Student Loans-What are Subsidized and Unsubsidized Student Loans?

Getting a student loan may sometimes be just as hard as playing the stock market. There may be hundreds of potential scholarships, student loan programs and other types of financial assistance for students available today, but for the majority of students, federal student loan programs are the best source of financial aid to opt for.

Most of the money given out in student loans stems from one out of six student loan programs; Stafford student loan for students and PLUS for parents are in charge of most cases. Aside from the names of these student loan programs, there are two other categories that student loan seekers should know about. Also, know that there will be different important financial impacts down each path, depending on the student loan of your choice.

The two categories of student loans are subsidized student loans and unsubsidized student loans. Payments are usually never paid until half a year after leaving school, regardless of whether graduation occurred or not. However, since interest is accumulated based on the amount of the student loan, it may add up to become quite a huge sum after several years.

Subsidized student loans are a kind of student loan where the government pays the entirety of the interest accumulated on the student loan through the years. While the student is in school, neither the student nor the parents will accumulate interest with subsidized student loans. Interest will only add up six months after the student leaves.

Unsubsidized student loans are the opposite of this. Although students can make payments while in school or afterwards, the interest is accumulated the minute the student loan has been funded. Even at a modest amount of $1,000, paying an additional 6% interest per year could add up to $60 in one year. This may not sound like much, but if it is left unpaid, it will be.

Plus, the example given is a very simple one. Interest is actually calculated per month, not per year, so the amount tends to grow incredibly fast. Even the interest amounts are incredibly large, since student loan amounts are usually 20 times more than the example given. A student loan calculator can put things in better perspective for you, if you really want to know the details.

A lot of student loans actually fuse together subsidized and unsubsidized students loans, and funds may be taken from a Stafford student loan and a PLUS loan at the same time; a lot of different options abide. Also, bear in mind that some students may not have the qualifications to get particular federal student loans due to the family’s overall income, amongst other reasons. In such cases, private student loans or other sources of funds will have to be looked at.

The best way to find out is by filling out a standard Free Application for Federal Student Aid (FAFSA) application today, which you can find here: http://www.fafsa.ed.gov/

By sending in an application along with other documents required, such as the family’s overall income, credit histories, current debt loans, etc. – student loan officers will decide whether you quality for a student loan or not.

Students tend to quality for at least some sort of financial aid, in most cases.

The William D Ford Direct Student Loan Program

The direct student loan program started around fifteen years ago and was designed to completely eliminate the middle man. Instead of dealing with credit unions, banks, and other private businesses for student loans, the federal government decided to give out direct student loans instead.

Direct student loan programs go beyond the Federal Family Education Loan Programs (FFELP), which are student loan programs that go through private lenders. Since they are quite similar to FFELP student loan programs, it is important for lenders to figure out which one they want. Both kinds offer Stafford student loans and PLUS student loans.

Direct student loans pretty much have the same criteria for eligibility, guidelines, and credit check requirements for non-need-based programs. Because this is so, it may be difficult to decide between them.

Partially, the decision involves deciding between two servicers that provide good customer service personnel for important queries. Sometimes, private lenders are more flexible and helpful and the government tends to be more bureaucratic and indifferent, while in some cases, the situation is reversed.

In order to get the best information on which option would be best for you, you can read some forums. One popular forum site is: http://talk.collegeconfidential.com/forumdisplay.php?f=7

Also, with so many social networking sites available on the internet nowadays, you have a wider range of personal opinions to peruse compared to objective opinions. Reading forum posts can quickly help you decide which option to go for.

There are more concrete differences between these two types, though. FFELP student loans are serviced and funded by private financial institutions, to which you will have to sign a promissory note to. It is quite common for lenders to grant student loans; it is quite similar to what mortgage companies do.

You may end up going through a lot of trouble to find a lender you actually like. You may end up choosing due to customer service instead of rate and repayment terms. But once they decide to give your student loan to another company, you may end up repaying one that you rejected. With direct student loans, the lender is none other than the federal government; student loans are never sold to another party.

The biggest and most important difference to people, though, is the rates, fees, and repayment terms. Stafford student loans and PLUS student loans come with fixed rates, but private lenders may be more flexible.

The only way to find out what is out there is to look around for the kind of student loan that you need. Then, calculate the total cost of the student loan and compare it with others. For additional information, visit: http://www.ed.gov/offices/OSFAP/DirectLoan/index.html

For Master Promissory Note (MPN) online applications, go to: https://dlenote.ed.gov/empn/index.jsp

No matter which student loan program you choose, it will still require a Free Application for Student Aid (FAFSA), so find the forms here: http://www.fafsa.ed.gov/

The Federal Family Education Loan Program

The Federal Family Education Loan Program (FFELP) is a governmental private lender partnership and umbrella student loan program that gives out federal student loans. This includes Stafford student loans, PLUS student loans, and Perkins student loans. The FFELP was established by an Act of Congress in 1965 and started in 1966. Ever since then, over half a trillion dollars have been given out as student loans, over $50 billion of which were given in 2006 alone.

The funds used for Stafford student loans, PLUS student loans and other FFELP student loans come from a wide number of independent banks, credit unions and other financial institutions. These lenders are confident enough to give out student loans despite high credit risks because the funds are theoretically guaranteed by the federal government.

Private guarantors may sometimes get involved, though, in those very few cases where student loans go into default. Guarantors will then go to the federal government for partial reimbursement of the funds they have lost.

The majority of these funds are put into two kinds of Stafford student loans: unsubsidized student loans and subsidized student loans. In unsubsidized student loans, the borrower is in charge of paying for the entire amount of interest. This amount includes the deferred interest until the grace period is over. In subsidized student loans, the government is in charge of paying for the interests on the student loan accumulated while the student is still in school until half a year after that.

The Parent Loans for Undergraduate Students (PLUS) student loan program gives out more than $8 billion per year to aid parents and, since July 2006, also professional and graduate students. Giving student loans to parents can greatly help pay for expenses that they would pay for anyway. The PLUS student loan program has since then become a big part of the world of financial aids today.

Generally, all student loan programs require a submission of the Free Application for Student Aid (FAFSA) application. The data collected from this application gives student loan officers an easier time in making funding decisions. These student loan decision makers are usually employed by the respective college itself, from which the student has been accepted. These forms are available at: http://www.fafsa.ed.gov/

Recommendations are made by the financial aid department mostly based on the Expected Financial Contribution (EFC) of the student and the parents. The income will be examined with the aim to supplement a student’s needs with a mixture of subsidized and unsubsidized Stafford student loans and other sources.

The Correlation of Credit History and Student Loans

A lot of ordinary student loan programs are not credit-based. Stafford student loans and Perkins student loans focus solely on students’ needs and do not even do credit checks. However, not everybody will be able to qualify and those student loan programs never completely cover the entire amount needed, most of all since the cost of education is quite high in our generation.

To work around this, a lot of students and their families wish to supplement them with credit-based student loans. When doing so, they must submit a good credit report to student loan evaluators to get a better edge at receiving the student loan, with great interest rates, to boot.

As with any student loan based on credit, bad credit student loans do not necessarily make things impossible, but they do make things much more difficult and usually come with a much higher interest rate.

Bad credit loan students can therefore make or break the decision of receiving student loans or even be the cause of more repayments than you would have had with good credit. But what does ‘good credit’ and ‘bad credit’ mean?

The first thing that student loan officers take a look at is the student’s FICO score. This is a number that credit agencies calculate based on a secret, proprietary formula. The exact equation is not known to the public, but there are several criteria that are known and relate to common sense.

FICO scores basically focus on the person’s debt and defaults, the amount of his late payments and how late those payments were, the credit available, the amount of recent credit inquiries, etc. All of these factors are weighed and weighted in various ways.

A lot of students don’t even have a FICO score yet because they do not own credit cards or have other forms of loan that would generate FICO score data. Because of this, students are mostly judged by the credit history of their parents, when it comes to granting student loans. Student credit history may be important, but it is the income and credit history of the parents that will really count in the final decision of granting student loans.

It is ideal for both students and parents to have good credit history. The higher the FICO score, the better. Having a low FICO score will make getting a student loan next to impossible and may trigger the submission of more information to influence the final decision. Getting this extra data to those involved is not exactly easy.

FICO scores aside, there are also other factors that prospective borrowers may take into consideration.

Making timely payments is always important. If you have a slew of late payments in your history, you will look like a bad credit loan student in the lenders’ eyes. Staying within the specified credit limits is also important. Try not to go over the limit to avoid penalties, and when you do, accept the responsibilities that come with it. Creditors do not just judge numbers, but characters, as well.

Make sure you meet all credit obligations and keep student loans at a modest level at all times to ensure that you give off the vibe of a good student loan candidate.

Stafford Student Loans

Stafford student loans are a very big part of the Federal Family Education Loan Program (FFELP) and were established by Congress in 1965, in order to give students ample financial aid. Stafford student loans were originally made in order to cover the costs of those in need. Nowadays, Stafford student loans offer more than 90% over $50 billion dollars and are given out to different FFELP categories annually.

Compared to how things used to be, however, Stafford student loans have broadened their horizons by introducing two new types of Stafford student loans: subsidized and unsubsidized student loans.

With subsidized student loans, the Federal Government offers to pay an amount of interest that would normally build up from the beginning of the student loan until the actual payments start. Usually, no payments need to be made while the student is still in school and for half a year after leaving, but students have the right to request for payments to start earlier if they wish.

Since this interest is subsidized, the student loans are usually based on the student’s individual needs. This means that the financial aid officials need to take a look at the student’s family income before deciding whether the student is qualified for one.

Around two-thirds of these subsidized Stafford student loans are granted to those students whose family has an Adjusted Gross Income of under $50,000 per year. Another 25% are granted to those students whose family has an income of $50-100,000 per year. However flexible this might look, only less than 10% of subsidized Stafford student loans are actually given to students whose overall family income exceeds $100,000.

For students whose application for a subsidized Stafford student loan has been rejected, they are still eligible for an unsubsidized Stafford student loan. Remember, however, that the interest for this student loan begins from the day the student loan money is paid until the final day where it is completely paid off. Even if you only get a student loan of $4,000, the first year interest of 6.8% could result to a total of $230. This will then be added to the $4,000 and the interest will then be taken by the total sum.

This is only a simple example, though; in actuality, the amounts are calculated monthly, not annually. The actual equation for it is quite difficult, but you can play with the numbers on a student loan calculator.
$4,000 is an extremely low amount for a student loan. Usually, student loans go for a bit higher. On average, undergraduate students take out a student loan of $15,000 annually, whether it is in a subsidized or unsubsidized form of Stafford student loans.

No-Credit Student Loans

Having poor credit history is never a good thing. Luckily for students and their parents, there are still some student loan and aid packages that do not take credit status into consideration. In fact, some federal student loans are purely need-based and do not look at credit history at all.

One of the oldest of these is Pell Grants, which focuses mostly on the student’s economic status. If the student stems from a family with low income, Pell Grants will almost instantly hand out the student loan. However, this low income must be proven with proper documentation, of course.

Those who grant student loans at Pell Grants use the Expected Family Contribution (EFC) number to conclude if the student loan should be granted, though the cost of the tuition itself may also play a factor.

Pell Grants are more of a gift than a student loan, really, and is given at $4,050 per year, at most. This may seem like a decent amount, but it does help greatly. However, if the annual tuition needed is more than $10,000, it definitely will not pay for a lot.

Because of this, the majority of students try to seek more student loans for their education, on top of the student loan granted by Pell Grant. A lot of other student loan programs are also based on needs, such as the Stafford student loan, which is available in two forms.

Subsidized Stafford student loans are those that are most wanted. With this student loan, the government will pay for any interest accumulated while the student loan is not yet being repaid, which is usually while the student has classes until half a year after graduation.

With unsubsidized Stafford student loans, it is the student who has to pay for the accumulated interest. This may turn out to be an acceptable amount if paid in installments while classes are being taken. In a span of 3 years, a $4,000 student loan would require a monthly payment of $42.43 at a 5% interest rate; that’s around $9 of interest per month. If this goes on for several years, it could grow to a much bigger amount by the time graduation occurs.

The good thing about unsubsidized student loans, however, is that anyone can avail of these student loans. Mostly, student loan programs will not pay for more than 40% of the total costs, though, so students will have to find other source of funds to pay off the student loan.

Student Loans-Interest Rates: Now and Soon

Not too long ago, Stafford student loans and other student loan programs have changed their interest rates from fixed rates to variable rates. But in July 1, 2006, they went back to their fixed rates yet again.

However, this can change yet again. The government can always undo what it has already done. Besides, lenders have quite some flexibility, so even official rates can subtly change in various ways. For instance, a lot of lenders charge an origination fee of 3% from the government, while the default insurance rate is 1%. Others may be willing to take in the cost to get to our business. As a rule, though, any fee of 3% is equal to a 1% interest rate.

Although most interest changes are modest (for example, PLUS student loans have increased from 6.1% to 8.5%), even a simple and low amount of $16,000 that is borrowed will add around $400 in interest charges in only one year with a 2.4% rate difference.

If you would like to see precise amounts per month, you can go through sample scenarios with using a student loan calculator, one of which you can find at: http://www.bankrate.com/brm/mortgage-calculator.asp

There are never any guarantees. Rates can keep changing because they are quite like variable rate home loans. Predicting interest rates of the near future or the distant future is a challenging task, even for the experts of finance. If it were not so, the bond market would be pretty boring. The most any student or parent can do is see what the experts have to say.

An easy way to keep up with the predictions of experts is by taking a look at different interest-bearing financial instruments, like long-term corporate bonds or T-bills. By taking a good look at these numbers, possible borrowers can easily guess which way the interest rates are going. This information can be obtained from practically any finance website; try Yahoo Finance.

The Treasury bill, for example, shows us two things: what debt the government is offering to sell debt over the next few decades, and what those who want to buy those debts are ready to pay. Since the rate fluctuates, student loan rates may also fluctuate.

The same holds true for particular corporate bonds, like Ford Motor Co. They have been suffering financially for a couple of years now and this can be seen through their bond rates and ratings. Back in the day, they had quality ratings, but now they are near the junk bond level.

As these rates rise, it just gets harder for borrowers to repay student loans. Not only do students and parents need to shell out more money, but it also gets harder to qualify for student loans because of this. Stafford student loans and other student loan programs are based on needs, so this may not be a factor there, but the interest rates of one student program usually influences other student loan programs that are based on credit history.

The best strategy for now would be to get a private student loan with fixed rates. The ideal student loans cost only 1%, which is a great deal; however, borrowers will have to have good credit history in order to avail of it.

There is no perfect solution to pay for education nowadays; but, like with other costs, looking around for available options is a good way to start.

Student Loans-Graduate vs. Undergraduate Financial Aid

Compared to the prices of education a few decades ago, today’s education costs are ten times higher. In fact, this difference has become even higher when looking at graduate versus undergraduate student loan programs. Fortunately, several resources are available for both kinds of student loan programs in helping students through college with financial aid.

Undergraduates usually mix and match various scholarships, grants and student loans, which they either take out themselves or have their parents take out; sometimes it is the mixture of the two, where a parent becomes a co-signer for student loans.

The most common student loan programs are still the unsubsidized and subsidized Stafford student loans. Subsidized student loans are most wanted because the federal government offers to pay for the interest accumulated while the student is in school. However, these student loans are based on needs. Unsubsidized student loans aren’t; this makes them more convenient for most students.

If you would like to see what can be borrowed in detail, visit: http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp or http://www.salliemae.com/get_student_loan/find_student_loan/undergrad_student_loan/federal_student_loans/stafford_loans/

On the other hand, graduates to not have as many options for scholarships, grants, and student loans, but teaching or research assistantships can usually make up for the shortfall. These jobs are only available for minimum pay and long hours, but they can be done while attending courses.

As of late, a new option has opened up for graduate students: PLUS student loans. The acronym may stand for Parent Loans for Undergraduate Students, but they are now available to graduate students, as well. In the cases of undergraduates, parents are normally the borrowers who make the payments; but in the case of graduates, they are responsible for student loan payments themselves.

PLUS student loans also come with a number of advantages. First of all, they are available for everyone since they are not based on needs or credit quality. Only a few graduate students find themselves in credit binds that most working adults fall into. Because of this, they may have little credit history and very few bad marks on their credit report. This makes it much easier for college student loan officials to find out who is eligible.

Both undergraduate and graduate students will have to invest time into researching the options that are available to them. Remember, however, that this normally requires a mixture of funds from various sources.

Total funds that were given out for student loans last year were more than $50 billion. This much money is being granted to students; one of them could easily be you.

Student Loans-Advice on Student Loans

Even though higher education may cost a lot of money nowadays and may even require the need to borrow money from others in order to pay them off, both parents and students have a lot of benefits and advantages today that wasn’t in existence several years ago. With the invention of the internet, financial aid and student loans can be sought in a number of different ways.

Nowadays, it is relatively easy to get a huge amount of information on interest rates, student loan limits and qualifying criteria from the internet. But this also allows a completely different kind of problem to appear: data overload.

With so much information readily available to everyone, it may make analyzing it all the more difficult, most of all with the complexity and wide variety of student loan programs today. To overcome this problem, there is one outdated method that can actually prove to be very useful: seeking personal student loan advice.

For current high school students, visiting the school counselor would be a great place to go to start planning for college education and finding out the various options in student loans. Student counselors are specifically there to aid students in going through a myriad of choices and pointing out the various advantages or consequences of each one. However, this kind of advice can prove to be either good or bad.

Professional student loan counselors usually have the latest updated information and visit several courses every year, in order to maintain their professional standing. The downside to visiting a professional student loan counselor, however, is that they charge for their services. If all you need is a few minutes of advice over the telephone, this is usually free. But if you need a complete and detailed program, then you will have to pay for it. Do take note that this is student loan counselors earn their living, though, so it should be understandable.

Professional student loan counselors you may find online also come with their various pros and cons. First of all, with so many choices available online nowadays, it may be difficult just trying to find a source that can be trusted. One downside to online professional student loan counseling is that there is no form of personal contact, so you cannot judge them by their voice or face. The upside to this, however, is that there are a lot of social blogs and networks available now, so this drawback hardly even matters anymore.

It is completely possible to get a ton of reliable recommendations from people who have regular interactions. It might be hard to judge someone’s worth just by viewing comments made by forum members. As time goes by, however, you will be able to tell the difference between reliable and unreliable information. Soon, you will be able to locate several professional student loan counselors that are capable of giving you in-depth advice. A great place to start looking for student loan counseling is http://www.finaid.org/ or http://talk.collegeconfidential.com/forumdisplay.php?f=7

Make sure you start ahead. Saving and planning for student loan counseling should start very early; but do keep in mind that the available interest rates, student loan limits and qualifying criteria may change over time, so be wary! And who knows, by the time you are closer to college, the internet may come up with something even more convenient.

Student Loans-Co-Signer and No Co-Signer Student Loans

A co-signer is a second party that promises to repay the student loan and generally jumps into the picture when the actual borrower has little or no credit history.

Students, for example, normally have little or no credit cards, car loans and home mortgage loans. Because of this, their credit history is practically non-existent. Or, if it is existent, their credit history is poor because of unwise choices they may have made in the past, such as the inability to repay on credit cards or irresponsibility on making these payments.

This lack of or poor credit history can easily put a possible borrower into the category of those in high risk, causing student loan officers (even those in federal student loan programs) to look at such students with a cautious eye. Due to this credit history, student loan applications may be denied.

To go against this lack of or poor credit history, possible borrowers can simply get a co-signer, like a parent. Student loan officers will then take a look at the co-signer’s FICO score, repayment history and other factors before granting the student loan.

The co-signer’s credit quality usually becomes the main factor in deciding the amount of interest rate assigned. Co-signers with very good credit history tend to get the best rates, while those with lower FICO scores tend to pay a higher rate.

For instance, one well-known student loan program shows a 4% program paying $5,489 in interest over the entire lifespan of the student loan, rising to $10,647 at 6%. A 2% difference may not seem like much, but with modern borrowing amounts and compounding, this scenario is not so unrealistic.

It is actually quite a common practice for students to ask for a student loan of $100,000 for their undergraduate education. And even though the interest is paid right away instead of letting it accumulate over the years of the student in school, interest at 6.8% is could still go up to $567 per month. Annually, this interest could amount to $6,600.

If this interest rate is lowered to 5%, which is the official amount for a Perkins student loan that is need-based, it will lower these numbers to $417 and $4,820. Remember that this example is when repayment begins instantly. If payments aren’t made until half a year after leaving school, which is what usually happens; the resulting amount will be much higher, unless the interest is completely deferred or subsidized.

Having a co-signer with good credit history can greatly lower the total amount of interest you need to pay, as well as improve the chances of getting good student loan features. You can play around with some sample scenarios on your own with the use of the student loan calculator on Bankrate.com.

Next Page »