Uncategorized June 7, 2017

Federal Unsubsidized Student Loans Simply Explained

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Financial aid can seem like a bad dream you can’t wake up from. All new vocabulary you’re unfamiliar with. You’re stressed and wondering how you are going to afford college but you feel like you need an advanced degree in finance to navigate and understand the system. For me, I want someone to speak to me like I’m in third grade; that’s what I’ll do for you explaining what you need to know about Federal Unsubsidized Loans.  First, please note that these loans may also be referred to as Federal Direct Unsubsidized Loans, Direct Unsubsidized Loans, or Stafford Unsubsidized Loans; they are all the same but are NOT to be confused with Subsidized Loans which can be learned about here.

 

Who gets Unsubsidized Loans?   These loans can be given to undergraduate and graduate students. You DO NOT need to demonstrate financial need to get this type of loan so basically, almost everyone qualifies. As a general rule, the student must be enrolled in a program that leads to a degree or a certificate upon completion. These loan recipients can be dependents of their parents or financially independent adults. They are awarded without a credit check.

Where does the money come from? As implied by the name, these are loans provided by the federal government.

Where and when do I apply? There is no specific application just for a Federal Unsubsidized Loan – this is where FAFSA comes to play. So, what the heck is FAFSA?  FAFSA is an acronym that stands for Free Application For Federal Student Aid.  By filling out this one application, your school will determine what, if any, aid you will be awarded or qualify for including unsubsidized loans. Just a few years ago, the opening date to submit your FAFSA application was January 1st. The new opening date to submit your application is October 1st. The deadline to submit your FAFSA application can be determined here based on the state you live in and the school year you are applying to get aid for. Some schools establish their own deadline; that information can only be found by contacting your school. The FAFSA application can be found online here. It is best to fill out this application as early as possible to receive the highest amount of aid.

How will I know if I’ve been approved for a Federal Unsubsidized Loan? Each year that a student is enrolled in college there will be some form of communication from the financial aid office with your financial aid package information or a directive to check your financial aid account on the school’s website. If you have received financial aid and/or approval for loans, you will see each type of aid received along with a dollar amount. Each school has its own method for accepting the aid being offered. For my daughter, it is as simple as an accept and decline button next to each aid offer. Deadlines for accepting aid will differ from school to school and it is important to find out when these dates are. Just because you were approved for a loan doesn’t mean you have to take it.

So, what is a Federal UNsubsidized Loan? It is a loan backed by the government but it is a loan and therefore, it has to be repaid. The current interest rate on this type of loan being dispersed after 7-1-17 and before 7-1-18 is 4.5% for undergraduate students and 6% for graduate students. The interest rate on student loans is set by Congress, so speak up to your local representatives to keep these interest rates from going up.

According to businessdictionary.com, an unsubsidized loan is

A loan in which interest is applied as soon as money is dispersed to a borrower. With an unsubsidized loan, the borrower will be charged interest on top of interest that has already accrued on the account.

Let me explain it clearly enough for me to understandWith an Unsubsidized Loan, you will begin being charged interest the day that they give out or disperse the loan money. You are not required to repay the loan or the interest until the six-month grace period ends after graduation. Required is the optimum word here though. While you are not required to pay the interest, which begins accruing (adding up) the day you take out the loan, you can begin to make interest payments immediately.

Why would I want to start repaying something before I’m required to? If you can, it is financially beneficial to you to begin paying the interest on your loan right away. Here’s why: Let’s say you take out an Unsubsidized Loan in the first semester of your freshman year. Over the 4 years that you have this loan, plus the six-month grace period you have before having to begin repaying the loan, you will accrue (add up) interest. Why is this bad? This is bad because of this frightening phrase “capitalization of your interest.” Simply put, capitalization of your interest means that once it is time to pay back the loan, the amount you now owe includes the interest that has added up (accrued) over the 4 years you have had the loan, plus 6-month deferment. Now, you will be paying interest on the original loan amount plus the accrued interest instead of just the original loan amount. You will be paying interest on the interest!

Using interest savings calculator on youcandealwithit.com, I will illustrate how this will play out in the long run estimating that you will take 120 months or ten years to pay off your student loan totals.

Original Loan Amount $3,000       Interest Rate  4.5%     Payment Period 120 months

Of course, if you can’t afford to pay the interest while you’re in school – you can’t. It’s not the end of the world but it will add to the overall cost of the loan. In the scenario pictured, your monthly payment will only be an additional $6.30 but over the life of the loan that extra amount each month adds up to $753.13.


Is there any financial benefit to paying it off more quickly? Absolutely! If you pay off your loan more quickly, less interest will accrue or add up. Take this same scenario as above, but instead of taking 10 years to pay off your loan, you do it in 5 years or 60 months.

Basically, if you pay the interest while you’re still in school and reduce the time you take to pay if off by half, in this scenario with an original loan amount of $3,000, you will save $368.10! While this might not seem like significant saving, understand that most student loan debt will be far greater than the $3,000 we used for the scenario. You can play around with the numbers and figure out what your savings would be based on your current loan situation by using the free calculator here.

Are there any other fees with Unsubsidized Loans?Unfortunately, yes. Like with most loans there is something called an origination fee. This fee is charged at the time the loan money is dispersed (given out) and will reduce the amount you receive. Currently, for unsubsidized loans received after 10-1-16 and before 10-1-17, the origination fee is 1.069% of the loan. So, if you are taking out a $1,000 loan, the actual amount you receive will be $998.31.

Do I have to co-sign this type of loan for my dependent child? No, federal loans do NOT require a co-signer. Therefore, the loan can be in your student’s name only and you bear no responsibility for the loan should your child default (not make the payments).

Is there a limit on how much can be borrowed? Yes, there is a limit on how much you can borrow from the federal government yearly and in total, for higher education. It varies by which year you are in school. See this chart on the federal government’s student aid website. If you scroll down, you will see a chart under How Much Can I Borrow.

What other ways can I save money sending my child to college? The first way you can save money is by not overbuying ‘stuff’ for your freshman. There are so many shopping lists out there. Ones sponsored by stores like Bed Bath and Beyond are of course stacked with items to buy because the more you buy, they more money they make. Use this no-nonsense list for shopping purposes. Most parents buy far too much than their student will ever need and waste far too much money. The second place you can save money is the dining plan you choose if you have a choice. Read this post for important information that will help you to save money on your dining plan. The third place you can save money is by renting instead of buying textbooks. I like Amazon Textbooks because with Amazon Prime they arrive in 2 days and the return process is simple and free. If you don’t have Amazon Prime Student, I highly recommend it. It is half the price of a regular Prime membership so I canceled my own and use my daughter’s.  Join Prime Student FREE Two-Day Shipping for College Students. The only reason you should ever buy a textbook is if it is a resource that they will be referring to after completing the class.

What is your student loan situation? Please leave comments, advice, and tips below. Also, join our discussions on  Facebook, Parenting Your College Students.