Uncategorized June 20, 2017

An Easy Explanation For Federal Subsidized Loans

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So now that you’re clear on what a Federal Unsubsidized Loan is, it’s time to learn about a Federal Subsidized Loan. I’ll make this as painless and simple as I can.

You might also hear these loans referred to as Stafford Loans, Stafford Direct Loans, or Direct Subsidized Loans. The amount and type of aid you get is determined by your school based on the information you provide on the FAFSA. Unfortunately, you do not get to pick whether you get a subsidized loan or an unsubsidized loan, or how much you are approved for. Within your financial aid package, you might actually be approved for both.

 

Who gets subsidized loans? In contrast to unsubsidized loans which do NOT require a student to show financial need, subsidized loans are given to students based on a demonstrated financial need. They can be awarded to undergraduate students. Graduate students are not eligible. You must be enrolled at least half-time in an accredited institution that participates in a direct loan program. As a general rule, the student must be enrolled in a program that leads to a degree or a certificate upon completion. Loan recipients can be dependents of their parents or financially independent adults.

Where does the money come from? As the name implies, the loan money comes from the federal government – same as unsubsidized loans.

Where and when do I apply? There is no specific application just for a federal subsidized 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 subsidized 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 subsidized 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 Subsidized Loan? It is a loan given by the federal government, but as it is a loan, it does need to be repaid. Some basics about subsidized loans: 

  1. A subsidized loan is granted based on a demonstration of financial need.
  2. It can only be given to undergraduate students.
  3. The government pays the interest on the loan while the student is in school at least half-time, for the first six months after graduation (called a grace period), and during a period of deferment (a postponement o loan payments).

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According to studentaid.gov

A grace period is period of time after borrowers graduate, leave school, or drop below half-time enrollment where they are not required to make payments on certain federal student loans. Some federal student loans will accrue interest during the grace period, and if the interest is unpaid, it will be added to the principal balance of the loan when the repayment period begins.

A deferment is a postponement of payment on a loan that is allowed under certain conditions and during which interest does not accrue on Direct Subsidized Loans, Subsidized Federal Stafford Loans, and Federal Perkins Loans. All other federal student loans that are deferred will continue to accrue interest. Any unpaid interest that accrued during the deferment period may be added to the principal balance (capitalized) of the loan(s).

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The current interest rate on a federal subsidized loan given after 7/1/2017 and before 7/1/2018 is 4.45%. Congress determines the interest on federal student loans. According to businessdictionary.com, a subsidized loan is:

A type of loan does not require the borrower to pay interest but rather has the interest paid by a third party. There are many types of subsidized loans including mortgage loans and student loans. Any individual or entity can subsidize a loan including the federal or local governments and charitable organizations.

And now, the no-nonsense explanation…A federal subsidized student loan is basically a 0% interest loan for the time you are in school; the government foots the bill for the interest during that period. Interest does not accrue, or add up, while you are still in school. You do not begin to pay interest until it’s time to pay back the loan.

Does a parent need to co-sign this type of loan for their student? No. No co-signor is needed for this type of loan. Therefore, should your child default, or fail to make the payments on the loan, you can not be held responsible for repayment.

Is there any benefit to paying off this loan more quickly than the terms require? Yes. The more quickly you pay off a subsidized loan, the less interest you will have to pay. You can even pay off this loan, in full, when it becomes due if you can afford it. 

For simplicity, let’s say you take out a subsidized student loan for $1000. Using the calculator on the website, You Can Deal With It, if you take ten years, or 120 months, to pay off this loan, this is what your payments will look like:

After ten years (120 months), you will pay back $1,240.80 which adds $240.80 in interest to the original loan amount.

For that same $1,000 loan, if you pay it off in five years or 72 months, this is what your payments will look like:

By paying it off in six years instead of ten, you will pay back a total of $1,141.20 which adds $141.20 in interest to the original loan amount. That’s a saving $99.60. Being that the amount students usually borrow usually far exceeds the $1,000 used in this example, paying off your loan more quickly can save you lots of money. You can play around with your own numbers here, You Can Deal With It.

Are there any other fees associated with a Federal Subsidized Loan? 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 subsidized 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.

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. 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 cancelled 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.

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