With the rising cost of education, few students can afford college without the help of student loans. Loans are borrowed money that must be paid back with interest.
More than 100 billion dollars are borrowed each year for federal loans and more than 10 billion dollars are taken out in private student loans.
Student debt has also been rising and is at a record high, the average student graduates owing at least 26,500 dollars in student loans. The total student loan debt is at 833 billion dollars with more than 600 billion residing in federal student loan debt.
Equipped with a standard 2,500 dollar tax deduction and no prepayment penalty, student loans are the only form of borrowed money universally conditioned to help keep students out of financial difficulty.
Education loans make college a condition of the agreement. They are all limited by a student’s cost of attendance. Any amount of funding exceeding the difference between cost of attendance and financial aid is treated as an outside resource and will reduce any need based aid.
Loan funding is sent either directly to the school or student and can be provided by the federal government or a private lender. With two programs offering five individual loans, the federal government is the largest provider of student loan aid. However, private lenders tend to offer larger total amounts through utilizing both student and mixed-use loans.
Federal Educational Loans
Federal education loans are also federally guaranteed loans. This means that maximum interest rates and fees are set by federal law, usually providing lower interest rates and more flexible payment plans, such as loan forgiveness options. Federal loans don’t require credit checks or a co-signer, making them beneficial to students, who are likely to not have a very established credit history.
There are two federal loan programs that offer a total of six loans, all of which come with a fixed interest rate and a standard 10-year repayment plan. However federal loans can either be subsidized or unsubsidized. Subsidized loans are based on financial need, whereas unsubsidized loans are not. However, the interest on subsidized loans is paid by the government while the borrower is in school, where unsubsidized loan interest is not.
Unsubsidized loans hold students responsible for collected interest. Although loan repayment may be deferred until after a student graduates, the interest continues to collect. Once the loan enters loan repayment, this interest is added to the added to the total loan balance. Capitalizing on interest can increase the size of a student’s loan by as much as 20 percent.