Student loans are loans that secure financing for students aspiring to go to college, who cannot afford the fees on their own. Read on to know more about the effects and benefits of subsidizing them…
There are mainly two types of student loans; subsidized and unsubsidized. There are some basic differences between the two.
What is a Subsidized Student Loan?
It is a loan that offers financial aid to students who are in need of money for their higher education. In this type of loan, the interest payments are subsidized, i.e., no interest is added to the loan until it becomes due for payment. The money is loaned with interest, but during your education years, you do not have to pay for the interest that accrues during that period. It is taken care of by the US government, wherein they pay the interest to the lending institution.
How to Apply for It?
To obtain a subsidized student loan, an applicant should:
- Have American citizenship or be an eligible non-citizen
- Have an enrollment in an accredited educational program
- Have possession of a high school diploma or GED (General Education Development)
In other loans, where you have to first submit a credit check, based on the approval of which an interest rate is fixed, and then the payments become due instantly upon disbursal. In a subsidized loan, no interest has to be repaid by the borrower, as the federal government takes care of this. However, there are very strict rules by which the administration of these loans are governed, and not just anyone is approved. FAFSA (Free Application for Federal Student Aid) is the standardized application form for determination of eligibility of the students to check whether they severely lack in the adequate funding, based on a low EFC (Expected Family Contribution). Since no credit check is required, students living independently without any credit history or staying with parents having poor credit history are eligible.
What are the Benefits of Subsidized Student Loans?
These loans are usually considered to be good for students due to following benefits:
- The loans offer low interest rates that are fixed.
- They offer a deferment of a six-month grace period after graduation for repayment.
- They provide acceptance requirements that are not completely based on credit standing.
How Does It Compare With Unsubsidized Loans?
In an unsubsidized student loan, you are required to pay interest while you are studying. A major difference between the two types is how much money you are allowed to borrow per year, as in a subsidized loan, that amount depends on your specific situation and financial status. Whereas, with unsubsidized loans, you can borrow much more money, somewhere between $4,000 and $5,000 per year. In fact, in most of the cases, students usually end up taking a combination of both the loans.
A subsidized loan lends instruments designed to help students in paying the costs of higher education, without actually worrying about the initial principle. However, the amount of loans is not based on the financial requirement, but on the borrower’s college attendance and their grade level.