Subsidized vs. Unsubsidized Loans
I've come to terms with the fact that more & more students are taking out student loans. I warn them to read the fine print & contract terms. I doubt many of them do, but I've realized maybe a more important factor is they need to know what type of loan they've actually signed up for. Most realize the difference between a private loan & the government loan options out there. But there are two terms I feel students & parents are lacking on understanding: subsidized & unsubsidized.
When taking out a loan everyone just assumes they will have to pay a set percentage more than the loan amount they actually took out due to the wonders of interest. They've failed to realize that this doesn't have to be the case. If they know the difference between subsidized & unsubsidized student loans then they'd assume the one to pick is a no brainer, assuming you have that option.
The biggest difference between these two loan types is the way interest accumulates. So a subsidized loan interest starts accumulating the second you are approved for the loan. Every month you'll receive a statement either via email or snail mail stating how much money has accumulated in interest. You are then given the opportunity to pay off the interest each month, usually amounts that are fairly reasonable. You are not required to pay the interest each month but it is beneficial to do so as whatever interest that has accumulated that hasn't been paid is simply added on to the total of the loan. This results in you having to pay a huge percentage of money on top of the loan amount you took out. So it is a good idea to pay the interest each month.
So what makes the unsubsidized student loans so special? Real simple answer: interest doesn't accumulate on the loan until you graduate college, assuming you're a "continuous" student - meaning you take no breaks or don't skip any of the fall/spring semesters. Not taking courses in the summer is fine. This results in the loan being the same amount in your senior year as it was when you took it out, making these loans much easier to pay off. The loophole though is you are afforded a 6 month grace period (whether you need it or not) upon graduation where you don't have to pay your student loans. During this 6 month grace period the interest starts to kick in.
So now we've solved the battle of subsidized loans vs unsubsidized loans but it is unhelpful if you don't make others aware as well.
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How to know the differences in student loans in North America.
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