College Connect Fall 2018: Understanding the Difference in Student Loans

Posted By David Wilhite

By Keegan Pope

For most kids, when you’re 17 or 18 years old, debt is a concept that doesn’t make a whole lot of sense. If you have a car, it’s likely that your parents own it and are least helping to make payments on it. Even if you don’t live at home, you’re almost certainly paying month-to-month rent somewhere. So when the idea of student loans to pay for college comes up, terms like principal and interest or subsidized and unsubsidized loans might as well be a foreign language you never took in high school.

Six years ago, when I looked into financial aid for my undergraduate degree, the difference between subsidized and unsubsidized loans was never explained to me. My parents weren’t able to contribute much to my education, and because I was hoping to pay as little as I could out of my own pocket, I accepted both before my freshman year began.

I did so again for the second semester. And the third. And the fourth. Like approximately 44 million other Americans, I needed some short-term financial assistance to get my life after graduation started.

Because the subsidized loans — which the U.S. Department of Education pays the interest on as long as you’re enrolled in school— didn’t accrue any payments, I assumed the unsubsidized didn’t either. I was in for a surprise when — after four semesters of classes — the balance of my student loan debt was $2,000 more than what I agreed to take on. As it had been explained to me, I didn’t have to worry about paying off student loans or the interest attached to them until six months after graduation. They weren’t talking about all loans, just subsidized ones.

When I called the school’s financial aid office in a panic, they explained to me that unsubsidized loans — unlike their counterpart — were not exempt from accrued interest while you’re still in school. Each month that I didn’t pay down the interest, it compounded and grew even larger.

Now, racking up 4 to 5 percent interest on a $7,000 loan might not seem like a large chunk of money over your first year. (It’s about $350, which you can calculate here.) But as you take out more loans each year — the average United States citizen has more than $37,000 in student loan debt when they graduate — those interest payments begin to seriously stack up.

After 4-1/2 years of college — and about $30,000 in combined subsidized and unsubsidized loans — I’d accumulated more than $3,000 in interest payments on the unsubsidized loans. And that number could’ve been substantially higher if I hadn’t been chipping away at the interest I owed.

Now imagine if you’re going to attend a private college or out-of-state institution. Your loan balance could be double, or even triple, what mine was at graduation. Instead of looking at a few thousands dollars extra on your bill, you could be on the hook for another $15,000 dollars.

Here’s a few tips on how to avoid the same shock I had:

    1.     This seems simple, but make sure you understand the difference between the loans you take on. Know the interest rate, when you’ll be expected to start repaying and what the monthly amount is you can pay back while in school.

    2.     Put aside money each month to pay down the interest on your unsubsidized loans. Even if it’s the extra $50 that you were planning to spend on food or booze, put it toward your interest payment. Your bank account will thank you later.

    3.     Take out subsidized loans first, and then if you need them, add unsubsidized loans to fill in whatever is left. If you can come out after four to five years with only a little bit more than the original amount you borrowed, you’ll be in much better financial shape.

    4.     Apply for any and every scholarship you can. There are thousands of small scholarships out there, whether they be for first-generation college students, people of specific races or ethnicities or even ones based on your college location. Take advantage of those. Although most will come with a GPA or other academic stipulation, they can help to drastically cut down on the cost of college.

There’s a lot of helpful information about student loans out there, so if you’re struggling to get information from your school or just want to understand the minutiae of what will likely be the second-largest amount of debt you take on over your lifetime, sites like studentaid.ed.gov and consumer.ftc.gov have a lot of useful information. Good luck, and just remember that the extra couple dollars to buy something other than Busch Light are absolutely worth it.

Keegan Pope is a graduate student at the University of Missouri School of Journalism.

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