How does the 6.8% interest work for federal stafford loan?

Question

ok so i'm really confused about the federal stafford loan...

say the first year I borrow $1000....the interest would be $68

second year i borrow another $1000...then i owe $2068....and the interest would be $140 second year. third year, borrow another $1000.....so i'd owe $3208 plus interest $218??

is that how it works? cuz if it is, the interest rate is really 6.8%*4.......not really worth it..

or is it like this....i borrow $1000 per year...and after 4 years, i owe $4000 plus interest $272?

Answer 1

A Stafford loan works like most other "consumer" loans. You have a monthly payment obligation, but you're not required to begin making those payments until 6-9 months after you finish school (or drop out).

Though you're allowed to postpone payments for several years while you're in school, the interest on an unsubsidized Stafford loan begins to accrue on the day that the loan funds are disbursed (given to your school). So - every month from now, until the day you pay the loan off, interest is accruing on the loan.

Your example is a little unrealistic, because it's unlikely that anyone would borrow $1000 in a Stafford loan. Also keep in mind that the standard repayment period for a Stafford loan is at least 10 years, depending on the amount you borrow.

Let's look at a more typical example:

Suppose you borrow the maximum Stafford loan amount this year - for a dependent undergraduate freshman, that would be $5500. If you paid that money back over 120 months (10 years), your monthly payment would be $63.29, and you would wind up paying $7595.30 (which means $2095.30 in interest).

You should not take out any form of student loan unless you need the money. If you and your parents are able to pay out of pocket, then that's almost always the way to go.

HOWEVER - most families can not afford the extreme expense of a college education - particularly families with more than one child to educate. There are many ways to finance a college education - and the federal government is by far the largest provider of educational assistance.

Students with exceptional need may receive grants (free gifts of money) from the government, students with outstanding academic potential may receive assistance in the form of academic scholarships - but for most students and families, the predominant form of assistance with educational expenses is the student loan.

The government's student loan programs, the Perkins and the Stafford are THE cheapest available form of educational borrowing. They also have several benefits that no other form of loan can offer. Most importantly, the federal government will help you arrange for a loan without any income or credit history - you can qualify for a Stafford even if your credit history is horrible. No other lender will give you that kind of deal.

If you're put off by the idea that you borrow $5500 and pay back more than $7500 ten years later, well, then welcome to the world of lending and borrowing. Lenders don't let you use their money for 10 years without your agreement that you're going to compensate them for their services. The Stafford and Perkins loans are THE cheapest long-term educational borrowing options available, short of getting a loan from grandma or your rich uncle.

Good luck!