Which Type of Loan Requires That You Pay the Interest Accumulated During College?
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You might be wondering which type of loan requires you to pay the interest accumulated during college. The answer is: federal Stafford loans.
If you have a Stafford loan, you’re responsible for paying the interest that accrues during your in-school and grace periods, as well as during any periods of deferment or forbearance. The good news is that you don’t have to start making payments on your principal until after you graduate or leave school.
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Types of Loans
There are two types of loans that students can take out to help pay for their education: federal loans and private loans. Federal loans are issued by the government and have fixed interest rates. Private loans are issued by banks and other financial institutions and have variable interest rates.
Stafford Loans
Stafford Loans are the most common type of federal student loan. They are available to both undergraduate and graduate students. Stafford Loans have two types: subsidized and unsubsidized. With a subsidized Stafford Loan, the federal government pays the interest while you are in college. An unsubsidized Stafford Loan accrues interest while you are in school, which is added to the principal amount of your loan.
Perkins Loans
The Perkins Loan is a federal student loan for undergraduate and graduate students with financial need. You must repay the loan, plus interest. The federal government pays the interest while you’re in school and during your grace and deferment periods.
PLUS Loans
PLUS loans are federal student loans available to graduate and professional students, as well as the parents of dependent undergraduate students. PLUS loans can help pay for education expenses not covered by other financial aid.
PLUS loans have a fixed interest rate of 7.08% for loans first disbursed on or after July 1, 2019, and before July 1, 2020. Interest rates for PLUS loans first disbursed on or after July 1, 2020 will be determined at a later date.
PLUS loans are not based on financial need; however, the borrower must not have an adverse credit history (a credit check will be performed).
Interest Rates
Interest is the price you pay to borrow money. The amount of interest you pay depends on the amount of money you borrow, the annual percentage rate (APR) charged by the lender, and the length of time you borrow the money. The APR is the annual cost of borrowing money, including fees charged by the lender. The APR is the rate at which your interest accrues.
Stafford Loans
Stafford Loans are the most common type of federal student loan. The interest rate for Stafford Loans disbursed between July 1, 2017 and July 1, 2018 is 4.45%. Stafford Loans have a fixed interest rate, meaning it will never change. For graduate or professional students, the interest rate for Stafford Loans is 6%.
If you have a Stafford Loan that was disbursed before July 1, 2006, or if you have a PLUS Loan that was disbursed before July 1, 2008, your loan has a variable interest rate. The variable interest rate is equal to the highest prime rate plus 3.11%.
Perkins Loans
Perkins Loans are low-interest federal loans for undergraduate and graduate students with exceptional financial need. The interest rate on Perkins Loans is 5%. You are not charged interest while you are in school or during your grace period. You have up to 10 years to repay your loan. Perkins Loans are administered by the school you attend.
PLUS Loans
A PLUS Loan is a federal student loan that is available to graduate or professional students as well as parents of dependent undergraduate students. The PLUS Loan can help pay for education expenses up to the cost of attendance minus any other financial aid that the student may be receiving.
Interest on a PLUS Loan begins accruing from the date of the first disbursement. For example, if you take out a PLUS Loan for the fall semester, your loan will begin accruing interest from the date of the first disbursement in September. You can choose to pay the interest while you are in school or allow it to accrue and be capitalized (added to your principal balance).
Loan Forgiveness
Many factors must be considered when taking out a loan, such as the type of loan, the interest rate, and the repayment plan. Another important factor is whether the loan will be forgiven. Some loans, such as Stafford loans and Perkins loans, offer loan forgiveness programs. This means that if you make your payments on time for a certain number of years, the remaining balance on your loan will be forgiven.
Stafford Loans
Stafford Loans come in two varieties: subsidized and unsubsidized. Both types of Stafford Loans are given to eligible students attending college at least half time to help pay for their education.
A subsidized Stafford Loan is awarded based on financial need. The U.S. Department of Education pays the interest that accrues on a subsidized Stafford Loan while the student is in school at least half time and during deferment periods. If the student consolidates his or her loans, the subsidies are lost.
An unsubsidized Stafford Loan is not based on financial need; however, the student is responsible for all interest that accrues on the loan from the time it is first disbursed until it is paid in full. The student can choose to pay the interest while in school or allow it to accrue and be capitalized (added to the principal amount of the loan). If the student consolidates his or her loans, any unpaid accrued interest will be capitalized.
Perkins Loans
The Perkins Loan is a type of federal student loan that is forgiven after 10 years of repayment. Perkins Loans are given to students who demonstrate high financial need, and the forgiveness period begins after the borrower has made 120 monthly payments. Interest on Perkins Loans is subsidized by the federal government, meaning that the borrower does not have to pay the interest that accrues during their grace period or deferment periods.
PLUS Loans
PLUS Loans are federal student loans available to the parents of dependent undergraduate students and the graduate or professional students themselves. The fixed interest rate is currently 7.08%. These loans begin accruing interest immediately, unlike subsidized Stafford Loans which do not begin to accrue interest until after the student graduates or leaves school. PLUS Loans must be repaid with fixed monthly payments, and typically have a 10-year repayment term.
