The organization known as FAFSA -- Free Application for Federal Student Aid -- grants students financial assistance by way of subsidized or unsubsidized loans, or both. Both of these types of loans come with advantages, including lower interest rates than other loans and the ability to start repaying after school. It's important, however, to understand how interest accrues.
About Stafford Loans
A Stafford Loan is a special type of borrowing program for eligible students at accredited and participating colleges in the United States. The U.S. Department of Education approves and distributes these loans to qualified candidates. Eligibility for the Stafford Loan program is determined by the FAFSA application. Upon approval, the applicant must sign a master promissory note (MPN), which is the agreement outlining the conditions of repayment.
Subsidized Interest Accrual
When a student is approved for a subsidized Stafford Loan, he receives money up front and doesn't have to repay it until graduation. During school, interest does not accrue on the loan. In a way, the loan account freezes, then activates at graduation, requiring the borrower to make regular payments at that time. This type of loan is extended to borrowers who have financial need as determined by the FAFSA form.
Unsubsidized Interest Accrual
An unsubsidized Stafford Loan is a loan that isn't dependent on the borrower's level of financial need. Like a subsidized Stafford Loan, the borrower doesn't have to start making payments until after graduation. Unlike a subsidized loan, the interest on an unsubsidized loan accrues while the student borrower attends school. The student has the option to pay the outstanding interest each year while in school to keep the balance down.
If it is absolutely necessary to borrow funds to pay for school, Stafford Loans come with the most favorable terms over standard unsecured loans from banks. But borrowers can look at alternatives to avoid accumulating debt that could end up plaguing them for years or even decades. In the article entitled "That Student Loan, So Hard to Shake," published in 2008 by "New York Times," writer Jonathan D. Glater discusses how student loan debt burdens graduates and lenders can take negative actions more quickly against people who default on these types of loans. Instead of taking out Stafford Loans, a student should apply for as many potential scholarships as possible and save up money during the summers before attending school to help pay for tuition, fees and living expenses.
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