What is a Subsidized Loan?

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Anybody who borrows a loan has to pay interest on the loan which is charged periodically. An option is to borrow subsidized loans, wherein the Federal government pays the interest. Commonly student loans are subsidized and some Federal loans too. To know more, keep reading.

Any loan or credit facility is basically a borrowing, and requires consideration for borrowing. APR (Annual Percentage Rate) or interest rate are the two types of considerations for the loan or credit facility. The interest rate, as we know, is charged with the help of a percentage and largely depends upon the time frame of the loan.

The interest is paid with every installment in most cases, though there are some loans where the first installments are made for only the total interest that is payable, and then the repayment of the actual borrowed amount starts. A loan that has some concession in the interest amount and the repayment schedule is termed as subsidized. Whereas an unsubsidized loans does not have any concessions in interest repayment.

About Subsidized Loans

Any said loan can become subsidized. The concession on interest is not necessarily provided by the lender, but in some cases third parties such as a guardian or employer does provide the concession. This term is used in two prominent contexts, namely, general subsidized loans and the subsidized loans for students. Here's an explanation of both the concepts.

1. General Subsidized Loans

The basic concept of such loans in practical life is simple. The interest is paid, either fully or partially, by some third-party or is discounted by the lender himself. Employer companies often provide subsidies to their employees for most of the secured loans such as auto loans, home loans and mortgage loans.

Similarly in the world of business, investment banks and financial institutions provide such loans to their client companies, their subsidies, partners and also their employees. This

is an example of subsidy provided by the lender himself. In several cases, the interest of private student loans is paid by parents, which technically is a subsidized loans.

There are several other examples, like, the production industry, waste and pollution treatment equipment which is purchased with the help of loan gets a subsidy which is paid by the government. In case of you are planning to get any kind of loans, approach recognized banks such as Bank of America, Wells Fargo or CitiGroup. A private loan should be a last resort.

2. Subsidized Student Loans

There are a large number of student loans which are subsidized by the government. Some of them such as the Stafford subsidized loan, and the Federal PLUS are given to almost all students, applying for colleges and universities. The subsidized Stafford loan is basically a direct loan. that is. it pays for a portion of the college's fees. The amount that is granted as subsidized loans for college depends upon the financial status of the student. Free Application for Federal Student Aid (FAFSA) is used to determine the amount that is to be lent out.

When a person borrows a Federal direct subsidized loan, no payment or installment is scheduled till the student completes his or her educational qualifications. Following this, a certain grace period is prescribed. Upon the lapse of the grace period, first the interest is repaid after which the actual amount is also repaid. This is a common mechanism for several student loans. Apart from that, deferment of installments and wage garnishments are also sometimes a part of a subsidized student loan. Note that a subsidized student loan is sometimes also known as financial aid.

In theory, and also in practical life, any loan can be subsidized, the discounting of interest with the help of a lender or even a third-party or the government itself is required.

Source: www.ibuzzle.com

Category: Credit

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