Subsidized loans: Interest-free during school, grace, and authorized deferment periods (such as at least half-time enrollment).
Example: Federal Perkins
Tip: If your repayment strategy includes early or aggressive repayment, it is best to repay your private or unsubsidized federal loans first.
Unsubsidized loans: Interest accrues immediately upon disbursement – through school, grace period (the time during which a late penalty that would have been imposed is waived), and authorized deferment period (a specific period of time during which you may postpone your payment) and is capitalized (see below for definition).
Examples: Federal Stafford, Grad PLUS, and private loans
Tip: These are best to pay off early if your repayment strategy includes early or aggressive repayment.
Capitalization of interest: Accrued and unpaid interest added to the principal amount you borrow at specific intervals. Capitalization often occurs during a status change (grace, deferment, or, most frequently, forbearance).
Example: Let’s say you borrow $10,000 at 10% interest per year. If capitalization occurs annually, $1,000 will be added to $10,000 after one year, resulting in a new principal of $11,000 on which interest now accrues.
Tip: Because this can greatly increase the cost of a loan, the less frequent interest is capitalized, the better.
Borrower Benefits: Discounts, often in the form of Interest Rate Reductions (IRRs), offered by some lenders on various loans.
Examples: automatic debit and timely payment
Tip: Recent changes in the student loan industry have resulted in fewer Borrower Benefits being offered on new loans, but it is always good to ask about them.
Credit Ready: The borrower has a satisfactory credit history, free of adverse items like 90-day-late payments or unpaid collection accounts.
Tip: Grad PLUS Loans are based, in part, on a borrower being Credit Ready.
Credit Worthy: Lenders evaluate a borrower’s FICO score (a widely used credit score that banks and other institutions use to make lending decisions), sometimes their income, repayment history and their current ability to repay new financing.
Tip: Most private loans will require you to be Credit Worthy.
Federal Direct Student Loan Program (FDSLP or “Direct Lending”): Loans made directly by the federal government; the school chooses the lender.
Examples: Stafford and Grad PLUS
Tip: It is generally better to apply for federal loans before applying for private loans.