What if someone tells you that you can study in an institution of repute and the federal government pays for it, at least for the time being and ask you to repay it only when you are eligible to. Sounds amazing right? This is what a student loan does. A student loan is specifically designed for students to pay for their education expenses and carry substantially lower interest rates and suitable repayment schedules to help students pay them back when they are capable of.
Student loans are different from scholarships and grants and are supposed to be paid off. In the US economy , government started offering student loans in 1950s under the National Defence Education Act. The Higher Education Act of 1965 further helped to broaden the scope of student loans. In the United States of America, there are mainly two types of student loans, namely, Federal student Loans and private student loans.
Federal Student Loans
Federal student loans are funded by the federal government. Interest rates on a federal loan are fixed and in some cases, tax deductible. Federal student loans can take two forms- Direct Subsidized loans and Direct Unsubsidized loans with the former offering certain advantages over the latter. Direct subsidized loans are available to undergraduate students with the loan amount not exceeding the financial need. The interest on such a loan is paid by the US Department of Education if the individual is in school at least half-time and during the grace period of the student, i.e., six months after graduating.
Direct unsubsidized loans are offered to undergraduates and graduates with the student being liable to pay interest payment for all periods. Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. Unlike federal loans, private student loans are never subsidized and might even require smooth credit history.
Eminent features of Federal Student Loans
Some key features are:
- The student does not need to start repaying the loan until he/ she leaves school, graduates from the school or changes his/ her enrolment position to less than half time.
- The interest rates on federal student loans, along with being tax deductible are also fixed and generally, far lower than credit card interest rates and what private lenders charge. The current interest rates range from 3.86% to 7.21% for different forms of federal student loans.
- Federal student loans offer a dual advantage to the borrower by not requiring a credit check for availing most federal student loan. At the same time, they help an individual to build a good credit score that enables him to borrow in the future. The requirement for a credit check arises only in the case of PLUS loans.
- Generally, a federal student loan does not require a co- signer for the borrower to take out a loan.
- Federal education loans can also be consolidated into a Direct Consolidation
- Loan which makes the borrowers for various student aide programmes, which otherwise might not be available to them.
- If a student with Federal student loan is not able to repay one’s loan due to some hardship, he/ she might be eligible to lessen the monthly payment or postpone the payment for some time.
- There are several repayment plans available to the borrower in order to repay the loan with maximum ease. Some of these plans are- Income- Based Repayment Plan, Income- Contingent Repayment Plan, Pay as You Earn Repayment Plan, Income- sensitive repayment plan, Graduated Repayment Plan, Standard Repayment Plan and Extended Repayment Plan.
For student borrowers who are not fit enough to repay a loan or who are in genuine need of help to pay back their federal student loan due to death or bankruptcy; the US Department of Education has a series of student loan Forgiveness and discharge plans that have over the years helped million of people to come out of debt. A student loan forgiveness programme is designed to help students pay full or a part of their student loan and require the student to pursue a particular occupation or volunteering service in exchange of paying off the loan completely or in part.
- In the US, student loan forgiveness programs are also aimed at directing individuals towards sectors of national importance where there is lack of qualified personnel. Once forgiven, the student is not liable to pay his remaining loan balance. Some of these plans are Public Service Loan Forgiveness Programme, Teacher Loan Forgiveness Programme, Total and Permanent Disability Discharge, Death Discharge, Perkins Loan Cancellation and Discharge, Discharge in bankruptcy and Unpaid refund discharge.
How to avail a Federal Student Loan
It is very easy for a student to avail a federal student loan. One needs to complete the Free Application for Federal Student Aide (FAFSA). This can be done either online or offline by downloading a copy of the form, completing it and then submitting it. Sometimes, students are not aware and start believing in some myths such as these aides are available to only students with high scores, students with financially strong parents are not eligible for such loans or the age of the student might be a barrier for availing a loan. In reality, these loans are available to one and all and no one should miss the opportunity of benefiting from them. The FAFSA has to be filled out in the beginning of every year of school for a student to be eligible for federal student aide benefits.
Federal student loans have helped student over decades to fulfil their ambitions by facilitating them in acquiring higher qualifications. Federal student loans offer a multitude of benefits but at the same time, it is a loan to be repaid and not a grant. Therefore, it becomes essential for a borrower to carefully assess is current and expected future financial standing and see if he/ she would actually be able to pay the loan back or not.
As a sign of prudence, one should avail the minimum loan possible and strive hard to pay it off once he/she is out of school. The federal government has also attracted some criticism for certain loan forgiveness programs to being a drain to the government’s funds, but these programmes continue with the sole objective of encouraging higher education in the society and overall betterment of the economy.