Before and During College: The Key Difference Between Subsidized and Unsubsidized Student Loans

Federal Direct Subsidized and Unsubsidized Loans. If you’re an undergraduate IMG_4578borrowing for college, you’ve probably borrowed both. What’s the difference? And what’s this mean for how you should handle them?

The most important ways Subsidized and Unsubsidized loans vary are:

•   Interest charges: No interest is charged on Subsidized loans while you’re enrolled at least half-time, during the six-month grace period you get when you stop being
IMG_4579enrolled half-time, and whenever your loan payments are postponed under federally-approved deferments.

Unsubsidized loan interest starts being charged the day those funds get disbursed — i.e. used to pay your tuition, given to you, or sent to your bank account, whatever comes first. This interest keeps getting charged until these loans are 100% repaid.

•   Interest Capitalization: You may pay Unsubsidized interest while you’re enrolled and during your grace period, but you’re not required to pay it until your grace period ends. At that point, interest you’ve not paid gets capitalized. This means it’s added to your loan’s principal. Then you’ll pay interest on your new, larger principal amount.

Suppose you borrow $1,000 in Subsidized and $1,000 in Unsubsidized loans at the beginning of this fall semester. Your loans’ interest rates are 5.5% (the rate for these loans in academic year 2018-19). But suppose you can’t afford to make any loan payments while enrolled, nor can you afford to pay anything during your grace period.

When your grace period ends, you’ll still owe $1,000 on your Subsidized loan. But what you owe on your Unsubsidized Loan will have grown by 23.5%, to $1,235. This is your original principal amount of $1,000 plus $235 in unpaid interest that gets added to your Unsubsidized principal. By the time it’s paid in full, it’ll cost at least $2,600 to repay your fall Unsubsidized loan of $1,000.

But you may be able to minimize your Unsubsidized loan debt. Here are three ways:

•   Reduce Borrowing: You’re not required to borrow all, or any, of the loans you’re IMG_4582offered so, if you don’t need all your Unsubsidized loan, tell the financial aid office to downsize or cancel it before it’s disbursed.

•   Pay During School: Return Unsubsidized loan funds within 120 days of the day they’re disbursed. This’ll reduce your principal amount, and the government will cancel any interest and fees charged on the returned amount. Your aid office can usually help you do this.

•   Pay During Grace: Anything you pay during your grace period will reduce interest you owe. Contact your loan servicer about this.

So because Unsubsidized loan interest always gets charged, and because it’ll inflate the amount you repay, minimize Unsubsidized borrowing whenever you can, and prepay Unsubsidized interest whenever you can.

Contact College Affordability Solutions if you’re looking for strategies that’ll reduce your costs of borrowing for college.

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Before College: A Last-Minute Affordability Checklist

Parents, you’ll soon be taking your freshman to college. Help him check off the following so he can begin keeping things affordable even before he arrives.

[ ] Apartment or Dorm Necessities
Make sure he has that blanket, mattress topper, printer, personal toiletries, pillow, IMG_4286sheets, and other basics not supplied by management. Space will be limited so don’t take too much extra stuff. And buy what’s needed before leaving. Merchants in college towns often charge high prices.

[ ] Coordination on Shared Items
Apartments and dorm rooms can only hold so many appliances, dishes, extra furnishings, posters, TVs, and such. These can be costly. If possible, he should contact his roommate(s) to decide who’ll bring what.

[ ] Key Money Management Knowledge
Today’s students face rapidly rising costs. They take on big debts to pay those costs. They get bombarded with credit card offers. But many don’t know about things like inflation, interest, debt, and financial record keeping. Make sure he’s not one of them.

IMG_4288[ ] Spending Plan
He needs to project what’ll remain after funds available for the academic term pay tuition and required fees. This’ll show what’s left to spend for the full term. Divide by the total weeks in the term to reduce his chances of running out of money before finals.

[ ] Do What’s Needed to Receive Loans
Loan funds don’t arrive until 5-10 days after new borrowers finish certain steps required to receive them. Unfinished steps can lead to missed payment deadlines or being cash-poor early in the term. So have him double check to make sure all these steps are complete. 

[ ] Return Unnecessary Loans Funds
Some spending plans show that extra money will be available. Their freshmen can return some of what they borrow before the term ends. This’ll cut the interest they pay. Later in the term, if it turns out they need what was returned, the financial aid office can usually help them re-borrow it.

[ ] Credit Card Management
A freshman who has or will get credit cards needs to know how to handle themIMG_4290that he’s borrowing each time he uses them, the date by which his monthly payment is required to avoid high interest charges, and that he shouldn’t use them use them to splurge or spend money he doesn’t have.

[ ] Key Deadlines
By what dates must tuition and fees, room and board or rent be paid? Missed deadlines can result in late fees, other extra charges, and even eviction. They can also hurt his credit rating.

[ ] Keep Looking for Scholarships
Some scholarships from inside and outside the college are reserved for upperclassmen. He needs to pursue these through his senior year.

[ ] Graduate On-Time
Not dropping classes helps achieve on-time graduation, which limits college costs and debt.

Want more information? Contact College Affordability Solutions for a no-charge consultation.

College Affordability Solutions Topical Index

This index links to almost 90 articles. Each describes an wat to make college more affordable. Use them to learn how to do this before, during, or after college

And don’t forget! On August 15, 2018, new articles will be posted here every Wednesday.

Before College

College Finance Plan

Cost Reduction Strategies

College Costs

College Search and Selection

Credit Cards

Deadlines

Dependent and Independent Students

FAFSA (Free Application for Federal Student Aid)

Financial Aid Application Processes

Financial Aid Offers

Grants

Money Management

Parent Borrowing

Private Student Loans

Saving and Investing for College

Scams and Rip-Offs

Scholarships

Seeking Financial Assistance

Student Loans

Tuition and Fees

Value of Postsecondary Education

Verification

During College

College Finance Plan

Cost Reduction Strategies

Credit Cards

FAFSA (Free Application for Federal Student Aid)

Financial Aid Offers

Grants

Money Management

Off-Campus Housing

Parent Borrowing

Private Student Loans

Scams and Rip-Offs

Scholarships

Seeking Financial Assistance

Student Loans

Tax Benefits for Higher Education

Working While in College

After College

College Finance Plan

Consolidation and Refinancing

Debt Forgiveness and Cancellation

Grace Period

Missed Payment

Repayment of College Loans

Repayment Assistance

Repayment Problems

Tax Benefits for College Loan Repayment

Before College: Step 1 in Building Your Student’s List of Potential Colleges

If you’ve got a college-bound student who’s entering her senior year of high school, it’s time for her to identify a set of schools to which she’ll apply this fall.

Step 1 is to build a list of institutions at which she’ll be happy and that will help her mature and succeed. Lisa Micele, Director of College Counseling at the University of Illinois Laboratory High School, recently provided some wonderful guidance about this list.

Ms. Micele cautions against concentrating solely on so-call “top-tier” and “name-brand” colleges and universities. The total cost of attending many of these institutions easily exceeds $60,000 per year. Some admit less than 10% of their applicants, and not all of their admitted students get institutional grants and scholarships to help discount their high costs.

This warning is right on target. And a 2017 report from the Institute for Higher Education Policy found:

IMG_3075

So before your student starts making her list, or at least early in that process, think carefully about your finances and family situation, then come up with answers to the following questions about how much your family will be able to contribute to your student each year from:

  1. Your annual income? Don’t forget expense reductions that can enhance this while she’s away at school – debt payments that’ll come to an end, her share of weekly grocery bills, money you can free up by squeezing your budget, etc.
  2. Your investment and savings accounts?
  3. Your retirement accounts? Think about how close you are to retirement when calculating this.
  4. Other family members? Consider funds from aunts and uncles, grandparents, and divorced spouses.
  5. What you would borrow in Federal Direct Parent PLUS Loans?

Now help your student answer these questions for herself:

  1. What’ll she be able to earn during summers and while in school?
  2. How much does she have in savings?
  3. What’s she willing to borrow in Federal Direct Subsidized and Unsubsidized Loans?
  4. How much Federal Pell Grant does the government’s FAFSA4caster estimate she’ll receive? It’s too early to count institutional, state, or private scholarships.

Add everything up and you’ve got an annual price range for schools your student can afford to put on her list. To find these prices, counsel her to search for “cost of attendance” on each school’s website, and then add another 4% per year (the approximate average annual increase in college cost over the last decade) for every year she’ll be enrolled.

Don’t worry. The U.S. has 4,360 degree-granting institutions, so your student will surely be able to some good “fits” in her price range while boosting her chance of graduating and keeping college debts lower – and isn’t that what it’s all about?

College Affordability Solutions can advise you and your student on strategies for keeping postsecondary education within your price range. Call (512) 366-5354 or email collegeafford@gmail.com for a no-charge consultation.

After College: Were You Wrongly Denied Public Service Loan Forgiveness? There’s a Chance to Fix That!

Are you a Federal Direct Loan Program (FDLP) borrower who applied for Public Service Loan Forgiveness (PSLF) after completing a decade of public service employment? Did you do exactly what you were told to qualify for PSLF, then told you weren’t eligible because you used the wrong student loan repayment plan? If so, help is now available!

What is PSLF?

Normally, PSLF forgives your remaining FDLP debt after you use a qualifying repayment IMG_2908plan to make 120 qualifying monthly payments while performing qualifying employment.

What’s the Problem?

Congress recently found that student loan servicing personnel hired by the U.S. Education Department (ED) to administer FDLP steered untold numbers of public servants into FDLP repayment plans that didn’t qualify them for PSLF.

After faithfully making payments for 120 months under the repayment plans they were directed to use, FedLoans (the loan servicer administering PSLF) informed these public servants they didn’t qualify for PSLF because they used the wrong plans.

So Congress created a $350 million fund to help borrowers left in the lurch by this fiasco. Applications for this money are now being reviewed under a program ED calls Temporary Expanded Public Service Loan Forgiveness, or “TEPSLF.”

What Should You Do?

If you were denied PSLF because of this blunder, ask for loan forgiveness again by sending an email to TEPSLF@myfedloan.org. Here’s the model ED recommends for this email:

IMG_2906

Do You Qualify for TEPSLF?

TEPSLF will forgive what’s left of your FDLP debt only if:

  • You submitted a PSLF application that was denied solely because some or all of your 120 monthly payments were made under the Extended or Graduated repayment plans — which don’t qualify for PSLF; and
  • Your employer(s) certified that you completed a total of 120 months of qualifying employment; and
  • FedLoans Servicing accepted your employer certification(s); and
  • Your payment amount for the 12 months before you applied for TEPSLF, and the last payment you made before applying for TEPSLF, equaled or exceeded what you would have paid under one of the four income-driven repayment plans qualifying for PSLF. FedLoans Servicing will make this determination and, when it does, it’s supposed to notify you by email.

Hurry Up!

While $350 million sounds like a lot, it’ll be used to forgive debts on a first-come/ first-serve basis. So if your PSLF application was rejected over the type of repayment plan you used, don’t miss your chance — email FedLoans Servicing right away!

Looking for advice on managing the debts you took on for college? College Affordability Solutions has been 40 years experience with student loan repayment issues. Call (512) 366-5354 or email collegeafford@gmail.com to consult us at no charge.

Before and During College: Get Answers to These Questions Before Borrowing Private Student Loans (Part 2)

In Part 1 of this series we identified answers to get on “up-front” issues when IMG_2699comparing a private versus federal student loan. Today we recommend questions to ask about things that happen after you get your money, but which are nevertheless essential to determining which loan is better for you.

Repayment Begin

  • When must you begin repaying your debt?

Payments aren’t required on federal student loans while you’re enrolled at least half-time and during a “grace period” lasting six months for Federal Direct Loan Program (FDLP) loans and nine months for Federal Perkins loans. Private student loan repayment start dates vary by loan.

Deferment and Forbearance

  • Under what conditions may payments be temporarily postponed or reduced?
  • What happens to interest that accrues (builds up) during these postponement and reductions?
  • Must you pay a fee to get your payments postponed or reduced?

You may temporarily postpone or reduce your monthly loan payments through various deferments and forbearances. Interest doesn’t accrue on FDLP Subsidized and Federal Perkins loans during deferment, but keeps accruing on other federal loans during deferment and all federal loans during forbearance.

The government charges no fees for deferment or forbearance, but some private lenders do — if they offer deferments or forbearances at all.

Loan Consolidation

  • May my federal and private college loans be consolidated?
  • Does my interest rate change if I consolidate? How much?
  • Does consolidating change my repayment period or other terms and conditions?

An FDLP Consolidation loan pays off whatever federal student loans you choose, but not your non-federal debts.

FDLP fixes your consolidation loan interest rate at the weighted average of all the loans it pays off, plus .125%.

You can usually get lower monthly payments on an FDLP Consolidation loan, which get extended repayment periods based on their size:

IMG_2695

Repayment Plans

  • How long will you have to fully repay your debt?
  • Do you have different repayment options. If so, what are their terms and conditions (monthly payment amounts, etc.)?

The FDLP allows you to choose from seven different repayment plans. The standard plan requires a monthly payment amount sufficient to pay off your debt within 10 years. Four others help ensure you’ll not be overwhelmed by monthly payment amounts by making such amounts a percentage of your Adjusted Gross Income, even if this requires a repayment period longer than 10 years.

Loan Discharge and Forgiveness

  • May any portion of your debt be cancelled? If so, under what circumstances?

Most private student loans offer no opportunities for discharge or forgiveness. Federal student loan debts may be discharged or forgiven under various reasons, including Public Service and Teacher Loan Forgiveness.

College Affordability Solutions offers free advice and counsel on college borrowing based on 40 years experience in student financial aid and student loans. Call (512) 366-5354 or email collegeafford@gmail.com for such assistance.

Before and During College: Get Answers to These Questions Before Borrowing Private Student Loans (Part 1)

Private credit providers want to increase their share of the student loan market. So if you’ll be in college — including graduate or professional school — during 2018-19, you may be targeted by private student loan marketing campaigns. If you are, remember that old saying, “Let the buyer beware!”

Private lenders want to convince you to borrow loans that’ll maximize their profits. You want to borrow loans that are as inexpensive as possible and, since you can’t predict the future, that give you flexible repayment terms. To do this, you’ll need answers to questions about your private and Federal Direct Loan Program (FDLP) borrowing options.

Here are some questions to ask:

Interest

  • What’s the initial interest rate?
  • Is the interest rate ever subject to change? If so, when and on what basis? If the changed interest rate was place today, what would it be?
  • Am I responsible for interest that accrues (builds up) during all phases of the loan’s life? What happens to this interest when I’m not required to pay it?

Many private college loans offer “introductory” interest rates that are lower than FDLP interest rates. But these rates generally rise later. Conversely, every FDLP loan has a fixed interest rate that’ll never change:

IMG_2469

FDLP interest payments aren’t required while you’re enrolled at least half-time and for six months after you leave school. But interest accrues on all but FDLP Subsidized loans during these times and, if you don’t pay it, it’ll be capitalized (added to loan principal) when your grace period ends. Many private loans handle interest in a similar manner.

Credit Record

  • What creditworthiness standards must you meet to get the loan?

Applicants get rejected, or charged higher interest rates, if they don’t have lender-required credit scores. But Washington limits access only to FDLP Graduate and Parent PLUS loans for applicants with “adverse credit histories.”

Loan Fees

  • How much will I be charged to obtain my loan(s)?

Washington currently charges a 1.066% fee on FDLP Subsidized and Unsubsidized loans, and a 4.264% fee on FDLP Graduate and Parent PLUS loans. Private lenders may require larger or smaller fees. These fees are deducted from the loan money you receive.

Private loan marketing campaigns usually concentrate on a few positive highlights about what they advertise so, to get all the answers you need, you’ll have to dig through lender websites and maybe even make calls or send emails to lenders. In-depth information on FDLP loans is available in the government’s Federal Student Loans: Basics for Students booklet.

Next Wednesday
Look right here for even more questions to get answered before you
borrow private student loans.

Contact College Affordability Solutions at (512) 366-5354 or collegeafford@gmail.com for free consultations about how to compare your college borrowing options.