Understanding How Federal Stafford Loans Work For College Education Loans

by Hank Coleman

College costs are skyrocketing and increasing faster than the current rate of inflation for other products in America. Many college students are turning to the Federal Stafford Loan to help pay for the high price of college nowadays. The student loan is available in two versions: unsubsidized and subsidized. Understanding the differences between the two versions of the popular student loan can help save you money on the cost of college.

Subsidized vs. Unsubsidized Stafford Loans

Federal Stafford Loans for collegeIf you acquire an unsubsidized loan, you are obligated to pay the interest on the loan while you are attending college. You are also required to pay back the loan immediately after you leave school and during any periods of hardships. On the other hand, if you obtain a subsidized Stafford loan, there is no interest accumulated while you are in college, during the six month grace period after leaving school, and for any loan deferment due to hardship. Usually a loan deferment is allowed if you have lost your job, have unforeseen expenses such as medical bills, or are enrolled in school or have applied for a graduate fellowship.

If you do take out a Stafford Loan, whether it is subsidized or not, make it a priority to graduate. You still owe the balance on your loan if you drop out. If you take out a subsidized loan, remember that you will have a larger balance to pay after the six-month grace period ends. Therefore, if you select to finance your education with an unsubsidized loan, you will owe more and your subsequent payments will be higher than opting for a loan where interest payments are made while in school and during the grace period.

Consider Your Options For Loan Repayment

Just like any late payment, if you are late on the installments for your loan, you will be penalized. The payments will go on your credit report and can linger there for seven years. You can avoid this situation through the numerous ways you can choose to pay back the amount on your loan. Look at your repayment plan. It is not set in stone. You can make alterations if another way is better suited to you financially. Here are some of the repayment alternatives:

    • Regular or standard repayment allows you to pay a fixed amount for a period up to ten years. Usually, if you opt for this type of plan, you will enjoy a lower rate of interest.
    • Prepayment of the loan amount is not penalized so take advantage to prepay all or part of your loan in order to lower the expense.
    • A graduated repayment of your loan allows you to make small payments in the early part of the loan, which are primarily interest, and assume payments that are considerably bigger in the final loan period.
    • Payments can be extended using a graduate or standard plan of repayment if you are in debt on your Federal loans for over $30,000. Extension gives the borrower reduced monthly payments over the term of the loan, which usually can be lengthened up to 30 years.
    • Payments can also be made based on your salary; therefore, repayment is made at a designated percentage of your monthly gross take-home pay. Two options exist. The “income-contingent” plan is designed for repayment to be made at a determined interest rate for 25 years while an “income-sensitive” loan repayment allows for payback to last up to 25 years.

Understanding the ins and outs of the Stafford Loan can help you pay for college while saving money. You can take advantage of the different options the student loan provides you and make them work in your favor or to suit your specific needs.

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