Stafford Loan and pay off from inheritance

Paying for College
1

DD was on FRL senior year of HS. Qualified for subsidized Stafford loans and full Pell. Did not accept loans freshman and soph years as she has a 529 that covered costs. Deciding now whether to take subsidized Stafford loan for Junior year. There may be a bit of 529 money remaining when she graduates, with or without loan, but she has plans for grad school and we are planning to use 529 for that. In addition, just found out that she will receive an inheritance at end of junior/beginning of senior year (grandmother estate in probate), which will help cover grad school costs. I didn’t realize how expensive grad school will be and now wish we had taken Stafford earlier. My thought is to take subsidized Stafford now, with no interest until graduation. I think I’ve read that grad school loans are never interest subsidized.

Two questions:

  1. does interest remain subsidized only in undergrad or will it be interest-subsidized through grad school?
  2. does it make sense to take Stafford now, and pay off soon after finishing school (timing based on answer to #1), from inheritance in order to establish credit record for DD? This assumes that 529 plus inheritance, and any other grad school grant/assistantship, scholarship, etc will cover grad school costs with no new loans.
2

“The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time…” See https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#subsidized-vs-unsubsidized

3

Make sure you understand the chart in 4kidsdad’s link. The loans are no longer subsidized once the student begins graduate school.

4

Huh. The way I read that chart, a student enrolled in a graduate or professional program is not responsible for paying the interest that accrues on subsidized loans.

5

My kid has a subsidized federal loan from undergrad and interest has still been subsidized on that loan throughout professional school and will be until several months after she graduates.

6

The undergrad loan is still subsidized in grad school, but any new loan would be unsubsidized.

7

Thanks so much for your responses! So it sounds like it will not hurt her to take out the 5K loan now. She can keep enough aside from the inheritance to pay it off when it becomes due. Though from what I’ve read elsewhere, she might be better off paying it off in a few installments, rather than all at once, in order to establish a record for credit report. Anybody have input on that aspect?

8

I am not sure, but I think making regular monthly payments on a loan over an extended period of time would be more valuable in establishing good credit.

9

Credit scores are made up of several factors, one being repayment of an installment loan. A student who paid a loan in full would get a tiny benefit, paying over time a little more, but it is but one part of a credit score. I never think it is worth it to get a loan just to build a credit score as you can do that by having utilities in your name, a credit card you pay every month, a lease for an apartment with a company that reports to credit companies. There is also the possibility a car loan might be needed.