Student loans in the United States
Encyclopedia
While included in the term "financial aid," higher education loans differ from scholarship
s and grants
in that they must be paid back. They come in several varieties in the United States:
, Stafford loan
, Federal Direct Student Loans
, and Federal student loan consolidation
Federal student loans in the United States are authorized under Title IV of the Higher Education Act as amended.
These loans are available to college and university students via funds disbursed directly to the school and are used to supplement personal and family resources, scholarships, grants, and work-study. They may be subsidized by the U.S. Government or may be unsubsidized depending on the student's financial need. The U.S. Department of Education published a booklet comparing federal loans with private loans. In this same document, the government describes what you may use the loan for:
Both subsidized and unsubsidized loans are guaranteed by the U.S. Department of Education either directly or through guaranty agencies. Nearly all students are eligible to receive federal loans (regardless of credit score
or other financial issues). 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 will owe $10,000 upon graduation.
Unsubsidized federal student loans are also guaranteed by the U.S. Government, but the government does not pay interest for the student, rather the interest accrues during college. Nearly all students are eligible for these loans regardless of demonstrated need. Those who borrow $10,000 during college will owe $10,000 plus interest upon graduation. For example, those who have borrowed $10,000 and had $2,000 accrue in interest will owe $12,000. Interest will begin accruing on the $12,000. The accrued interest will be "capitalized" into the loan amount, and the borrower will begin making payments on the accumulated total. Students can choose to pay the interest while still in college; however, few students choose to exercise this option.
Federal student loans for graduate students have higher limits: $8,500 for subsidized Stafford and $12,500 (limits may differ for certain courses of study) for unsubsidized Stafford. Many students also take advantage of the Federal Perkins Loan. For graduate students the limit for Perkins is $6,000 per year.
Usually these are PLUS loans (formerly standing for "Parent Loan for Undergraduate Students"). Unlike loans made to students, parents can borrow much more — usually enough to cover any gap in the cost of education. However, there is no grace period: Payments start immediately.
The parents are responsible for repayment on these loans, not the student. Loans to parents are not a 'cosigner
' loan with the student having equal accountability. The parents have signed the master promissory note to repay the loan and, if they do not repay the loan, the credit rating of the parents may suffer. Also, parents are advised to consider "year 4" payments, rather than "year 1" payments. What sounds like a "manageable" debt load of $200 a month in freshman year can mushroom to a much more daunting $800 a month by the time four years have been funded through loans. The combination of immediate repayment and the ability to borrow substantial sums can be expensive.
Under new legislation, graduate students are eligible to receive PLUS loans in their own names. These Graduate PLUS loans have the same interest rates and terms of Parent PLUS loans.
Parents should also be aware that legislation raised the interest rate on these loans significantly — to 8.5% on July 1, 2006.
According to the U.S. Department of Education, more than 6,000 colleges, universities, and technical schools participate in FFELP, which represents about 80% of all schools. FFELP lending represents 75% of all federal student loan volume.
In 2010, the Heath Care Reform Act incorporated provisions on Education, which terminated the Federal Family Education Loan Appropriations after June 30, 2010. From that date on, all government-backed student loans have been issued through the Direct Loans program.
School-channel loans offer borrowers lower interest rates but generally take longer to process. School-channel loans are "certified" by the school, which means the school signs off on the borrowing amount, and the funds are disbursed directly to the school.
Direct-to-consumer private loans are not certified by the school; schools don't interact with a direct-to-consumer private loan at all. The student simply supplies enrollment verification to the lender, and the loan proceeds are disbursed directly to the student. While direct-to-consumer loans generally carry higher interest rates than school-channel loans, they do allow families to get access to funds very quickly — in some cases, in a matter of days. Some argue that this convenience is offset by the risk of student over-borrowing and/or use of funds for inappropriate purposes, since there is no third-party certification that the amount of the loan is appropriate for the education finance needs of the student in question.
Direct-to-consumer private loans are the fastest growing segment of education finance and under legislative scrutiny due to the lack of school certification. Loan providers range from large education finance companies to specialty companies that focus exclusively on this niche. Such loans will often be distinguished by the indication that "no FAFSA is required" or "Funds disbursed directly to you."
Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate
or the BBA LIBOR rate, plus an overhead charge. Because private loans are based on the credit history of the applicant, the overhead charge will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Money paid toward interest is now tax deductible. However, lenders rarely give complete details of the terms of the private student loan until after the student submits an application, in part because this helps prevent comparisons based on cost. For example, many lenders will only advertise the lowest interest rate they charge (for good credit borrowers). Borrowers with bad credit can expect interest rates that are as much as 6% higher, loan fees that are as much as 9% higher, and loan limits that are two-thirds lower than the advertised figures.
. Origination fees are a one-time charge based on the amount of the loan. They can be taken out of the total loan amount or added on top of the total loan amount, often at the borrower's preference. Some lenders offer low-interest, 0-fee loans. Each percentage point on the front-end fee gets paid once, while each percentage point on the interest rate is calculated and paid throughout the life of the loan. Some have suggested that this makes the interest rate more critical than the origination fee.
In fact, there is an easy solution to the fee-vs.-rate question: All lenders are legally required to provide you a statement of the "APR (Annual Percentage Rate
)" for the loan before you sign a promissory note and commit to it. Unlike the "base" rate, this rate includes any fees charged and can be thought of as the "effective" interest rate including actual interest, fees, etc. When comparing loans, it may be easier to compare APR rather than "rate" to ensure an apples-to-apples comparison. APR is the best yardstick to compare loans that have the same repayment term; however, if the repayment terms are different, APR becomes a less-perfect comparison tool. With different term loans, consumers often look to "total financing costs" to understand their financing options.
Many international students in the United States can obtain private loans (they are usually ineligible for federal loans) with a cosigner who is a United States citizen or permanent resident. However, some graduate programs (notably top MBA programs) have a tie-up with private loan providers and in those cases no cosigner is needed even for international students.
s (a period when payments are temporarily stopped due to financial or other hardship). These policies are solely based on the contract between lender and borrower and not set by Department of Education policies.
When Federal student loans enter repayment, they are automatically enrolled in standard repayment.
Under it, a borrower has 10 years to repay the total amount of his or her loan.
The loan servicer
(whoever is sending the bill) determines the monthly bill by splitting the loan amount into 120 equal payments (12 payments per year).
Payments pay off the interest building up each month, plus part of the original loan amount. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
in bankruptcy only with a showing of "undue hardship." Bankruptcy Code Section 523(a)(8) determines what loans can and cannot be discharged. In contrast to credit cards, which can be discharged through bankruptcy proceedings, this option is not available to Student loans. The undue hardship standard varies from jurisdiction to jurisdiction, but is generally difficult to meet, making student loans practically non-dischargeable through bankruptcy. While US Federal student loans can be discharged for total and permanent disability, private student loans cannot be discharged outside of bankruptcy.
The rules for total and permanent disability discharge are undergoing major changes as a result of the Higher Education Opportunity Act of 2008. Loan holders will no longer be required to be unable to earn any income, but instead the standard will be "substantial gainful activity" (SGA) as a result of disability. Comments on the proposed rules were open until August 24, 2009, and the new regulations will take effect July 1, 2010.
In 2007, the Attorney General of New York State, Andrew Cuomo
, led an investigation into lending practices and anti-competitive relationships between student lenders and universities. Specifically, many universities steered student borrowers to "preferred lenders" which resulted in those borrowers incurring higher interest rates. Some of these "preferred lenders" allegedly rewarded university financial aid staff with "kick backs." This has led to changes in lending policy at many major American universities. Many universities have also rebated millions of dollars in fees back to affected borrowers.
The biggest lenders, Sallie Mae and Nelnet, are criticized by borrowers. They frequently find themselves embroiled in lawsuits, the most serious of which was filed in 2007. The False Claims Suit was filed on behalf of the federal government by former Department of Education researcher, Dr. Jon Oberg, against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the U.S. Government and defrauded taxpayers of millions and millions of dollars. In August of 2010, Nelnet settled the lawsuit and paid $55 million.
The New York Times recently published an editorial endorsing the return of bankruptcy protections for private student loans in response to the economic downturn and universally increasing tuition at all colleges and graduate institutions.
In June of 2010, the amount of student loan debt held by Americans exceeded the amount of credit card debt held by Americans. At that time, student loan debt totaled at least $830 billion, of which approximately 80% was federal student loan debt and 20%was private student loan debt. In October 2011, the total amount of money owed in student loan debt was said to exceed $ 1 trillion.
Scholarship
A scholarship is an award of financial aid for a student to further education. Scholarships are awarded on various criteria usually reflecting the values and purposes of the donor or founder of the award.-Types:...
s and grants
Grant (money)
Grants are funds disbursed by one party , often a Government Department, Corporation, Foundation or Trust, to a recipient, often a nonprofit entity, educational institution, business or an individual. In order to receive a grant, some form of "Grant Writing" often referred to as either a proposal...
in that they must be paid back. They come in several varieties in the United States:
- Federal student loans made to students directly: No payments while enrolled in at least half time status. If a student drops below half time status, the account will go into its 6 month grace period. If the student re-enrolls in at least half time status, the loans will be deferred, but when they drop below half time again they will no longer have their grace period. Amounts are quite limited as well. There are many deferments and a number of forbearances one can get in the Direct Loan program. For those who are disabled, there is also the possibility of 100% loan discharge if you meet the requirements. Due to changes made by the Higher Education Opportunity Act of 2008, it will become much easier to get one of these discharges as of July 1, 2010. There are loan forgiveness provisions for teachers and health professionals serving low-income areas. Currently, certain loan forgiveness or discharges are considered income by the Internal Revenue Service due to 26 U.S.C. 108(f).
- Federal student loans made to parents: Much higher limit, but payments start immediately
- Private student loans made to students or parents: Higher limits and no payments until after graduation, although interest will start to accrue immediately. Private loans may be used for any education related expenses such as tuition, room and board, books, computers, and past due balances. Private loans can also be used to supplement federal student loans, when federal loans, grants and other forms of financial aid are not sufficient to cover the full cost of higher education.
Federal loans to students
See Federal Perkins LoanFederal Perkins Loan
A Federal Perkins Loan, or Perkins Loan, is a need-based student loan offered by the U.S. Department of Education to assist American college students in funding their post-secondary education. The program is named after Carl D. Perkins, a former member of the U.S...
, Stafford loan
Stafford loan
A Stafford Loan is a student loan offered to eligible students enrolled in accredited American institutions of higher education to help finance their education...
, Federal Direct Student Loans
Federal Direct Student Loan Program
The William D. Ford Federal Direct Loan Program provides "low-interest loans for students and parents to help pay for the cost of a student's education after high school. The lender is the U.S. Department of Education .....
, and Federal student loan consolidation
Federal student loan consolidation
In the United States the Federal Direct Student Loan Program include consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan...
Federal student loans in the United States are authorized under Title IV of the Higher Education Act as amended.
These loans are available to college and university students via funds disbursed directly to the school and are used to supplement personal and family resources, scholarships, grants, and work-study. They may be subsidized by the U.S. Government or may be unsubsidized depending on the student's financial need. The U.S. Department of Education published a booklet comparing federal loans with private loans. In this same document, the government describes what you may use the loan for:
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.
Both subsidized and unsubsidized loans are guaranteed by the U.S. Department of Education either directly or through guaranty agencies. Nearly all students are eligible to receive federal loans (regardless of credit score
Credit score
A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person...
or other financial issues). Both types offer a grace period
Grace period
A grace period is a time past the deadline for an obligation during which a late penalty that would have been imposed is waived. Grace periods, which can range from a number of minutes to a number of days or longer, depending on the context, can apply in various situations, including arrival at a...
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 will owe $10,000 upon graduation.
Unsubsidized federal student loans are also guaranteed by the U.S. Government, but the government does not pay interest for the student, rather the interest accrues during college. Nearly all students are eligible for these loans regardless of demonstrated need. Those who borrow $10,000 during college will owe $10,000 plus interest upon graduation. For example, those who have borrowed $10,000 and had $2,000 accrue in interest will owe $12,000. Interest will begin accruing on the $12,000. The accrued interest will be "capitalized" into the loan amount, and the borrower will begin making payments on the accumulated total. Students can choose to pay the interest while still in college; however, few students choose to exercise this option.
Federal student loans for graduate students have higher limits: $8,500 for subsidized Stafford and $12,500 (limits may differ for certain courses of study) for unsubsidized Stafford. Many students also take advantage of the Federal Perkins Loan. For graduate students the limit for Perkins is $6,000 per year.
Stafford loan aggregate limits
Students who borrow money for education through Stafford loans cannot exceed certain aggregate limits for subsidized and unsubsidized loans. For undergraduate dependent students, the maximum aggregate limit of subsidized and unsubsidized loans combined is $57,500, with subsidized loans limited to a maximum of $23,000 of the total loans. Once a student has borrowed the maximum amount (s)he is eligible for (based on grade level, such as undergraduate, graduate/professional, etc.), in subsidized loans, the student has the option to take out a loan in an additional amount less than or equal to the amount (s)he would have been eligible for in subsidized loans. Once both the subsidized and unsubsidized aggregate limits have been met for both subsidized and unsubsidized loans, the student is unable to borrow additional Stafford loans until a portion of the borrowed funds has been paid back to the respective lender(s). Once the student has paid back some of these amounts, (s)he will regain eligibility up to the aggregate limits as before.Federal student loans to parents
See PLUS loanPLUS loan
A PLUS Loan is a student loan offered to parents of students enrolled at least half time in eligible programs at participating and eligible post-secondary institutions or graduate and professional students at participating and eligible postsecondary institutions.-Similarities with Stafford and...
Usually these are PLUS loans (formerly standing for "Parent Loan for Undergraduate Students"). Unlike loans made to students, parents can borrow much more — usually enough to cover any gap in the cost of education. However, there is no grace period: Payments start immediately.
The parents are responsible for repayment on these loans, not the student. Loans to parents are not a 'cosigner
Co-signing
The act of co-signing involves a promise to pay another person's debt arising out of contract if that person fails to do so. Many realtors and landlords require a cosigner for college students, people with bad credit or people whose income is less than a certain, low multiple of the amount of rent...
' loan with the student having equal accountability. The parents have signed the master promissory note to repay the loan and, if they do not repay the loan, the credit rating of the parents may suffer. Also, parents are advised to consider "year 4" payments, rather than "year 1" payments. What sounds like a "manageable" debt load of $200 a month in freshman year can mushroom to a much more daunting $800 a month by the time four years have been funded through loans. The combination of immediate repayment and the ability to borrow substantial sums can be expensive.
Under new legislation, graduate students are eligible to receive PLUS loans in their own names. These Graduate PLUS loans have the same interest rates and terms of Parent PLUS loans.
Parents should also be aware that legislation raised the interest rate on these loans significantly — to 8.5% on July 1, 2006.
Disbursement: How the money gets to student or school
Federal Direct Student Loans, also known as Direct Loans or FDLP loans, are funded from public capital originating with the U.S. Treasury. FDLP loans are distributed through a channel that begins with the U.S. Treasury Department and from there passes through the U.S. Department of Education, then to the college or university and then to the student.According to the U.S. Department of Education, more than 6,000 colleges, universities, and technical schools participate in FFELP, which represents about 80% of all schools. FFELP lending represents 75% of all federal student loan volume.
In 2010, the Heath Care Reform Act incorporated provisions on Education, which terminated the Federal Family Education Loan Appropriations after June 30, 2010. From that date on, all government-backed student loans have been issued through the Direct Loans program.
Debt levels
The maximum amount that any student can borrow is adjusted as federal policies change. A study published in the winter 1996 edition of the Journal of Student Financial Aid, “How Much Student Loan Debt Is Too Much?” suggested that the monthly student debt payment for the average undergraduate should not exceed 8% of total monthly income after graduation. Some financial aid advisers have referred this as "the 8% rule." Circumstances vary for individuals, so the 8% level is an indicator, not a rule set in stone. A research report about the 8% level is available at the Iowa College Student Aid Commission.Private student loans
These are loans that are not guaranteed by a government agency and are made to students by banks or finance companies. Advocates of private student loans suggest that they combine the best elements of the different government loans into one: They generally offer higher loan limits than federal student loans, ensuring the student is not left with a budget gap. But unlike federal parent loans, they generally offer a grace period with no payments due until after graduation (this grace period ranges as high as 12 months after graduation, though most private lenders offer six months). However, some higher education advocates are private loan detractors because of the higher interest rates, multiple fees, and lack of borrower protections private loans carry that are not associated with federal loans.Private student loan types
Private student loans generally come in two types: school-channel and direct-to-consumer.School-channel loans offer borrowers lower interest rates but generally take longer to process. School-channel loans are "certified" by the school, which means the school signs off on the borrowing amount, and the funds are disbursed directly to the school.
Direct-to-consumer private loans are not certified by the school; schools don't interact with a direct-to-consumer private loan at all. The student simply supplies enrollment verification to the lender, and the loan proceeds are disbursed directly to the student. While direct-to-consumer loans generally carry higher interest rates than school-channel loans, they do allow families to get access to funds very quickly — in some cases, in a matter of days. Some argue that this convenience is offset by the risk of student over-borrowing and/or use of funds for inappropriate purposes, since there is no third-party certification that the amount of the loan is appropriate for the education finance needs of the student in question.
Direct-to-consumer private loans are the fastest growing segment of education finance and under legislative scrutiny due to the lack of school certification. Loan providers range from large education finance companies to specialty companies that focus exclusively on this niche. Such loans will often be distinguished by the indication that "no FAFSA is required" or "Funds disbursed directly to you."
Private student loan rates and interest
Private student loans typically have variable interest rates while federal student loans have fixed rates. Consumers should be aware that some private loans require substantial up-front origination fees. These fees raise the real cost to the borrower and reduce the amount of money available for educational purposes.Most private loan programs are tied to one or more financial indexes, such as the Wall Street Journal Prime rate
Prime rate
Prime rate or prime lending rate is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case...
or the BBA LIBOR rate, plus an overhead charge. Because private loans are based on the credit history of the applicant, the overhead charge will vary. Students and families with excellent credit will generally receive lower rates and smaller loan origination fees than those with less than perfect credit. Money paid toward interest is now tax deductible. However, lenders rarely give complete details of the terms of the private student loan until after the student submits an application, in part because this helps prevent comparisons based on cost. For example, many lenders will only advertise the lowest interest rate they charge (for good credit borrowers). Borrowers with bad credit can expect interest rates that are as much as 6% higher, loan fees that are as much as 9% higher, and loan limits that are two-thirds lower than the advertised figures.
Private student loan fees
Private loans often carry an origination feeOrigination fee
An origination fee, or activation fee, is a payment associated with the establishment of an account with a bank, broker or other company providing services handling the processing associated with taking out a loan....
. Origination fees are a one-time charge based on the amount of the loan. They can be taken out of the total loan amount or added on top of the total loan amount, often at the borrower's preference. Some lenders offer low-interest, 0-fee loans. Each percentage point on the front-end fee gets paid once, while each percentage point on the interest rate is calculated and paid throughout the life of the loan. Some have suggested that this makes the interest rate more critical than the origination fee.
In fact, there is an easy solution to the fee-vs.-rate question: All lenders are legally required to provide you a statement of the "APR (Annual Percentage Rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
)" for the loan before you sign a promissory note and commit to it. Unlike the "base" rate, this rate includes any fees charged and can be thought of as the "effective" interest rate including actual interest, fees, etc. When comparing loans, it may be easier to compare APR rather than "rate" to ensure an apples-to-apples comparison. APR is the best yardstick to compare loans that have the same repayment term; however, if the repayment terms are different, APR becomes a less-perfect comparison tool. With different term loans, consumers often look to "total financing costs" to understand their financing options.
Private student loan cosigners
Eligible loan programs generally issue loans based on the credit history of the applicant and any applicable cosigner/co-endorser/coborrower. This is in contrast to federal loan programs that deal primarily with need-based criteria, as defined by the EFC and the FAFSA. For many students, this is a great advantage to private loan programs, as their families may have too much income or too many assets to qualify for federal aid but insufficient assets and income to pay for school without assistance.Many international students in the United States can obtain private loans (they are usually ineligible for federal loans) with a cosigner who is a United States citizen or permanent resident. However, some graduate programs (notably top MBA programs) have a tie-up with private loan providers and in those cases no cosigner is needed even for international students.
Private student loan terms
The terms for private loans vary from lender to lender. A common suggestion is to shop around on all terms, not just respond to "rates as low as..." tactics that are sometimes little more than bait-and-switch. However, shopping around could damage your credit score. Examples of other borrower terms and benefits that vary by lender are deferments (amount of time after leaving school before payments start) and forbearanceForbearance
In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”...
s (a period when payments are temporarily stopped due to financial or other hardship). These policies are solely based on the contract between lender and borrower and not set by Department of Education policies.
Private student loan consolidation
Several lenders offer private consolidation programs. Borrowers of privately subsidized student loans may face the same restrictions to bankruptcy discharge as for government based loans: New legislation makes clear that these loans are, like federal student loans, not dischargeable under bankruptcy. Even before the legislation was passed, private student loans that were guaranteed "in whole or in part" by a nonprofit entity are non-dischargeable in bankruptcy (and most private loans, regardless of the lender, were guaranteed by a nonprofit). The interest rates on private loan consolidations are often not any better than the rates already available on the private loans separately.Standard repayment
When Federal student loans enter repayment, they are automatically enrolled in standard repayment.
Under it, a borrower has 10 years to repay the total amount of his or her loan.
The loan servicer
Loan servicer
A loan servicer is a public or private entity that collects, monitors and reports loan payments, handles property tax, insurance escrows and late payments, forecloses defaulted loans, and remits payments....
(whoever is sending the bill) determines the monthly bill by splitting the loan amount into 120 equal payments (12 payments per year).
Payments pay off the interest building up each month, plus part of the original loan amount. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
Discharge of student loans
US Federal student loans and some private student loans can be dischargedBankruptcy discharge
A discharge in United States bankruptcy law, when referring to a debtor's discharge, is a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor...
in bankruptcy only with a showing of "undue hardship." Bankruptcy Code Section 523(a)(8) determines what loans can and cannot be discharged. In contrast to credit cards, which can be discharged through bankruptcy proceedings, this option is not available to Student loans. The undue hardship standard varies from jurisdiction to jurisdiction, but is generally difficult to meet, making student loans practically non-dischargeable through bankruptcy. While US Federal student loans can be discharged for total and permanent disability, private student loans cannot be discharged outside of bankruptcy.
The rules for total and permanent disability discharge are undergoing major changes as a result of the Higher Education Opportunity Act of 2008. Loan holders will no longer be required to be unable to earn any income, but instead the standard will be "substantial gainful activity" (SGA) as a result of disability. Comments on the proposed rules were open until August 24, 2009, and the new regulations will take effect July 1, 2010.
Criticism of US student loan programs
After the passage of the bankruptcy reform bill of 2005, even private student loans are not discharged during bankruptcy. This provided a credit risk free loan for the lender, averaging 7 percent a year.In 2007, the Attorney General of New York State, Andrew Cuomo
Andrew Cuomo
Andrew Mark Cuomo is the 56th and current Governor of New York, having assumed office on January 1, 2011. A member of the Democratic Party, he was the 64th New York State Attorney General, and was the 11th United States Secretary of Housing and Urban Development...
, led an investigation into lending practices and anti-competitive relationships between student lenders and universities. Specifically, many universities steered student borrowers to "preferred lenders" which resulted in those borrowers incurring higher interest rates. Some of these "preferred lenders" allegedly rewarded university financial aid staff with "kick backs." This has led to changes in lending policy at many major American universities. Many universities have also rebated millions of dollars in fees back to affected borrowers.
The biggest lenders, Sallie Mae and Nelnet, are criticized by borrowers. They frequently find themselves embroiled in lawsuits, the most serious of which was filed in 2007. The False Claims Suit was filed on behalf of the federal government by former Department of Education researcher, Dr. Jon Oberg, against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the U.S. Government and defrauded taxpayers of millions and millions of dollars. In August of 2010, Nelnet settled the lawsuit and paid $55 million.
The New York Times recently published an editorial endorsing the return of bankruptcy protections for private student loans in response to the economic downturn and universally increasing tuition at all colleges and graduate institutions.
In June of 2010, the amount of student loan debt held by Americans exceeded the amount of credit card debt held by Americans. At that time, student loan debt totaled at least $830 billion, of which approximately 80% was federal student loan debt and 20%was private student loan debt. In October 2011, the total amount of money owed in student loan debt was said to exceed $ 1 trillion.
See also
- College tuition in the United States
- EdFundEDFUNDEdFund is the United States' second largest provider of student loan guarantee services under the Federal Family Education Loan Program . It is organized as a non-profit public benefit corporation. EdFund offers students and their families a wide range of information on the value of higher...
- Free educationFree educationFree education refers to education that is funded through taxation, or charitable organizations rather than tuition fees. Although primary school and other comprehensive or compulsory education is free in many countries, for example, all education is mostly free including...
- Higher Education Price IndexHigher Education Price IndexThe Higher Education Price Index is a measure of the inflation rate applicable to United States higher education; more precisely, the increase in costs in a defined basket of goods and services typically purchased by institutions of higher education...
- Post-secondary education
- Private universityPrivate universityPrivate universities are universities not operated by governments, although many receive public subsidies, especially in the form of tax breaks and public student loans and grants. Depending on their location, private universities may be subject to government regulation. Private universities are...
- Student benefitStudent benefitStudent benefits are transfer payments that are given to students for purposes of full-time study, and require progress in studies, or obtaining academic credits. Student benefits are found in countries where education is free of charge, e.g. Finland and Sweden...
- Tuition agencyTuition agencyA tuition agency is a commercial organisation which specialises in introducing tutors to students requiring help in the academic area. Tuition agencies exist largely due to the problems parents and students face in finding a specialist who can help them with the study of one or more specific...
- Tuition centerTuition centerTuition center is a special term for private educational institutions; they are especially abundant and ubiquitous in Malaysia,India,The Middle East and Singapore. Many school teachers earn their supplementary income through tuition centers and agencies...
- Student debtStudent debtStudent debt is a form of debt that is owed by an attending, withdrawn or graduated student to a lending institution. The lending may usually be a student loan, but debts may be owed to the school if the student has dropped classes and withdrawn from the school Student debt is a form of debt that...
- Student loanStudent loanA student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education...
- Tuition fees
- Tuition freezeTuition freezeTuition freeze is a government policy restricting the ability of administrators of post-secondary educational facilities to increase tuition fees for students. Although governments have various reasons for implementing such a policy, the main reason cited is improving accessibility for working-...
Further reading
- Loonin, Deanne. Student loan law: Collections, intercepts, deferments, discharges, repayment plans, and trade school abuses. Boston: National Consumer Law CenterNational Consumer Law CenterThe National Consumer Law Center is an American nonprofit organization specializing in consumer issues on behalf of low-income people. Legal services, government and private attorneys, as well as community organizations, work with the center to advocate for consumer reform.The National Consumer Law...
, June 30, 2006. ISBN 9781602480018 - Student loan program: A journey through the world of educational lending, collection, and litigation. Mechanicsburg, PennsylvaniaMechanicsburg, PennsylvaniaMechanicsburg is a borough in Cumberland County, Pennsylvania, USA, eight miles west of Harrisburg. It is part of the Harrisburg–Carlisle Metropolitan Statistical Area. Mechanicsburg was settled in 1806 and incorporated as a borough on April 12, 1828...
Pennsylvania Bar Institute, c2003. vii, 300 p. : forms ; 28 cm. ASIN B000IB82QA - Wear Simmons, Charlene. Student Loans for Higher Education. Sacramento, California: California Research Bureau, California State Library, 2008. 59 pages. ISBN 1-58703-233-3
External links
- "College, Inc.", PBS FRONTLINE documentary, May 4, 2010
- U.S. Dept. of Education