College students are often confused about credit card APR and the difference between subsidized and unsubsidized student loans
From credit cards to student loans, today’s college students are forced to take a crash course in borrowing just to make it through four years of higher education. More than 60 percent take out student loans, according to the American Council for Education. Add to that the fact that more than two-thirds of today’s students have a credit card, and of those 71 percent carry a balance from month to month,* and you’ve got some pretty widespread student debt issues.
So YOUNG MONEY asked our readers what financial issues they found to be most confusing, and not surprisingly their questions centered on debt. We’ve answered two of those questions below.
What does the APR on a credit card mean?
“I see those commercials for [credit cards], and I don’t really understand what it means when they say no interest,” said Samee Nann, 19, a freshman at Point Park College in Pittsburgh. Interest rate is typically measured by APR, which stands for annual percentage rate. It is the interest rate that credit cards charge on the money you owe. It’s important to know that the APR is an annual rate. In theory, an APR of 20 percent means that if you charged $1,000 on a credit card and didn’t pay it for one year, at the end, you would owe $1,200.
Editor’s note: Please don’t try this! If you don’t make payments on your credit card for a year, you won’t have a credit card account left- it will be closed, turned over to a debt collector, and your credit will be shot!
The monthly finance charges on your bill won’t actually charge you the full 20 percent each month-it will be for roughly 20 percent divided by 12, for the 12 months in the year, which comes to 1.67 percent. So you will be charged an extra 1.67 percent of your balance each month.
Also, be sure to watch out for low introductory APRs. Those rates are only good for a few months, so be sure to check what the permanent APR will be.
What’s the difference between subsidized and unsubsidized student loans?
“I’m kind of sketchy in terms of the loans I’ve taken out,” said Shai Levin, 21, a senior at Goucher College in Baltimore.”I recognize that there are subsidized and unsubsidized [student loans], and it has something to do with interest.”
Interest is key-it comes down to a question of who pays it, starting when. There are three major types of student loans: Perkins, PLUS, and Stafford loans. The first major difference is that students may apply for Stafford and Perkins loans, while PLUS loans may only be taken out by parents. The loans that you can take yourself are often a better deal because PLUS loans require your parents to start paying off the debt right away. With the other loans, you don’t have to start paying for them until six or nine months after you graduate from school.
The question of whether a loan is subsidized comes down to who pays the interest while you are in school. On a subsidized loan, like a Perkins and some Staffords, the federal government and/or your school picks up the interest tab until after graduation.
On an unsubsidized Stafford loan, you pay the interest, and your payments are simply deferred-or postponed-until you graduate.
Subsidized loans are clearly a better deal. The only problem is that they are capped at certain levels annually. That means you can only borrow so much money per year. After that, you have to turn to an unsubsidized Stafford loan.
*Data based on recent survey by financial software-maker, Intuit, Inc.
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