With the cost of college tuition increasing each year and incomes not increasing at the same rate, many people are forced to take out student loans in order to be able to afford their college tuition. One of the most common types of loans available today are federal loans. However, there are different kinds of federal loans and it is important to understand the difference between them before you start taking them out.
Two different federal loans that can be taken out to assist students with finances are subsidized and unsubsidized student loans. These are both given by the federal government, from the United States Department of Education, and are used to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school. While they both come from the Department of Education and serve the same purpose, there are some distinct differences between Direct Subsidized Loans and Direct Unsubsidized Loans, or sometimes referred to as Stafford Loans or Direct Stafford Loans.
Direct Subsidized Student Loans
Direct Subsidized Loans are distributed to undergraduate students who display financial need. This can be shown through specific documentation that is submitted to your school and the school then determines the amount of money that you are eligible to borrow. This amount will vary from person to person but will not exceed your financial need.
After you have proven that you need financial assistance in paying for your tuition, the U.S. Department of Education will pay the interest on your Direct Subsidized Loans while you are enrolled in school, as long as you are attending at least half-time. It will also continue paying the interest on these loans for the first six months after you leave school and are in what is called the grace period. During the repayment period, if you must defer your loans at any time, which is postponing your payments due to financial need, the Department of Education will also help pay your interest for your Direct Subsidized Loans during this time.
Direct Unsubsidized Loans
The other type of federal loan that is distributed by the U.S. Department of Education is Direct Unsubsidized Loans. Direct Unsubsidized Loans are available to both undergraduate and graduate students and you do not need to demonstrate financial need in order to be granted them. Again, your school will determine the amount that you can borrow and it will be based on your cost of attendance as well as other financial aid you have received.
A huge difference with these compared to Direct Subsidized Loans is that you are responsible for paying all of the interest on your Unsubsidized Loans during the grace period, during deferments, and during all other loan periods. If you choose not to pay the interest during any of these times, it will accumulate and will be added to the principal balance of your loan, resulting in a higher amount of repayment through the life of your loan.
In order to be considered for either types of these federal loans, you must be enrolled at least part-time in an accredited school that participates in the Direct Loan Program. You must also be participating in a program that leads to a degree or certificate that is awarded by the school, not just taking courses. It is important to remember that you must demonstrate financial need in order to be eligible for a Direct Subsidized Loan and it is only available to undergraduate students. On the other hand, Direct Unsubsidized Loans are available to both undergraduate and graduate students and you do not need to require financial assistance in order to receive them.
If you are a first-time borrower, there is a time limit in which you are eligible for these loans, which is called your maximum eligibility period. This period is usually equal to 150 percent of the length of your program. This means that if your degree program typically requires four years to complete, you will be eligible for Direct Loans for six years. If you are enrolled in a field of study that requires two years, your maximum eligibility period will change to three years. If you modify or change your course of study during your time at school, your eligibility period could change, as well, depending on the published length of your program.
Aside from the interest you must pay if you receive a Direct Unsubsidized Loan, you will also be responsible for the fees that are associated with these student loans. The fee is a percentage of the loan and is determined by the total amount of the loan you were eligible for as well as what year the loan was disbursed. These fees will automatically be deducted from each loan disbursement and will be spread out through the course of these disbursements.
The first time you receive either type of Direct Loan, you will be required to complete what is called entrance counseling. Entrance counseling is a tool that is used in order to educate you about the terms of your loans and make sure you understand your obligation to repay them. You will also be required to sign a Master Promissory Note, which is simply you agreeing to all of the terms of your Direct Loans.
In order to begin the application process for either a Direct Subsidized Loans or a Direct Unsubsidized Loan, you must first fill out and submit the Free Application for Federal Student Aid, the FAFSA. The school you are attending will then use the information you have submitted through your FAFSA to determine your financial need and how much student aid you are qualified to receive.
If you are qualified for any amount of these federal loans, your school will contact you about them and notify you of how to accept the loans. When the Direct Loans are disbursed by the Department of Education, your school will apply the funds to your specific school account to pay for your tuition, fees, room and board, and other school charges. If there is any money left over after these charges have been paid, your school will then distribute them back to you in order to use for other education expenses you might have.
In the end, it is vital to be informed about any type of student loan you may be eligible for. Whether you receive Direct Subsidized Loans or Direct Unsubsidized Loans, or both, it is important to understand the differences between the loans as well as the criteria of both. It is also necessary to know all of the terms and repayment criteria that each of these loans might carry.
Taking out student loans in order to afford a college education is becoming the typical American way these days. While federal loans are often easier to obtain and can have better terms than private student loans, it is still necessary to know all of the benefits as well as challenges that may accompany them. You are the only person who can decide what types of loans are for you, but, by being educated and knowledgeable about them, you can rest assured as you work on your college degree.
Author: Jeff Gitlen
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