From Stafford Student Loan and Private Student Loan News Blog:

For prospective or current college students, it is important to know the 2 different types of the Stafford loan. It is not news that if you are going to take out a loan, you should be well educated about the loan, for obvious reasons….but equally as important is realizing what these loans mean for your financial future. Remember it’s your Education and your money…two things that have extreme importance in todays world. Ok so here goes: Subsidized Stafford loan means that no interest accrues on this loan while you are in school at least part time. Interest starts accrueing on it 6 months after you graduate, or withdraw from school…or 6 months after you drop below part time. The goverment puts limits on how much you can borrow, because they are the ones paying the interest for you to the lenders.

Unsubsidized Stafford loan are a bit different. They accrue interest from the moment it is disbursed. You, the borrower, have the option to pay the interest monthly, or let the interest accrue and be capitilized. For a 3500 Unsub Stafford loan, with a rate of 6.8% – this will accrue about $20 per month in interest. So $20 a month for four years will add about $1000 to your original loan balance by the time you graduate….and this will increase if you have the interest capitlized.

So here is the big picture….

Four years of school…you take out as much Sub as you can….you also take out some Unsub to help cover tuition costs….so you have $17125 in subsidized Stafford, and 10,500 in unsubsidized Stafford

Scenario # 1 (you paid the interest monthly for 4 years)

Total loan debt: $27,625

Monthly Payment: $ 318/ month for 10 years

Total Interest Paid: $10,535

Scenario # 2 (you did not pay your interest)

Total loan debt: $29,605

Monthly Payment: #341/ month for 10 years

Total Interest paid: $11,315

As you can see, it is wiser to pay the interest monthly, if you can afford it. If you cannot afford it, thats ok…you can make up for it later by paying not taking the full 10 years to pay the loan. Federal loans have no prepayment penalties. So the sooner you pay them off, the less you will end up paying in interest. Got Questions or Comments…..

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Read the whole article originally published in: Stafford Student Loan and Private Student Loan News Blog.