if you're applying for financial aid to attend college in the United States at some point you'll hear about subsidized and unsubsidized student loans and it's really important that you understand the difference between these two types of loans because subsidized loans are definitely preferable to unsubsidized and if you get the choice you should definitely take subsidized / unsubsidized loans if you have the opportunity to choose between them the reason that subsidized loans are so much better is that with subsidized loans the government will pay your interest while you're in school at least half time so if you take at least the half the amount of credits to be full-time then the government will pay your interest while you're in school or if you're in your grace period so after you graduate and leave school you get six six months before you have to start repaying your student loans so during that time the government would pay your interest and also if you go into deferment for your loans the deferment if you don't know what that means that just means a postponement if you're just having your loans are postponed maybe you're unemployed or something and you apply for a deferment and the government would pay your interest for you on your student loans assuming that they're subsidized loans and now if it's an unsubsidized loan what that means is that the borrower is going to responsible for all of the interest from day one so the government is not going to pay any of the interest and each period any unpaid interest is going to be capitalized to the loan principal the loan principal just means the balance of the loan that you owe and it's a little abstract this idea of capitalisation so I want to walk you through an example to make it a little bit easier for you to understand so let's say that you take out a student loan of three thousand dollars at a five percent interest rate and let's just pretend that you're at the very beginning of your college experience and that you're going to attend four years and so we're going to map out and say okay at the beginning the loan principal the amount that you owe is three thousand dollars and obviously there's no interest due at the very beginning but we're going to pretend that this is an unsubsidized loan this is an unsubsidized loan now I want to show you what what this cap zatia means so you start with the 3000 but there's an interest rate of 5% so multiplying the 3000 by 5% means that after 1 year you'll have incurred 150 dollars in interest now if this were a subsidized loan the government would pay that interest for you because you're still in school but it's assuming that you don't pay this so you're going to be responsible for this interest yourself now it will get capitalized which means added to your loan principal the loan balance is the balance of your loan it'll get capitalized assuming that you don't pay it yourself at the end of this year at the end of the year you get a letter from the government that says hey look 150 dollars of interest has accrued you can pay that you can send them a check for the 150 in which case your loan principal is stay at 3000 or you can just let it ride and just not send them anything and then they'll add that 150 to your loan principal you might say well why would I bother to borrow this well the thing is is that now that the loan principal is three thousand 150 that three thousand 150 is going to be multiplied by the five percent to get next periods interest so next periods interest is going to be one hundred and fifty seven dollars and fifty cents and that's three thousand 150 times the five percent now notice something the interest assuming you didn't pay it at the end of the first year and you just let it be added to your loan balance now the interest that you incurred before is itself earning interest or you're incurring interest I should say so that three thousand 150 instead of three thousand is being multiplied by that five percent and so that's why the interest that you incur during year two is more than what you incurred during year one so now we have this one seven one fifty seven fifty to the three thousand one fifty inside gives us three thousand three hundred and seven dollars and fifty cents we multiply that 330 307 fifty times the five percent again that gives us for year three your junior year of college you one hundred and sixty-five dollars and 38 cents add that to our balance that updates our balance to three thousand four hundred and seventy two dollars and eighty-eight cents and then for year four our interest is one hundred and seventy three dollars and sixty four cents and that means that when you graduate your loan that started at three thousand dollars is now three thousand six hundred and forty six dollars and fifty two cents and so that means if we take the three thousand six 46 to 52 and subtract the initial three thousand dollars that means that over the course of of your college experience that three thousand dollar loan and that basically got you six hundred and forty six dollars and fifty two cents an interest now bear in mind you are unless you immediately pay that the day after your graduation you pay the loan in full this is going to continue to accumulate interest so just be just the six forty six fifty two is just the interest accumulated while you were in school right so until this is completely paid off it's going to continue accumulating interest now here is the great thing about the subsidized student loan so this was all for an unsubsidized student loan right if this were a subsidized student loan so if this were subsidized then the government would have been paying all this interest while you're in school right so when you get out that three thousand that you borrow that's what you do youdo three thousand dollars so you have saved six hundred and forty six dollars and fifty two cents now after you graduate with a subsidized loan then you get the grace period of six months or whatever and and then after the grace period is up assuming you don't get an unemployment deferment or something like that at some point your repayment is going to begin for a subsidized loan right somewhat unsubsidized but with a subsidized loan once repayment begins once you go into repayment then the government is no longer paying your interest and then the loan balance will begin accumulating interest and you'll you'll have to pay the interest after you enter repayment

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