Question

1.Explain the difference between subsidized and unsubsidized student loans.

2.Explain what it means to capitalize the student loan. Is this an option for both subsidized and unsubsidized loans? What does it mean if you don't capitalize your student loan?

(please use appropriate grammar, complete sentences, and that you explain yourself completely. This will mean there should be at least a couple sentences for each explanation.)

Answer 1

1.

(a) Direct subsidized loan

The government pays interest on a subsidized loan while you’re enrolled in school at least half time. If you’ve already graduated and put your loans into deferment or forbearance, the government also covers interest on your subsidized loans.

While students are not required to pay interest on a direct loan while in school, interest begins to accrue immediately.

Pros of direct subsidized loans

• The U.S. government pays the interest on your loan as long as you remain enrolled at half-time status.
• Interest is paid by the government on eligible loans during deferment and forbearance, as well as on certain repayment plans. Find out more about how this works with this helpful guide to federal loan interest subsidies.
• No payments are due until six months after leaving school.
• The longest eligibility period is 150% of the length of the college program you’re enrolled in. For instance, if you attend a full, four-year undergraduate program, you’ll qualify to receive six years worth of loans.

Cons of direct subsidized loans

• Graduate students don’t qualify for subsidized federal student loans.
• Students who can’t demonstrate financial need — which can happen if parents earn too much — cannot qualify for this type of financial aid.
• Annual loan limits are lower for direct subsidized loans than for direct unsubsidized loans. The total aggregate loan amounts are capped at $23,000 for subsidized loans.

(B) Direct unsubsidized loans

Direct unsubsidized loans are also federal loans, and students must complete the FAFSA to be eligible.

However, eligibility for direct unsubsidized loans isn’t based on financial need, and students are responsible for interest on direct unsubsidized loans, even while you’re in school or while your loans are in deferment after graduation. If you don’t make interest payments, the unpaid interest is added to your loan balance, making repayment more costly.

“With an unsubsidized loan, the student is responsible for making the interest payments the moment the loan is taken out,” said Bielagus. “If the student does not make the interest payments, then those payments are simply added onto the principal amount.”

Pros of direct unsubsidized loans

• Both undergrad and grad students can apply for direct unsubsidized loans.
• Potential borrowers don’t need to prove financial hardship to qualify.
• Optionally defer payments until six months after leaving school (at the cost of accrued interest).
• No time limit on your eligibility period for unsubsidized borrowing.

Cons of direct unsubsidized loans

• Borrowers are responsible for paying all the interest on their unsubsidized loans, even during the grace period after graduation and during deferment or forbearance.
• Annual loan limits are lower than for a subsidized loan

2. What causes interest to capitalize on student loans?

There are several situations in which interest capitalizes.

For federal student loans, capitalization of unpaid interest occurs:

• When the grace period ends on an unsubsidized loan.

• After a period of forbearance.

• After a period of deferment, for unsubsidized loans.

• If you leave the Revised Pay as You Earn (REPAYE), Pay as You Earn (PAYE) or Income-Based-Repayment (IBR) plan.

• If you don’t recertify your income annually for the REPAYE, PAYE and IBR plans.

• If you no longer qualify to make payments based on your income under PAYE or IBR.

• If you’re on the Income-Contingent Repayment (ICR) plan, it capitalizes annually.

• When you consolidate federal loans.

Capitalized interest is unpaid interest that's added to your student loan, increasing the total you repay.

The federal government does not pay the interest on unsubsidized loans during a deferment or forbearance and the interest on subsidized loans during a forbearance. If the borrower does not pay this interest as it accrues, it is capitalized by adding it to the loan balance.

Capitalization affects the compounding of interest. When interest is added to the loan balance, interest may begin being charged on this interest.