also offer low-interest loans to college students on the basis of need, and are subsidized by the Department of Education and provided directly by participating colleges. Although the federal subsidy keeps these loans’ interest rates low, students are expected to repay the loan amount to their college. If a student enrolls in the military, becomes a teacher or becomes involved in other forms of qualifying public service, the Department of Education forgives the loan – either in full or in part, depending upon the type of commitment – and students don’t need to repay it.
When a student can’t qualify for enough support in loans from the Department of Education, he may turn to commercial lenders to help finance his education. These loans typically charge a higher interest rate than federal loans, and, because they’re not subsidized by Education Department funding, usually feature repayment policies that are more restrictive than their non-commercial counterparts. Because banks provide these loans to turn a profit, not invest in students’ future, you’ll expected to repay them as if they were any other type of commercial loan.
Loan Repayment Strategy
The type of loans a student receives while in college may affect his approach to repaying his loans. As with any form of debt, a student should devote all his excess loan payments to the loan with the highest interest rate first to lessen the impact of interest charges. If a student took out high amounts of unsubsidized commercial loans, he may be better served to repay all his lenders using a single consolidation loan if he can locate one with an interest rate lower than what he pays on his other loans.