Understanding Loans

Loans

Loans are made by the Federal government or state government or by private banks or loan agencies. Interest on the government loans tends to be lower than in the private sector. Federal loans charge a one-time origination fee while private lenders do not.

Federal Loans.

Federal loans are allocated by the schools as part of your financial aid package. Federal loans are generally subsidized or unsubsidized. Subsidized loans are need-based and unsubsidized loans are available to any student.

The interest rate for the 2021/22 school year for these loans is 3.73% and interest accrues daily. The main difference is how interest accrues before repayment starts. For a subsidized loan, the government pays the interest on the loan while you are enrolled in school at least half-time, in the 6-month grace period after you leave school (or drop below half-time enrollment), and during any deferments. Unsubsidized loans instead accrue interest and any unpaid interest is added to the principal (capitalized) when the grace period ends.

There are also Federal PLUS loans which parents can take out to help pay for college. These charge a higher interest rate, 6.28%.

Private Loans.

Private lenders have credit requirements for their loans and students may need a cosigner with established good credit to qualify for the loan. Interest rates from private lenders range from 1.04 – 12.99% and may be fixed for the life of the loan or variable. Private lenders do not charge an origination fee.