Student Loans
Suppose that Andy resorted to the second option, that is, he borrowed money to pay the $3,000 medical expenses and used his savings to pay Jill’s tuition. The following semester, however, Andy realizes that the tuition fee payments have taken a toll on his bank statement. Jill suggests that it might be better to borrow funds to cover her tuition fee for the remaining amount of time in school. Jill realized after all that she can pay for her own tuition after college, without having to burden her father with any more financial dilemma at present, especially with his grandfather needing medical sustenance for his heart condition. She decides to confer with university officials who then tell her that she may apply either for a subsidized student loan or for a private loan.
Jill wonders, what’s the difference?
Supposing Jill takes the direct subsidized student loan at the beginning of her junior year in August 2009, Jill starts paying her $28,500 annual tuition fee loan only after graduation, for a total amount of $57,000 plus interests and fees. An advantage of this type of loan is that interest only begins to run once Jill starts working, not while she is still enrolled in the univer
sity. Who will then shoulder the interest during the two-year period that Jill is still a student?
Under a direct subsidized student loan with a 4% interest rate, for instance, the education ministry of the government usually shoulders the 4% interest payments during the time Jill is still in school. Some packages also offer a grace period of six months after graduation. This means that the 4% interest payments will still be shouldered by the government not only when Jill is still studying, but even for six months from the time of her graduation from university. This is to give Jill some time to look for a stable job and to adjust her finances accordingly. Moreover, a direct
subsidized loan will consider Jill’s income in fixing repayment terms, such that the amount of installment she has to pay every month is proportioned to her monthly salary.
However, if Jill takes the unsubsidized loan, which is usually offered by private financial institutions, the total amount that Jill would have to pay would cover the period where she started to take out the loan, that is, from the time that she was still a student. This means that apart from the yearly $28,500 tuition fee she receives every year, she will also shoulder the 4% interest payments for the duration of her stay in the university, as well as after. Since Jill obtained the loan during her third year, the total amount of $57,000 representing the tuition fee payment for her two remaining years in the university (otherwise known as the principal amount) as well as the 4% annual interest from her junior year up to the time she completes the payment will be the full repayment value of the loan. If she completes the payment in February 2016, then the 4% interest rate would be proportioned to the February payment, considering that the last payment did not reach the full term, the starting date of which was in August 2009.
The income-based repayment scheme would also not be available, to Jill’s disappointment.
