<P> You may use the money you receive only to pay for education expenses at the school that awarded your loan . Education expenses include school charges such as tuition; room and board; fees; books; supplies; equipment; dependent childcare expenses; transportation; and rental or purchase of a personal computer . </P> <P> Both subsidized and unsubsidized loans are guaranteed by the U.S. Department of Education either directly or through guaranty agencies . The loans that are provided are the Stafford and Perkins loans regulated by the U.S. Department of Education . Nearly all students are eligible to receive federal loans (regardless of credit score or other financial issues). Federal student loans are not priced according to any individualized measure of risk, nor are loan limits determined based on risk . Rather, pricing and loan limits are politically determined by Congress . Undergraduates typically receive lower interest rates, but graduate students typically can borrow more . This lack of risk - based pricing has been criticized by scholars as contributing to inefficiency in higher education . </P> <P> Both types offer a grace period of six months, which means that no payments are due until six months after graduation or after the borrower becomes a less - than - half - time student without graduating . Both types have a fairly modest annual limit . The dependent undergraduate limit effective for loans disbursed on or after July 1, 2008 is as follows (combined subsidized and unsubsidized limits): $5,500 per year for freshman undergraduate students, $6,500 for sophomore undergraduates, and $7,500 per year for junior and senior undergraduate students, as well as students enrolled in teacher certification or preparatory coursework for graduate programs . For independent undergraduates, the limits (combined subsidized and unsubsidized) effective for loans disbursed on or after July 1, 2008 are higher: $9,500 per year for freshman undergraduate students, $10,500 for sophomore undergraduates, and $12,500 per year for junior and senior undergraduate students, as well as students enrolled in teacher certification or preparatory coursework for graduate programs . Subsidized federal student loans are only offered to students with a demonstrated financial need . Financial need may vary from school to school . For these loans, the federal government makes interest payments while the student is in college . For example, those who borrow $10,000 during college owe $10,000 upon graduation . </P> <P> Unsubsidized federal student loans are also guaranteed by the U.S. Government, but the government, while controlling (setting) the interest rate, does not pay interest for the student, rather the interest accrues during college . Nearly all students are eligible for these loans regardless of financial need (on need, see Expected Family Contribution). Those who borrow $10,000 during college owe $10,000 plus interest upon graduation . For example, those who borrowed $10,000 and had $2,000 accrue in interest owe $12,000 . Interest begins accruing on the $12,000, i.e., there is interest on the interest . The accrued interest is "capitalized" into the loan amount, and the borrower begins making payments on the accumulated total . Students can pay the interest while still in college, but few do so . </P>

Where does the money come from for student loans