One of the better ways to fund your education, if scholarships are out of the equation, is taking student loans. Student loans help the students complete their education by borrowing money from the government or private organizations with the condition that they will be eventually paid back.
As of the most recent statistical update, there are nearly 20 million Americans that attend college each year and of them, a significant number of 12 million—which is 60%—take annual financial aid to complete their education. Student loans can be used for college-related expenses like tuition fees, room and board, books, computers and transportation expenses.
Since most of the college-level funding in the USA is covered by the students or their parents themselves, the amount of money given in loan is huge. The reason for the high willingness of providing loan for students is that it has been one of the best forms of investment for both the individual and the government due to the high standards of education in the USA.
There are a several varieties of student loans, but they are basically split in two forms—federal and private student loans.
They are applied for using FAFSA application. They are further subdivided to subsidize —where the student is studying at least half-time while the government takes the burden of paying the interest and is only offered to students with a verified financial need—and unsubsidized.
The subsidization of federal loans happens only at the undergraduate level. The general consensus is that the subsidized federal loans are the best student loans available in the USA for it is much less expensive than private student loans.
Federal student loans are made regardless of credit history. If the students meet the requirement level of the program, the loan is granted. No payback is made while the student is enrolled in half-time studies, at least. If, however, the student drops below the line considered as half-time studies or graduates, then there is a 6-month grace period after which they must start by paying the loan they took.
When the student once again enrolls in half-time studies, the loans are deferred but are once again dropped—this time without any grace period—if the said student globules below the line again.
The limit of loan disbursed, as of July 1st, 2008, is as follows…
- $5,500 a year for freshman undergraduate students
- $6,500 for sophomore undergraduates
- $7,500 a year for junior and senior undergraduate students, and also students that are registered in teacher certification or preliminary coursework for graduate programs.
The limit on independent undergraduates is higher than the aforementioned figures…
- $9,500 a year for freshman undergraduate students
- $10,500 for sophomore undergraduates
- $12,500 a year for junior and senior undergraduate students, and also students that are registered in teacher certification or preliminary coursework for graduate programs.
Stafford loan limits
There is a certain amount of money that a student can borrow through Stafford loans for both subsidized and unsubsidized loans. The maximum aggregate limit of subsidized and unsubsidized loan, combined, for undergraduate students is $57,500—with $23,000 being the maximum subsidized loan a student could take.
Federal student loan to parents
These are usually PLUS loans that are handed out to parents and they are the ones responsible for it, not the students. The advantage with this loan is that parents are handed out more money that suffices in covering the cost that the student financial aid doesn’t cover. Repayment isn’t necessary until the student is out of school, but parents can start repaying before that if they want.
How the money is received by the student or school
Federal Direct Student Loans are funded from the taxpayers’ money originating with the U.S. Treasury. The loan funds are passed from the U.S. Treasury to the U.S. Department of Education and then to the colleges and schools, whence it goes to the student.
There is a cap on the amount of money one can borrow, an amount that is adjusted as federal policy changes. The current loan ceiling is below the amount of money required for a student to finish studies in 4 year private institutions and public universities—and it is to cover up this difference is why students borrow money from private student loans, despite them having higher interest rates.
According to The Economist’s report on June 2014, the U.S. loan debt exceeded a mammoth $1.2 trillion.
Once the Federal student loans enter the repayment phase, they get automatically enrolled in standard repayment. The time limit to repay the loan back, under this, is 10 years. The monthly bill constitutes of an amount that is an amalgamation of the accrued interest rate and a certain amount from the original loan. A total of 120 bills, one bill a month over the course of 10 years, will be issued—though, the number of bills depends on the loan amount. A minimum fee of $50-per-month is issued in a bill.
Income-Based Repayment Plan
There are some cases where the student’s loan is too high whereas the income of that said student is low. In those cases, they may be qualified for the Income-Based Repayment Plan. Apart from the PLUS loans for parents, almost all types of Federal student loans are eligible for IBR.
Private Student Loans
As the name suggests, these loans are handed out by banks or finance companies instead of government agencies. The terms and conditions of private loans are less friendly than federal ones and cost much more as well. As mentioned earlier, they are only used when a student has exhausted the borrowing limit set by the federal student loans.
Unlike federal loans, students who take them aren’t eligible for Income-Based Repayment Plan. Their payment terms are often less flexible, have higher fees and harsher penalties.
Private student loan types are generally of two types…
The interest rates surrounding these loans are generally lower, but take a longer time to process. The school certifies the borrowing amount—as in, they sign off the amount and the funds are distributed to the school directly. The contents of the certification include that the funds will only be used for educational means and will be distributed as necessary.
Direct-to-consumer private loans
Unlike school-channel loans, these are distributed directly to the student taking the loans. The school doesn’t get involved here at all. The plus point is that the loan reaches the student quicker than school-channeled ones, but the downside is that the interest rate is higher.
Private Student loan rates and interest
The loan interest rates in this sector deviate according to the financial markets. At times, the loan interest rate might seem small, but that is because they are deceptively veiled under the masquerade of a high initial origination fees—a one-time charge which is based on the amount of the loan. The interest rates also vary according to the credit history of the student.
Private Student loan cosigner
Eligible loan programs generally issue loans based on the credit history of the applicant and any applicable cosigner/co-endorser/co-borrower. International students aren’t eligible for government-based federal loans and hence can obtain private loans with the aid of a cosigner who is a citizen of the U.S.A.
Private student loan terms
The terms and conditions for private loans are not only harder, but also vary from lender to lender—unlike federal ones, which have fixed condition. Comparing the two isn’t easy and diligence is needed when doing so. The profit-based nature of private organizations means that the details of the terms are only apparent when the student is presented with the contract.
Studying with loans has its pros and cons. While federal loans could be discharged with very valid reasons like bankruptcy or disability, private ones can never be done so. The best way to go about loans is to thoroughly research the options and choose the best possible option.
As it can be clearly interpreted, federal loans are much better than private loans. The latter falls more in the “loan sharks” category, while the former is only available for U.S. citizens. If you are U.S. citizen, then a thoroughly thought out combination of both federal loans and private loans would help you cross the sea of education, but if you are a foreigner, then it would be wiser to have a good backup of funds before applying for American universities.