Student Loans

Student loans in the United States are a form of financial aid that usually must be repaid, in contrast to other forms of financial aid such as scholarships, which never have to be repaid, and grants, which only rarely have to be repaid. Student loans play a very large role in U.S. higher education. Nearly 20 million Americans attend college each year. Of that 20 million, close to 12 million - or 60% - borrow annually to help cover costs. In Europe, higher education receives much more government funding, so student loans are much less common. In parts of Asia and Latin America government funding for post-secondary education is lower - usually limited to a few flagship universities, like the Mexican UNAM - and there are no special programs under which students can easily and inexpensively borrow money. However, in the U.S., much of college is funded by students and their families through loans, although public institutions are funded in part through state and local taxes, and both private and public institutions through Pell grants and, especially with older schools, gifts from donors and alumni. Some believe this substantially increases intergenerational correlations in income (having two generations of a family have similar earning ability), although other factors, including genetics, work ethic, and preferences for work versus leisure, have been shown to play a larger combined role in some studies. Nonetheless, higher education in the U.S. has been shown to be an excellent investment both for individuals and for the public, even though differences in the returns to educational investment across schools has been overstated in many cases.

Student loans come in several varieties in the United States, but are basically split into federal loans and private student loans. The federal loans, for which the FAFSA is the application, are subdivided into subsidized (the government pays the interest while the student is studying at least half-time) and unsubsidized. Federal student loans are subsidized at the undergraduate level only. A subsidized loan is by far the best kind of loan, but an unsubsidized federal student loan is far better than a private student loan. Some states have their own loan programs, as do some colleges. In almost all cases, these student loans have better conditions - sometimes much better - than the heavily-advertised and expensive private student loans.

Student loans may be used for any college-related expenses, including tuition, room and board, books, computers, and transportation expenses.

An unusual provision in the law prohibits student loans from being discharged through bankruptcy.

The main types of student loans in the United States are the following:

Federal student loans made to students directly (Stafford and Perkins loans). These loans are made regardless of credit history (most students have no credit history); approval is automatic if the student meets program requirements. The student makes no payments while enrolled in at least half-time studies. If a student drops below half time or graduates, there is a six-month grace period. If the student re-enrolls in at least half-time status, the loans are deferred, but when they drop below half time again they no longer have access to a grace period and repayment must begin. All Perkins loans and some undergraduate Stafford loans receive subsidies from the federal government. Amounts of both subsidized and unsubsidized loans are limited. There are many deferments and a number of forbearances (cancellation of loan) one can get in the Direct Loan program. For those who are disabled, there is also the possibility of 100% loan discharge (cancellation of loan) if you meet the requirements. Due to changes by the Higher Education Opportunity Act of 2008, it became easier to get one of these discharges after July 1, 2010. There are loan forgiveness provisions for teachers in specific critical subjects or in a school with more than 30% of its students on reduced-price lunch (a common measure of poverty), and qualify for loan forgiveness of all their Stafford, Perkins, and Federal Family Education Loan Program loans totalling up to $77,500. In addition, any person employed full-time (in any position) by a public service organization, or serving in a full-time AmeriCorps or Peace Corps position qualifies for loan forgiveness (cancellation) after 10 years of 120 consecutive payments without being late. However, loan forgivenesses or discharges are considered taxable income by the Internal Revenue Service under 26 U.S.C. 108(f).

Federal student loans made to parents (PLUS loans): Much higher limit, but payments start immediately. Credit history is considered; approval is not automatic.

Private student loans, made to students or parents: Higher limits and no payments until after graduation, although interest starts to accrue immediately and the deferred interest is added to the principal, so there is interest on the (deferred) interest (which Is not the case with subsidized student loans). Interest rates are higher than those of federal loans, which are set by the United States Congress. Private loans are, or should be, a last resort, when federal and other loan programs are exhausted. Any college financial aid officer will recommend you borrow the maximum under federal programs before turning to private loans.

Site Map