By: Margaret Mitschke*
In previous blogs in this loans blog series, different tips and legal aspects of loans have been discussed. This blog will specifically focus on student loans, federal versus private loans, and how to be careful when it comes to taking out a student loan.
Subsidized vs. Unsubsidized
The difference between these two terms is actually very important when it comes to student loans. Subsidized loans mean that the interest does not start being charged on the loan until the time begins to pay it back. An unsubsidized loan is a loan that starts accruing interest as soon as it is taken out. This can make a large difference in the total amount that a student is contractually obligated to pay back.
For example, say a student takes out a $5,000 subsidized student loan their freshman year of college. The loan, when it does start accruing interest, will be charged at a hypothetical 5.5% interest rate, and needs to be paid back within five years of the student graduating college. Since the loan is subsidized, at graduation the principle for the loan would still be $5,000 because no interest has accrued. The total interest they would be charged at the end of the five years can be calculated using the simple interest formula:
Principle x Interest Rate x Years =
5,000 x .055 x 5 =
The total amount that the student would have to pay back would then be the original $5,000, plus the $1,375 in interest, or a total of $6,375. If they pay monthly, their payment would be $107.
Now, if the loan is unsubsidized, the interest starts accruing immediately after the $5,000 is borrowed. If the student is in college for four years, then the interest that has built by the time of graduation is:
5,000 x .055 x 4 =
When they graduate, they already owe $6,100. The new interest total for the five years they have to pay the total loan back in would be:
6,100 x .055 x 5 =
The new total that they have to pay back in the five years is the $6,100 plus the new interest of $1,678, or $7,778. Monthly payments would also increase to $130.
There are two main types of student loans: federal and private. There are four different kinds of federal loans, all with different terms as described on the Sallie Mae Federal Student Loans website. The first is the Federal Perkins Loan, which is subsidized, currently at 5% interest, and is available to both undergraduate and graduate students. However, the loan is only available to students with great financial need, the student must being going to school at least half-time, and the loan is not available at all schools.
Two other types of federal loans are direct subsidized and direct unsubsidized loans. For a direct subsidized loan, students must demonstrate financial need according to certain federal regulations. There is also a regulation that began July 1, 2013, stating that students are only allowed to borrow enough money to cover one-and-a-half times the length of their program study. For instance, if a student’s degree program is for four years, they are only allowed to borrow one-and-a-half times four, or enough money for six years. For a direct unsubsidized loan, the university decides the amount they are allowed to borrow based on any other financial aid they receive and the cost of attendance. Interest is also charged while the student is in school, and the loan is not based on financial need.
Both the subsidized and unsubsidized direct loans have limits as to how much a student can borrow. This depends on whether a student is dependent or independent, shown in the following table.
|Annual Subsidized/Unsubsidized Loan Limits|
|Total Hours Completed||Dependent Student||Independent Student||Amount That Can Be Subsidized|
|Junior/Senior||Remainder of Undergrad.||$7,500||$12,500||$5,500|
|Graduate or Professional Students||N/A||$20,500||$0|
The last type of federal loan is a Direct PLUS loan. These are also unsubsidized loans, but these are for the parents of dependent undergraduate students, or for graduate/professional students. They also only pay for expenses that come after the cost of attendance minus any other loans or financial aid that has been awarded.
Private loans have three main parts to them. The first is that they are based on a student’s credit history. This means that the amount the lender is willing to lend, the number of months or years they allow the borrowing to pay back the loan, and the monthly payment amounts can all depend on the borrower’s credit score. The second part is the interest rate the borrower is charged. This is also not a set number, and can vary significantly depending on the amount of money that has been borrowed and repaid in the past, as well as the current loan’s terms and options. The final part is the variety of options that a student may have when taking out a private loan, such as different payment options, which can greatly affect the final total amount a student has to pay.
It is important before signing any loan document to thoroughly read and understand all of the terms.
- Check to see if the interest rates are compounded annually, monthly, or in other intervals, which may increase the total amount of interest due;
- See if the interest rate can change with inflation, or if it is a set rate;
- Know when you can start making payments on the loan. including during the time you are still in college;
- Check and see if any early payments made are put towards interest, or towards principle. Payments put towards interest do not decrease the total amount a student owes, while principle payments can; and
- Try to pay more than the minimum amount due for a monthly loan payment, if the lender allows. This will also decrease the total amount a student owes.
As an SHSU student, you have access to a full-time attorney on campus to help you with a variety of legal matters. If you have questions, or would like to have your loan documents reviewed, please feel free to contact us and make an appointment at (936) 294-1717, or go online at http://www.shsu.edu/legalservice to schedule a free consultation with our attorney.