A Guide to Coinsurance and Copays

A Guide to Coinsurance and Copays – SmartAsset

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Having health insurance makes it possible to receive medical care while only paying a fraction of that care’s true cost. Insurance doesn’t cover everything, however. Some of the cost of your care is still up to you to pay, and that cost comes in two primary forms: copays and coinsurance.

What Is a Copay?

A copay is a flat amount of money that you’re responsible for paying for a health care service. Copays typically apply for things like a doctor’s appointment, prescription drug or medical test. The amount of your copay is dependent on your specific health insurance plan.

You can typically expect to pay your copay when you check in for your service, be it an annual physical, dental cleaning or blood test. Copays are typically lower amounts ranging from $10 for something like a generic drug prescription to around $65 for a visit to a medical specialist.

Depending on your insurance plan, copays may not take effect until after you reach your deductible. Your deductible is the amount of money you must pay out-of-pocket before your insurance provider starts to pitch in. Deductibles reset at the beginning of every year.

When you are reviewing your plan information and you see the phrase “after deductible” or “deductible applies” in reference to your copays, that’s an indication that the copay is only in place once you meet your deductible. On the other hand, if you see “deductible waived,” that’s a sign that your copay is in place from the beginning. It may go without saying, but the latter situation is vastly preferable to you.

What Is Coinsurance?

Coinsurance is another method of splitting the cost of medical coverage with your insurance plan. A coinsurance is a percentage of the cost of services. You pay the percentage, and your insurance company foots the rest of the bill. So, if you have a $8,000 medical bill and a 20% coinsurance, you would be on the hook for $1,600.

Coinsurance typically only comes into play after you hit your deductible. Further, you may have differing coinsurance percentages for the same services depending on your provider network. If you have a preferred provider organization (PPO) plan, your coinsurance could be a higher percentage for providers outside your network than it is for providers in your network.

Similarly, your coinsurance may not apply to providers outside your network if you have a health maintenance organization (HMO) plan or an exclusive provider organization (EPO) plan. That’s because these plans typically don’t provide any out-of-network coverage.

Copay vs. Coinsurance

Copay and coinsurance are very similar terms. They both have to do with portions of the cost of your health care that’s under your responsibility. Because of that, and their similar names, it’s easy to confuse the two. There are a couple of important distinctions to keep in mind, however.

The most notable difference between copays and coinsurance is that copays are always a flat amount and coinsurance is always a percentage of the cost of the service. Another difference is that some copays can be in place before you hit your deductible, depending on the specifics of your plan. With coinsurance, you have to hit your deductible first.

Bottom Line

If you’re choosing between health insurance plans, make sure to examine the provided copays and coinsurance for each option. While they may not be the most important factor to consider, a high copay can be quite a pain, especially over the course of years of appointments and procedures.

Tips for Staying on Top of Medical Expenses

  • One of the best ways to stay ahead of surprise medical expenses is to have an emergency fund in place for just such a situation. If you can manage it, have three to six months worth of expenses stashed away in a high-yield savings account. That way, if you’re dealing with medical bills or have to step away from work, you’ll have a bit of a cushion.
  • If you’re not sure how an unexpected medical expenses would fit into your finances, consider working with a financial advisor to develop a financial plan. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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Hunter Kuffel, CEPF® Hunter Kuffel is a personal finance writer with expertise in savings, retirement and investing. Hunter is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. He graduated from the University of Notre Dame and currently lives in New York City.
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What Is a Stafford Loan and How Do You Qualify?

What Is a Stafford Loan and How Do You Qualify? – SmartAsset

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If you’re in search of financial help for higher education, you may have explored different scholarships and grants to pay the way. Gifted money is a great way to pay for school without having to worry about paying it back after graduation. However, if you don’t have all your expenses covered through scholarships and grants, you might need to consider student loans to fill in the gaps. If you’re exploring federal aid, Stafford loans might be an option. Here’s what they are, how much they cost and how to know if you qualify.

What Is a Stafford Loan?

A Stafford loan is a federal student loan provided by the government to help pay for your education while you’re attending a university, community college, trade or technical school. 

Stafford loans are now referred to as direct subsidized loans or direct unsubsidized loans. The difference between subsidized and unsubsidized loans is who pays for the accrued interest of the loan while you’re in school and how much you may be able to borrow.

A subsidized loan is only available to undergraduate students in financial need. The U.S. Department of Education pays the interest that adds up on your behalf while you’re in school at least half-time, as well as during the six-month grace period after graduation and during deferment or forbearance periods. The limit on how much you can borrow is $3,500 for the first year, $4,500 for the second and $5,500 for the third and fourth years. The aggregate loan amount is capped at $23,000, which is lower than unsubsidized loans.

An unsubsidized loan is available for both graduate and undergraduate students and isn’t based on financial need. The student is responsible for the interest that builds up while in school. Payments could be more costly than those for a subsidized loan because of that accrued interest.

If a subsidized loan doesn’t cover all your college costs, you can take out an unsubsidized loan, too. The aggregate loan amount for unsubsidized loans is capped at $31,000 for undergraduate students considered dependents and whose parents don’t qualify for direct PLUS loans. Undergraduate independent students may be allowed to borrow up to $57,500, while graduate students may be allowed to borrow up to $138,500.

These types loans have fixed interest rates determined by the government, come with a fee and allow the student to borrow for up to 150% of the length of the program they’re enrolled in. For example, if you’re attending a four-year college, you would be able to borrow these loans for up to six years.

How to Qualify for a Stafford Loan

What you need to get a Stafford loan depends on your financial standing.

Students or parents of the student must first complete the Free Application for Federal Student Aid (FAFSA). Next, you’ll receive an award letter that details if you qualify for a Stafford loan. Your financial need determines if you’ll get a direct subsidized loan. If you don’t qualify, then you may receive a direct unsubsidized loan.

If you do qualify for one of these loans and you’re ready to accept the federal aid, you’ll need to submit a Mastery Promissory Note (MPN). This is a legal document which states that you promise to pay back your loans in full, including any fees and accrued interest, to the U.S. Department of Education. The school of your choice will determine how much money you’re eligible to receive and the funds go straight to your school – not to you. Since you can receive money based on your need or school enrollment – not your credit score – only your application is required.

Stafford Loan Alternatives

If you’ve exhausted all of your financial aid options, it might be time to explore other means to pay for school.

Direct PLUS Loans

Direct Plus loans are federal loans that are available to graduate or professional students, or parents of undergraduate students. They require a credit check and you might be required to make payments while you or your child is in school. However, you could request deferment and make payments after you or your child graduates or drops below half-time.

Private Student Loans

If you can’t get any further federal aid, you may consider private student loans. Instead of coming from the U.S. Department of Education, these types of loans are issued from private issuers, such as banks, credit unions or online lenders.

If you’re not sure where else to look, contact your school’s financial aid office. It may have scholarships, grants or other small loans available that you might qualify for.

The Bottom Line

College is expensive and not everyone can afford to pay for it out of pocket. Tapping into financial resources, including Stafford loans like subsidized and unsubsidized loans, as well as direct Plus loans and private student loans, may help. Don’t be afraid to contact your school’s financial aid office for even more resources to pay for school.

Tips for Student Loan Borrowers

  • If you’re not sure of the best strategy for securing student loans, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Interest rates for private student loans are often higher than those for federal loans. If you or your child is struggling to pay private student loans, consider student loan refinance rates available now.

Photo credit: ©iStock.com/William_Potter, ©iStock.com/utah778, ©iStock.com/BrianAJackson

Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization’s “Chapter of the Year” award two years in a row while she was head of the chapter. She graduated with a bachelor’s degree from Florida Atlantic University and currently lives in South Florida.
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A Beginner’s Guide to Insurance Premiums

Deductibles can reduce your insurance premiums, as well. An insurance deductible is the cost you pay before the insurance company pays anything. If your car is insured and you have a $1,000 deductible, you have to pay $1,000 before the insurance company will begin to cover any costs. If there are $3,000 in damages to your vehicle, you would have to pay $1,000 and the insurance company would pay the other $2,000. As a general rule, the higher your deductible, the lower your premiums.

In the case of health insurance, taking on a higher deductible, higher co-pays or longer waiting periods may lower your costs. However, if you can afford a plan with a lower deductible, you may want to take that. Lower deductible health plans offer customers more predictable prices for higher amounts of coverage.

Your homeowners insurance premium may be affected by the coverage limits you choose, your deductible amount, optional coverages you select, your home’s age and condition, your claims history and your credit rating.

Car insurance premiums may be affected by your age, your credit score, your driving record, the age of your car, the type of coverage you chose, coverage limits you select, where you live and drive, and how often you drive.

Your life insurance premium may be affected by the amount of life insurance coverage you buy, the type of life insurance policy you select, the length of your policy, and your age, health, and life expectancy.

Insurance Limits

Some companies, specific policies or types of coverage have insurance limits. An insurance limit is the maximum amount of money the company will pay. Typically, the higher your insurance limit, the higher your premium. It’s also the inverse of a deductible. You pay the part of the claim or claims that’s more than the limit on your policy.

Insurance limits can be on a per occurrence basis or on an aggregate basis. For example, a per occurrence basis could be a $20,000 insurance limit on bodily injuries per person, per car accident. An aggregate insurance limit might be a $100,000 limit on construction costs in the event of a natural disaster.

Car Insurance

Car insurance laws and policies typically list liabilities as a set of three numbers that stand for the coverage limits when you’re responsible for an accident. If your numbers were 22/66/15, your insurance would cover $22,000 for bodily injuries per person, $66,000 in total bodily injury coverage per accident and $15,000 for property damage per accident. For personal injury protection, collision and comprehensive coverage, the numbers are listed as a single amount for each type of coverage. Your state may have specific minimum limits for certain coverages, so make sure you’re getting a fair rate.

Health Insurance

Healthcare laws often change, and many lifetime and annual health insurance limits are illegal. However, some health insurance policies still list annual limits or limits on the number of times certain treatments will be covered, such as acupuncture, chiropractic services and orthotics. Companies may also place limits on prescription medication to keep costs down. There may be policies such as “step therapy,” which requires you to try less expensive drugs first, or quantity limits, such as only covering 30 pills in 30 days.

Homeowners Insurance

Your homeowners insurance policy will often list separate limit amounts for different types of coverage. The limit amounts for liability coverage – in case you’re sued by someone for property damage or injuries that occur on your property – may be different than the limit amount for damage to your home and personal property. Make sure you review all of your homeowners insurance coverage limits, such as the amount it may cost to rebuild your home (dwelling coverage), liability coverage and personal property coverage.

Shopping Around

It’s important to shop around for insurance because different companies have different target clients. You may be the target client for one company, but not for another. That means your premium may be lower with one company than another. The price you pay for your insurance may include taxes or fees, as well. And these could differ from company to company. Before shopping around, call your insurance company and see if they’re willing to lower your premium.

In addition, insurance companies may decide to pursue a new market segment. That can lower rates on a temporary basis, or on a more permanent basis if that works for the company. In either case, you can get a better deal on your insurance if you are part of the demographic that insurance company wants to attract.

The best insurance company for you may not be the best insurance company for your parents or your best friend. It all depends on your age, location and many other factors.

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The Dos and Don’ts of Borrowing Money

The Dos and Don’ts of Borrowing Money – SmartAsset

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Taking on debt is a thorny subject. Signing on an affordable mortgage is one thing. Racking up credit card debt on unnecessary purchases? Quite another. Any time you borrow money, you put your finances at risk. That’s why it’s important to do your research before committing to new debt. If you’re not sure whether to borrow money, read our list of dos and don’ts. And if you need hands-on help managing your financial life, consider linking up with a financial advisor.

Do: Comparison shop when deciding where to borrow

Thinking of borrowing money? Don’t just go for the first credit source you can find. Look around for a loan that meets your requirements and leaves you with monthly payments you can actually afford. If you’re not happy with what lenders are offering you, it may be best to take the time to build up your credit score and then try again.

Don’t: Just look at the interest rate

Comparing loans is about more than searching for the lowest interest rate you can get. Look out for red flags like prepayment penalties. Stay away from personal loans that come with pricey insurance add-ons like credit life insurance. These insurance policies, particularly if you decide to finance them by rolling them into your loan, will raise the effective interest rate on the money you borrow. Approach payday loans and installment loans with extreme caution.

Do: Go for “good debt”

Good debt is debt you can afford that you use on something that will appreciate. That could be a home in a desirable neighborhood or an education from a reputable institution that will help your future earning power. Of course, you can’t be 100% sure that your home will appreciate or your advanced degree will pay off but you can take leaps based on thorough research.

Don’t: Go overboard with consumer debt

Consumer debt is generally considered bad debt. Why? Because it’s debt taken out for something that won’t appreciate. You’ll spend the money and get fleeting enjoyment but you’ll be making interest payments for months or years. In other words, it’s generally better to save up for that new tablet or vacation than to finance it with consumer debt.

Do: Keep a budget

Real talk: Anyone who has debt should be on a budget. Budgets are great for everyone, but those who owe money to lenders are prime candidates for a workable budget. Start by keeping track of your income and your spending for one month. At the end of that month, sit down and go over what you’ve recorded. Where can you cut back? You can’t be sure you’ll be able to make on-time payments unless you’re keeping track of your spending – and keeping it in check.

Don’t: Be late

Speaking of making on-time payments: Making a late payment on a bill you can afford to pay is not just careless. It’s also  costly mistake. Late payments lower your credit score and increase the interest you owe. They can also lead your lender to impose late-payment penalties and increase your interest rate, making your borrowing more expensive for as long as it takes you to pay off your debt.

Do: Seek help

If you’re having trouble keeping up with your debt payments or you’re not sure how to tackle a handful of different debts, seek help from a non-profit credit counseling organization. A credit counselor will sit down with you and review your credit score and credit report. He or she will help you correct any errors on your credit report. Then, you’ll work together to set up a debt repayment plan. That may mean you make payments to your credit counselor, which then pays your lenders on your behalf.

Don’t: Throw good money after bad 

Why a non-profit credit counselor? Well, there are plenty of people and companies out there that want you to throw good money after bad. They may offer counseling or they may try to sell you on bad credit loans. At best, they’ll charge you an arm and a leg for advice about debt repayment that you could be getting for free. At worst, they could lead you further into debt.

Do: Automate

If you have debts to pay off then automation can be your friend. Setting up automatic transfers for your bills and your loan payments will remove the temptation to overspend, to make only the minimum payment or to skip a payment altogether. If you can afford it, set up automatic savings while you’re at it. The sooner you start saving for retirement the better. Just because you’re still paying off your student loans doesn’t mean you should defer your retirement savings until middle age.

Bottom Line

Most of us will borrow money at some point in our adulthood. These days, it’s easier than ever to borrow money online and take on debt quickly. The choices we make about when, how and how much to borrow? Those can make or break our finances. Before you take on debt, it’s important to ask yourself whether that debt is necessary and how you will pay it back. Happy borrowing!

If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

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Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia’s work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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Deferment and Forbearance of Student Loans

Deferment and Forbearance of Student Loans – SmartAsset

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Deferment and forbearance are options that people struggling to keep up with their student loans can use to make sure they don’t get into serious trouble. Falling behind on your payments can hurt your credit or lead your lenders to garnish your wages, neither of which outcomes anyone wants. If you are struggling with loan payments, a financial advisor may be able to help.

Deferment and Forbearance Defined

Both deferment and forbearance allow you to temporarily stop making payments or reduce your payments on your student loans without causing you to fall behind on what you owe. However, each program differs in the type of relief it provides.

Even though both allow you to halt or reduce your student loan payments, you may not be responsible for interest that accrues during deferment. This depends on the type of loan you have and if it’s subsidized or unsubsidized:

Interest Responsibility for Deferment
– Direct Subsidized Loans
– Subsidized Federal Stafford Loans
– Federal Perkins Loans
– The subsidized portion of Direct Consolidation Loans
– The subsidized portion of Federal Family Education Loans (FFEL) Consolidation Loans
– Direct Unsubsidized Loans
– Unsubsidized Federal Stafford Loans
– Direct PLUS Loans
– FFEL PLUS Loans
– The unsubsidized portion of FFEL and Direct Consolidation Loans

In forbearance, you’re on the hook for the interest that accrues on any type of loan while you aren’t making payments.

Interest that accrues during deferment and forbearance can be capitalized, or added to your principal balance, or you can pay it off as it accrues. If you have it added to your principal balance, the total amount you owe and your monthly payments may cost more. This means it could take you longer to pay back your loans.

Deferment Eligibility Requirements

To qualify for deferment, you’ll need to meet a few requirements.

  • You’re enrolled at least part-time and you’ve received a Direct PLUS loan or FFEL PLUS loan as a graduate or professional student. Deferment is allowed for an extra six months after you’ve dropped below half-time enrollment.
  • You are a parent who received a Direct PLUS loan or FFEL loan on behalf of a student who meets the above requirement.
  • You’re enrolled in an approved graduate fellowship program.
  • You are enrolled in an approved rehab training program for the disabled.
  • You’re unemployed or not able to find full-time work for up to three years.
  • You are going through an economic hardship for up to three years.
  • You’re in the Peace Corps for up to three years.
  • You are on active duty military service. Deferment is also allowed up to 13 months following that service or until you return to college or a qualifying school at least half-time (whichever is sooner).

Remember that even if you qualify for deferment, you might still be on the hook to pay for the interest that adds up during that deferment period, depending on the type of loan.

Forbearance Eligibility Requirements

If you’re exploring forbearance as an option, there are two different types: general and mandatory.

General forbearance is available if you’re experiencing problems affording your basic needs or medical expenses. It may also be available if you’ve had a recent change in employment. It may be wise to talk to your loan provider to see if your specific situation qualifies you for forbearance.

On the other hand, only Direct and FFEL loans qualify for mandatory forbearance. It becomes available if:

  • You’re serving a medical or dental internship or residency program.
  • The total amount you owe each month for all your loans is 20% or more of your total monthly gross income (available up to three years, and qualifies on Perkins loans, too).
  • You’re serving in AmeriCorps and received a national service award.
  • Your current teaching status would qualify you for teacher loan forgiveness.
  • You qualify for partial repayment through the U.S. Department of Defense Student Loan Repayment Program.
  • You’re a member of the National Guard, but not eligible for military deferment.

Both general and mandatory forbearance can be granted for up to 12 months at a time. If you have a Perkins loan, you have a three-year cumulative limit for general forbearance. Direct and FFEL loans don’t have the same limitation, but your loan provider may have its own limitations.

Since there is a 12-month term, you’ll need to apply for forbearance each time you need it. Some loan providers may set a maximum limit on how many times you can receive general forbearance, but mandatory forbearance doesn’t have the same restrictions.

Deferment and Forbearance Alternatives

If you don’t qualify for deferment or forbearance, you may be able to access other debt assistance programs, such as:

  • Income-Driven Repayment (IDR) Plans – These are federal student loan repayment plans that are based on your monthly income and family size. There are four IDR plans for which you may qualify.
  • Direct Consolidation Loan – This option allows you to combine all your federal student loans into one loan. You’ll have one monthly payment rather than many different payments spread out across different loans. You may get a lower monthly payment because your new loan terms can be up to 30 years, rather than the standard 10-year repayment term.
  • Refinance – Refinancing is when you take out one new loan, pay all your outstanding loans, and then make one monthly payment to your new lender. You can refinance both federal and private student loans. Your new interest rate is based on your creditworthiness, so if you don’t have excellent credit, you could end up paying more in interest than if you didn’t refinance. Before refinancing, compare lenders to see if they offer benefits best for you.

Bottom Line

Falling behind on student loan payments can hurt your financial future for years to come. You may be able to avoid this, though, by using deferment or forbearance to hit the pause button on your payments. While these programs are meant to help you, interest may still add up while you’re not making payments, which can potentially raise the cost of your payments down the road.

To find out if you qualify for either deferment or forbearance, you’ll need to submit a request on the U.S. Department of Education’s website. Your specific financial situation will dictate which choice is best for you. Most requests have their own unique form to complete, meaning there is no form for both deferment and forbearance.

Tips for Paying Back Student Loans

  • If you’re not sure of the best strategy for paying back your student loans, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • It may sometimes seem as if your student loan payments will never end. A good start is to pay more than the minimum monthly payment every month, which will pay off the loan faster and save you money in the long run.

Photo credit: ©iStock.com/zimmytws, ©iStock.com/Anchiy, ©iStock.com/MonthiraYodtiwong

Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization’s “Chapter of the Year” award two years in a row while she was head of the chapter. She graduated with a bachelor’s degree from Florida Atlantic University and currently lives in South Florida.
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A Guide to Subsidized and Unsubsidized Loans

A Guide to Subsidized and Unsubsidized Loans – SmartAsset

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As you explore funding options for higher education, you’ll come across many different ways to pay for school. You can try your hand at scholarships and grants, but you may also need to secure federal student loans. Depending on your financial situation, you may qualify for a subsidized loan or an unsubsidized loan. Here’s the breakdown of subsidized and unsubsidized loans, along with how to get each of them.

Subsidized vs. Unsubsidized Loans

In name, there’s only a two-letter difference. But in operation, subsidized and unsubsidized loans  – sometimes referred to as Stafford loans – aren’t quite the same.

A subsidized loan is available to undergraduate students who prove financial need and are enrolled in school at least part-time. After students or parents of the students fill out the Free Application for Financial Student Aid (FAFSA), the school will determine how much money can be borrowed. Unfortunately, you can’t borrow more than you need.

One major difference of a subsidized loan vs. an unsubsidized loan is that the U.S. Department of Education pays the interest on a subsidized loan while the student is in school, for the first six months after graduating and during a deferment period (if the student chooses to defer the loan). For example, if your subsidized loan is $5,000 at the start of your college education, it’ll still be $5,000 when you begin paying it off after graduation because the government paid the interest on it while you were in school. The same may not be true for an unsubsidized loan.

An unsubsidized loan is available to both undergraduate and graduate students, and isn’t based on financial need. This means anyone who applies for one can get it. Like subsidized loans, students or their parents are required to fill out the FAFSA in order to determine how much can be borrowed. However, unlike subsidized loans, the size of the unsubsidized loan isn’t strictly based on financial need, so more money can be borrowed.

For an unsubsidized loan, students are responsible for paying the interest while in school, regardless of enrollment, as well as during deferment or forbearance periods. If you choose not to pay your interest during these times, the interest will continue to accrue, which means that your monthly payments could be more costly when you’re ready to pay them.

Both types of loans have interest rates that are set by the government and both come with a fee. Each one offers some of the easiest repayment options compared to private student loans, too. Students are eligible to borrow these loans for 150% of the length of the educational program they’re enrolled in. For example, if you attend a four-year university, you can borrow these loans for up to six years.

Pros and Cons

Both types of loans have pros and cons. Depending on your financial situation and education, one may be a better fit than the other. Even if you qualify for a subsidized loan, it’s important to understand what that means for your situation before borrowing that money.

Pros of Subsidized Loans

  • The student is not required to pay interest on the loan until after the six-month grace period after graduation.
  • The loan may be great for students who can’t afford the tuition and don’t have enough money from grants or scholarships to afford college costs.

Cons of Subsidized Loans

  • Students are limited in how much they can borrow. In the first year, you’re only allowed to borrow $3,500 in subsidized loans. After that, you can only borrow $4,500 the second year and $5,500 for years three and four. The total aggregate loan amount is limited to $23,000. This might cause you to take out additional loans to cover other costs.
  • Subsidized loans are only available for undergraduate students. Graduate students – even those who show financial need – don’t qualify.

If you don’t qualify for a subsidized loan, you may still be eligible for an unsubsidized loan.

Pros of Unsubsidized Loans

  • They are available to both undergraduate and graduate students who need to borrow money for school.
  • The amount you can borrow isn’t based on financial need.
  • Students are able to borrow more money than subsidized loans. The total aggregate loan amount is limited to $31,000 for undergraduate students considered dependents and whose parents don’t qualify for direct PLUS loans. Undergraduate independent students may be allowed to borrow up to $57,500, while graduate students may be allowed to borrow up to $138,500.

Cons of Unsubsidized Loans

  • Interest adds up — and you could be on the hook for it — while you’re in school. Once you start paying back the unsubsidized loan, payments may be more expensive than those for a subsidized loan because of the accrued interest.

How to Secure Subsidized and Unsubsidized Loans

If you’re looking to get loans to pay for a college education, direct subsidized or unsubsidized loans might be your best option.

To apply for a subsidized or unsubsidized loan, you’ll need to complete the FAFSA. The form will ask you for important financial information based on your family’s income. From there, your college or university will use your FAFSA to determine the amount of student aid for which you’re eligible. Be mindful of the FAFSA deadline, as well additional deadlines set by your state for applying for state and institutional financial aid.

After the amount is decided, you’ll receive a financial aid package that details your expected family contribution and how much financial help you’ll get from the government. Your letter will include the amount of money you’ll receive in grants, as well as all types of loans you could secure. If you’re ready to accept the federal aid offered, you’ll need to submit a Mastery Promissory Note (MPN). This is a legal document that states your promise to pay back your loans in full, including any fees and accrued interest, to the U.S. Department of Education. 

The Bottom Line

Both subsidized and unsubsidized loans may be good financial resources for upcoming college students who need help paying for school. Both loans tend to have lower interest rates than private student loans, as well as easier repayment terms. 

Keep in mind that these are still loans and they will need to be paid back. If you avoid paying your student loans, you could end up in default or with a delinquent status, and your credit score could be damaged. Once you’re done with your college or graduate school education, stay responsible with your student loan repayment and you’ll be on the path to a successful financial future.

Tips for Managing Student Loan Debt

  • If you’re struggling to manage student loan debt, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Paying off student loans can be overwhelming. One way to make it easier is by refinancing them into one lower monthly payment, if you can. Check out the different student loan refinance rates that are available to you now.

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Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization’s “Chapter of the Year” award two years in a row while she was head of the chapter. She graduated with a bachelor’s degree from Florida Atlantic University and currently lives in South Florida.
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Source: smartasset.com