Students Loan and Financial Aid

A 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 school. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy.

Types of Student Credit Card
1. Federal Loan
2. Student Private Loan

In the United States, there are two types of student loans: federal loans sponsored by the federal government and private student loans, which broadly includes state-affiliated nonprofits and institutional loans provided by schools. The overwhelming majority of student loans are federal loans. Federal loans can be "subsidized" or "unsubsidized." Interest does not accrue on subsidized loans while the students are in school. Student loans may be offered as part of a total financial aid package that may also include grants, scholarships, and/or work study opportunities.

Prior to 2010, federal loans were also divided between direct loans (which are originated and funded by the federal government) and guaranteed loans, originated and held by private lenders but guaranteed by the government. The guaranteed lending program was eliminated in 2010 because of a widespread perception that the government guarantees boosted student lending companies' profits but did not benefit students by reducing student loan costs.

Federal Student loans are generally less expensive than private student loans. However, the federal student lending program still generates billions of dollars in profit for the government each year, because the interest payments exceed the government's own borrowing costs, loan losses, and administrative costs. Losses on student loans are extremely low, even when students default, in part because these loans cannot be discharged in bankruptcy unless repaying the loan would create an "undue hardship" for the student borrower and his or her dependents. In 2005, the bankruptcy laws were changed so that private educational loans also could not be readily discharged. Supporters of this change claimed that it would reduce student loan interest rates.

Income-Based Repayment

The Income-Based Repayment plan is an alternative to paying back student loans, which allow the borrowers to pay back loans based on how much they make, and not based how much money is actually owed. However, income based repayment does not apply to private loans.

IBR plans generally cap loan payments at 10 percent of the student borrower's income. Interest accrues and the balance continues to build. However, after a certain number of years, the balance of the loan is forgiven. This period is 10 years if the student borrower works in the public sector (government or a nonprofit) and 25 years if the student works at a for-profit. Debt forgiveness is treated as taxable income, but can be excluded as taxable under certain circumstances, like bankruptcy and insolvency.

Scholars have criticized IBR plans on the grounds that they create moral hazard and suffer from adverse selection. That is, IBR may encourage student borrowers who could have obtained high-wage jobs to take low wage jobs with good benefits and minimal work hours to reduce their loan payments, thereby driving up the cost of the IBR program. And, if IBR programs are optional, only students who expect to have low wages will opt into the program. Historically, a number of IBR programs have collapsed because of these problems.

Qualification

Most college students in the United States qualify for federal student loans. Students can borrow the same amount of money, at the same price, regardless of their own income or their parents' incomes, regardless of their expected future income, and regardless of their credit history. Only students who have defaulted on federal student loans or have been convicted of drug offenses are excluded.

The amount students can borrow each year depends on their education level (undergraduate or graduate), and their status as dependent or independent. Undergraduates may receive lower interest rates than graduate students, but graduate students can typically borrow more per year.

Private lenders may use different underwriting criteria, including income level, parents' income level, and other financial considerations. Students will generally only borrow from private lenders when they exhaust the maximum borrowing limit under federal loans. Several scholars have advocated eliminating the borrowing limit on federal loans and enabling students to borrow according to their needs (tuition plus living expenses) and thereby eliminating high-cost private loans.

Repayment

Federal student loan interest rates are established by Congress and listed in § 20 U.S.C. § 1087E(b). Because the interest rates are established by Congress, interest rates are a political decision. The federal student loan program currently runs a multibillion dollar "negative subsidy", or profit, for the federal government. Some scholars have suggested that federal student loan interest rates should be tailored to particular courses of study and reflect the riskiness of those different courses of study. They have also suggested that the program should be run at cost, or below cost, because of the benefits an educated workforce provides to society—lower burdens on public services, lower health costs, higher wages and tax revenues, lower unemployment.

Repayment typically begins anywhere from six to twelve months after a student leaves school, regardless of whether or not they complete their degree program. In some cases, repayment begins if course load drops to half time or less, so it is important to check the exact terms and conditions of any student loan.

The student may have multiple options for extending the repayment period, although an extension of the loan term will likely reduce the monthly payment, it will also increase the amount of total interest paid on the principle balance during the life of the loan. Extension options include extended payment periods offered by the original lender and federal loan consolidation. There are also other extension options including income sensitive repayment plans and hardship deferments. Extensions and consolidation will also add to the principal, many times unpaid interest and penalties become capitalized.

The Master Promissory Note is an agreement between the lender and the borrower that promises to repay the loan. It is a binding legal contract.

Student loans in the United States are a form of financial aid that must be repaid, in contrast to other forms of financial aid such as scholarships and grants.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 is more highly subsidized for students and funded by the government. In parts of Asia and Latin America most post secondary education is still private with little funding from the governments. However, in the U.S., much of college is funded by students and their families with public institutions being funded in part through state and local taxation, and both private and public institutions through additional gifts from donors and alumni. Some believe this substantially increases intergenerational correlations in income, although other transmissions 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, which broadly includes state-affiliated nonprofits and institutional loans provided by schools.

• Federal student loans made to students directly: The student makes no payments while enrolled in at least half time status. If a student drops below half time, the account goes into 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. 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 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, and qualify for loan forgiveness of all their Stafford, Perkins, and FFEL loans totalling more than $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 after 10 years of 120 consecutive payments without being late in a public service position 2007 law mandates. 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 starts 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. Students can also use private loans to supplement federal student loans when federal loans, grants, and other forms of financial aid are insufficient to cover the full cost.