Subsidized Student Loans
What are subsidized student loans exactly?
While looking for loans for college, you may stumble across the word “subsidized”. A subsidy is a grant paid by the government. In the case of a subsidized student loan such as the Federal Stafford Subsidized Student loan, it is like getting a grant from the government for school.
When you get a student loan from the government, you are charged an interest rate. Normally, you are required to pay the interest throughout college. For example, you may get a $4,000 loan with a 5% interest rate. If you are charged a monthly payment, you would have to pay about $16.67 a month. If you add $4,000 each year, the second year you will be paying about $33.33 a month, the third year about $50 a month, and the final year about $55.57 a month.
After the four year period, you will have paid $2,000 in interest. The payments sound small, but when you add them together, they sound a lot larger.
Some lenders will allow you to defer the interest until you graduate from college. This means you don’t have to pay a penny until you graduate college, or sometimes until 6 months after you graduate college. This means you will have to pay the $16,000 you borrowed plus the $2,000 in interest when you graduate college for a total of $18,000, and it will continue to accrue interest until it’s paid off.
What happens if it’s subsidized?
For those with extra financial need, the government offers subsidized student loans. In this case, the government will pay the interest while you’re in college. Using the example above, the loan will still accrue $2,000 while you’re in college, but the government will pay it for you.
This is different from deferring it until you graduate. With a subsidy, you’ll never have to pay it. You will have to pay the interest that builds up after you graduate.
This can be considerable help if you qualify. It can save you $2,000 or more, depending on what rate you are assigned. It will be worth your time to look into a subsidized loan if you need money.
A great idea to help you pay off your loan is to take the amount you would normally pay in interest each month and put it into a high interest savings account such as ING Direct. This way, you will have a good amount saved towards paying off the loan. In fact, save as much as you can as long as you have the interest-free money!