Which Loan Type Requires You to Make Loan Payments While You're Attending School?
There are many different types of student loans available. It's important to do your homework before choosing one.
Contributing Writer at Tally
March 18, 2022
When it comes to choosing a student loan, it's easy to become overwhelmed with the different options available. There are federal student loans, with multiple different types available under this umbrella, and there are countless private loans. Each loan may be different when it comes to things like criteria for application, interest rates and repayment plans.
To help with your decision, you'll want to ask yourself questions like, "Which loan type requires you to make loan payments while you're attending school?" We'll answer that question and more.
We'll also discuss the types of loans that are available and the differences between them. By the end of this article, you should hopefully have a much better idea of what type of loan is best for your personal financial situation.
What are the different types of student loans available?
As mentioned, there are numerous student loans available. Below, you'll find a breakdown of the different types of loans along with general information regarding their interest rates, repayment expectations and credit information.
Direct Subsidized Loans
Direct Subsidized Loans are a type of federal student loan. Students will need to fill out a Free Application for Federal Student Aid (FAFSA®) to apply. These loans are for undergraduate students only and are based on financial need. There is no credit check required to obtain this federal direct student loan.
These loans can be particularly advantageous because the U.S. Department of Education pays the interest on the loan while you’re in school, during a six-month grace period after you leave school and during deferments. Students need to be enrolled for at least half-time to maintain eligibility.
After the six-month grace period, the federal government will stop paying the interest. At that time, you will be responsible for making monthly payments that cover your principal and interest. The current interest rate is 3.73% for subsidized loans that are first disbursed between July 1, 2021, and July 1, 2022.
There are also loan limits — the max you’re allowed to borrow — associated with Direct Subsidized Loans. Annual loan limits cap how much you can borrow in an academic year based on how long you’ve been in school. Aggregate loan limits are the maximum outstanding loan amount you can have at a given time. The current aggregate loan limit is $23,000.
Direct Unsubsidized Loans
Direct Unsubsidized Loans are another type of loan offered by the federal government. Unlike subsidized loans, students do not need to exhibit financial need to apply for this loan. They will, however, need to complete a FAFSA form. Credit history is not taken into consideration during the application process.
All higher-education students are eligible to borrow, including:
Professional degree-seeking students
Students must maintain half-time enrollment to receive loan funds.
Unlike subsidized loans, the federal government will not pay interest on these loans. The interest rate for an unsubsidized federal student loan first disbursed between July 1, 2021, and July 1, 2022, is 3.73% for undergraduates and 5.28% for graduates or professionals. Interest begins accumulating upon loan disbursement, even during deferment.
After you leave school, you will have a six-month grace period. During this grace period, you are not required to make monthly loan payments.
However, because the loan is unsubsidized, you still accrue interest during the grace period and any deferments. Any interest you accumulate during these periods will be added to your principal loan balance. So, you’ll end up paying interest on the interest.
Lastly, the loan limits are higher for unsubsidized loans than they are for subsidized loans. Dependent undergraduate students — student borrowers who have to report information with their parents or guardian — have a limit of $31,000. Independent undergraduate students have a limit of $57,5000. Graduate and professional students have limits of $138,500.
Keep in mind that these limits are for all of your federal student loans combined. So, if you’re a dependent undergrad, your subsidized and unsubsidized loans together can’t exceed $31,000.
Direct PLUS Loans
Direct PLUS Loans are another type of loan offered by the federal government. They are only available for graduate students, professional students and the parents of undergraduate students.
If these loans are made to parents on behalf of undergraduate students, they are known as parent PLUS loans. If they are made to graduate or professional students, they are known as grad PLUS loans. These loans are designed to cover education expenses not otherwise covered by the direct loan program.
Unlike the two options mentioned previously, credit checks will occur during the application process. Students will also need to complete a FAFSA form.
The maximum amount you can receive is the cost of attendance less any other financial aid received. The cost of attendance is determined by your school.
For parents to be eligible for a Direct PLUS Loan, their child must be a dependent and an undergraduate student enrolled at least half-time. Borrowers must begin repayment as soon as the loan is fully disbursed (paid out).
However, it’s possible for parents to request a deferment, which means they won’t need to make payments on the loan while the child is in school or for six months after the child leaves school. Interest will still accrue during this time.
For graduate and professional students with a Direct PLUS Loan, loan payments are not required to begin until six months after graduation, leaving school or dropping below half-time enrollment. However, interest will still accrue. Any interest that isn’t paid during the deferment or grace period will be capitalized (more on this below).
The interest rate for Direct PLUS Loans is currently 6.28% for loans first disbursed between July 1, 2021, and July 1, 2022.
Private student loans
You can also apply for private student loans to help cover the cost of your education. In these cases, interest rates and loan repayment schedules are set directly by the lender, meaning they can vary significantly. These lenders may check your credit score to determine your eligibility. If you have a low credit score, you may need to consider adding a cosigner to the loan application.
Which loan type requires you to make loan payments while you're attending school?
Of the loan types mentioned above, the only one that requires you to make loan payments while you’re attending school is the parents PLUS loan. Unless the parents request deferment, they will be required to start making payments once the loan is fully disbursed, even if their child is still attending school.
However, even though you aren’t required to make any payments while you're in school with a Direct Unsubsidized Loan or a grad PLUS loan, you may want to. Interest begins accumulating as soon as the loan is disbursed. If you choose not to make interest payments while you’re in school, your accrued interest will be capitalized. This means the interest will be added to your principal balance, and you will pay interest on that higher balance, increasing the total cost of the loan.
For example, let's say you take out $50,000 in Direct Unsubsidized Loans for your education. While you are in school, you begin accruing interest on the loan and choose not to make payments on that interest. By the time you finish school, you’ve accumulated $2,000 in interest. The interest will then be capitalized, and your principal loan balance will increase from $50,000 to $52,000. You will then accrue interest on this higher balance — meaning you’ll be paying interest on your interest.
Once you leave school, you have a grace period of six months before you need to begin making loan payments. The interest that is accrued and not paid during the grace period will also be capitalized.
If you’re able to pay down your student loan interest while you are in school, you’ll prevent yourself from being charged interest on top of interest. If you need extra income to make these payments while your student, consider picking up a side hustle.
Lastly, stipulations may be different for private student loans. Lenders may have their own terms and conditions associated with their loans. It's important to read the fine print and understand what you’re signing up for before you use a private loan to cover your education expenses.
How can you choose the best loan for you?
The best loan for you is the one that fits your personal financial situation. For instance, if you take out an unsubsidized loan and want to make interest payments while you're attending school, you'll need to closely analyze your budget. You should make sure that you have the cash flow or savings needed to repay the interest each month.
Perhaps one resource you may want to utilize when choosing a loan is the abundance of student loan advisors who are available to help. Groups like the Institute of Student Loan Advisors and the National Foundation for Credit Counseling offer student loan assistance, potentially for free. Discussing your options with one of these counselors can help provide more clarity as to which loan option is right for you.
Lastly, you can also look to see whether your educational institution offers any financial aid resources. Many colleges offer entrance counseling through the financial aid office to help you sort through your loan options. These counselors can also point you toward funding options that don't require you to borrow money, such as scholarships that are specific to the institution or your area of study.
Student loan knowledge can help when managing your finances
Whether you're going to school for a bachelor's degree or a Ph.D., you may find yourself in the position of applying for federal student loans and other forms of financial aid. The loan that is right for you depends on numerous things, including factors like the type of loan, interest rate and repayment options.
During the application process, it's important to have a financial management plan. Knowing when you have to repay your student loans can help you apply for and select the loan option that’s best for you. Doing a bit of research beforehand can help ensure your financial aid package best meets your personal financial needs.
Also, remember that student loans are just one portion of your financial journey. If you're looking for the latest financial management tips and relevant news, be sure to subscribe to Tally's† newsletter. The newsletter is delivered directly to your inbox, helping to keep you in the know so you can reach your financial goals.
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