The Everyday Person’s Guide to Understanding Student Loans

Have you filled out your FAFSA? Are you financing your education through grants, unsubsidized loans, or subsidized loans? What’s your interest rate?

Have you ever noticed when it comes to talking about student loans there appears to be a language attached to the discussion – words like subsidized, unsubsidized, or acronyms like FAFSA? Student loans can be a difficult topic to discuss, but they’re even more difficult to discuss when a language barrier exists. This post will provide an everyday person’s definition of the words and phrases you will likely hear surrounding student loans.

What’s the FAFSA?

First, and foremost, what does FAFSA stand for? FAFSA stands for Free Application for Federal Student Aid and your FAFSA can be accessed at https://fafsa.ed.gov/. Before we go any further, let’s talk about the two parts of FAFSA. First, FAFSA is a “free application.” This is great; this means you can apply for free for financial aid to help pay for your education. Second, the FAFSA is for “federal student aid.” What does this mean? This means that any financial aid obtained through the FAFSA application is supplied by the government. This isn’t the only way to find aid, but know that the FAFSA directly impacts government aid.

The FAFSA is only for those who are considered “need-based.” Why should I fill it out?

The FAFSA not only opens the door for federal aid, but the FAFSA also has the opportunity to make you eligible to receive financial aid supplied by your university. Remember, because the FAFSA is free, there is no harm to fill it out. Additionally, the FAFSA could make you eligible to receive financial aid, but this does not mean you must accept the financial aid (i.e. subsidized loans, unsubsidized loans, etc.)

Grants? Scholarships? Federal Loans? What’s the difference?

Grants are another type of financial aid usually disbursed by the government. For example, you may have heard of the Pell Grant. This grant is given to low-income undergraduate students to help finance their tuition. In order to find out if you’re eligible for a grant like the Pell Grant, you must fill out the FAFSA.

Scholarships are also a form of financial aid, but, unlike grants and federal loans, these are normally issued by corporations, non-profit organizations, foundations, and individuals. Most often the application for scholarships occur through an application which will usually include an essay or a creative piece. Scholarships are for students of any age and income. They can be given out on the basis of academics, athletic ability, ethnicity, major, state, or even being short or left-handed (I know an individual who received scholarships for her height).

The main difference between a grant and a scholarship is who is supplying the money. The similarity between grants and scholarships – the best part – it is free money that you do not have to pay back after you graduate. This means less college debt!! You can apply for scholarships before and throughout college. Unlike grants and scholarships, loans require that you repay the lender the money you borrowed and with interest.

What’s the difference between a subsidized and unsubsidized loan? Is one better than the other?

First, we need to define interest. When you borrow money, you will have to pay interest on the amount you borrowed. Interest is the price you pay for borrowing money. Rather than a fixed amount such as $1,000, interest is described as a percentage such as 4%. For example, if you borrowed $10,000 and the interest is 4%, you would owe the lender $400 ($1,000 multiplied by 4%) for borrowing their money. That means that in total, you would owe $10,400. You can see how this can add up.

An unsubsidized loan is a federal loan that begins accruing interest as soon as you borrow money. The interest rate is higher on an unsubsidized loan than a subsidized loan. These loans are available to undergraduate, graduate, and professional students.

A subsidized loan is a federal loan given out to undergraduate students on a need-basis and doesn’t accrue interest until after the sixth month grace period is complete. This doesn’t mean that there isn’t interest being charged; it means that the government is paying the interest for you until you graduate. Which loan is better? Subsidized loans have a lower interest rate; therefore, they accrue less debt than an unsubsidized loan.

Deferment? What does this mean?

While you’re in school, you are not required to make payments on your student loans. After you graduate or drop below ½ student status, you have a 6 month grace period before you must begin making payments on your loan. The time that you are in school and the 6 months following leaving school are referred to as the deferment period – the time that you may defer making payments on your loan(s).

Understanding these basics of student loans can eliminate the language barrier that might stand between you and understanding the student loan discussion. If you’re curious about your personal student loans including loan type, balance, interest rate, and servicer (the organization supplying you the loan), login into https://www.nslds.ed.gov/nslds_SA/.

If you would like additional help walking through your own financial story, please feel free to contact me Jessee Miller – [email protected]