High school graduation has come and gone, and the euphoria has settled into the realization college is just around the corner. The first thought is usually independence and being treated like an adult; the second thought is expenses, since Mom and Dad are not always going to be around to pay the bills.
Yes, during the last year of secondary education, the applications for scholarships practically resulted in a terminal case of writer's cramp. Nevertheless, the awards do not always pay for a full ride. When expenses are looming, and a part-time job will not suffice, many students apply for subsidized student loans.
Despite the best efforts to stay out of debt, many students cannot afford the rising cost of post-secondary education, without the aid of a subsidized student loan. So, what does "subsidized" mean anyway? The answer is: a little extra financial help.
When a person obtains a loan for an automobile or a house, the interest starts accruing immediately. While 3-5% interest may not seem like a big deal, over the life of the loan, the borrower will end up paying at least half again what the purchase is worth. For example, over the life of a mortgage for a $100,00 house, the homeowner will end up actually forking over $150,000-$200,000.
Unlike a mortgage or car payment, a student is not required to start paying back a subsidized student loan until six months after graduation. So, instead of worrying about where the extra money is going to come from to make the monthly payments, a student can use the money and concentrate on studying hard to get a decent education.
In addition, a subsidized student loan has a deferment clause. If the graduate needs to delay repayment, and has a justifiable reason, the loan can be held longer. For example, having excellent grades and good recommendations does not guarantee immediate employment. Many college graduates are pounding the pavement to find substantial work opportunities. In this case, no one needs the added burden of a monthly loan payment.
However, the best perk of a subsidized student loan is the interest, or lack thereof. Unlike other student loans, house payments, or auto loans, the subsidy prevents the loan from accruing interest until the first payment is due. Thus, the extra financial benefit can save thousands, in the long run. How?
Anyone who is currently making a loan payment can verify how interest really works. The interest is not tacked on to the remaining balance, like a credit card. The total interest is figured into the repayment amount of the loan from the onset of repayment. Plus, the interest amount is always paid first.
For instance, when a homeowner first begins repaying a mortgage, most of the money goes directly to interest, with very little actually going toward the equity of the home. In fact, most of the payments, for years, will be delegated to repaying the interest. Financial planners will actually suggest a person pay a few dollars extra each month. Why? Because the extra automatically goes to the principle, meaning an additional $20 per month can reduce repayment by a year or two.
What does this explanation have to do with subsidized student loans? Plenty! If an education loan does not accrue interest while the student is still in school, the amount of interest will be greatly reduced, and the individual will be paying more toward the principle of the loan from the beginning.
Since most subsidized student loans have a 10-year repayment plan, an individual only pays the interest on ten years, instead of 11-18 years, depending on the length of schooling required for a chosen degree. Thus, the monthly repayment amount is greatly reduced.
Also, for the former students fortunate enough to obtain well-paying jobs soon after graduation, adding a little extra amount each month can eradicate one more bill in a timely manner. With a subsidized student loan, the individual is actually paying less interest and more on the monies actually loaned.
Case in point: While many teenage students have opportunities for a plethora of scholarships and financial assistance from Mom and Dad, more and more college students are non-traditional. With many corporations downsizing, and a decrease in adequate employment opportunities, it is Mom and Dad who are going back to school for further education. Oftentimes, subsidized student loans are the means to get an education, when any other income is still available to support a family. Not being required to pay extra interest during repayment also leaves more of a paycheck for family expenses.
Federal subsidized student loans help many students, traditional and non-traditional have the resources available to pay for classes, books, room and board, and general living expenses. How the money is ultimately used is up to the borrower, and interest fees and a repayment schedule are not instituted until six-months after graduation, to further aid an individual in achieving personal and professional success.
