Loans for Students Explained with 8 Major Questions Answered
Longing for an advanced degree? The obvious advantages are bolstered career prospects and a ticket to a middle-class life. But have you ever wondered why most American students obtain credit? Well, college is darn expensive.
Today, you’ll get a definitive solution to “how do student loans work.” We’ve tackled eight main questions you might have. And covered lots of interesting topics. So stick around till the end.
1) What Is a Student Loan?
“It’s cash obtained on credit to finance post-secondary training at higher education institutions.”
Who obtains loans for students?
Which Kind of Student Are You?
Traditional or non-traditional? Discover by answering this simple questionnaire:
Did you know that…
The significant portion of borrowers are undergrads (taking up 4-year courses) and graduate understudies at charitable institutions and state-funded colleges. Borrowers taking up 2-year courses or those studying at revenue-driven schools make up the lesser portion of borrowers.
What’s the Average Age of College Students?
The latest figures we could get our hands on are 2020 enrollment & student demographic projections from educationdata.org. Run your eyes over this table to find out the number, gender & age of scholars that were expected to enroll in 2018.
|Anticipated enlistment fall semester 2018||19,900,000||_|
|Female students||11,200, 000||56.28%|
|Under 25 years of age||12,300,000||61.80%|
|25 years +||7,600,000||38.20%|
Other stats and trends to note include:
- Female enlistment numbers have consistently outperformed those of male students since the late 1970s.
- In 2016, female students earned 57.34% of all bachelor degrees.
- It’s expected that by 2028, there will be 17.2 million college enrollments.
- In the year 2000, the number of those who enrolled was 13.2 million.
- Most college entrants are 18 or 19 years old.
Which Costs Should Credit Cover?
Your school of choice will decide the amount of cash you require to study there. All things considered, students at state-funded colleges pay $9,410 yearly. Private students part with $32,410 on average. The cash you’ll need will also differ based on your year of study.
Some school-related expenses include:
- Living expenses;
- Room and board;
- Books and school gear;
2) How Do Student Loans Work
You obtain some cash. After completing your studies, there might be a grace period of a half-year for federal loans before you begin making reimbursements. You have to pay interest, which is expressed as a percentage.
Loans for students are supplemented by awards & grants. Your folks might also pay for some of the expenses with their reserve funds as most loans (government particularly) don’t cater for the full expense of school.
3) Where to Get Student Loans?
“Who are the student loan people I should begin conversing with?” Thinking of where to get student loans, you have two options:
- Private banks;
- Federal loans.
A) Private Student Loans
Likewise called private advances, they are originated by commercial services, for example, the Citizens Bank and Wells Fargo. The average student loan amount may go from $1,000 to $350,000 for private advances.
For Which Reasons Do Individuals Use Private Credit?
a. Funding Gap
Government advances make up 90% of all college loans for students obtained in the US. But they don’t cater to the full expense of school as they offer low credit sums. The financing gap is more pronounced for undergrads going to costly universities.
b. When Guardians Can’t Deal With the Expected Family Contribution
When financial aid is determined for Direct Loans, the guardians of the prospective college students have to make some contribution. For example, the Expected Family Contribution for a family with an adjusted gross income of $50,000 ranges from $3,000 to $4,000. By and large, the higher your family’s AGI, the higher the EFC. But some guardians can’t fulfill this obligation necessitating the option for private loans.
c. Better and Lower Loan Fees
Private loans feature fixed and variable interest rates. Banks carry out a financial assessment before deciding the rate to charge you. If you’re found to be highly reliable, your financing costs may be as low as 2.70%. With federal credit, everyone gets the equivalent fixed rate, about 4%.
d. Not Meeting the Qualification Criteria for Government Advances
You might miss out on government advances for having a GPA below 2.0. Similarly, non-residents are not qualified to receive federal loans. What’s more, millions of students begin the Free Application for Federal Student Aid process but end up not finishing all the necessary steps.
What Are the Advantages and Cons of Private Student Advances?
|Obtain as much as you require for school-related costs||Credit-dependent. (High creditworthiness needed)|
|Not founded on financial need. (Your parent’s pay won’t influence your loan sum)||Might have higher financing costs than government credit|
|Loan costs may be lower||Less flexible payment plans. The forbearance period is short.|
|No prepayment penalties on most loans||Most banks will request that you have a cosigner.|
What Are the Necessities for Private Student Loans?
Loan specialists need to see that you have sufficient income, a high FICO assessment, and meet other requirements (be 18 years old and US citizen).
Most students don’t check all boxes for private loans mostly because of age and inexperience with what are student loans. That’s why you’ll see that 90% of undergraduate loans are made after the borrower partners with a cosigner with enough creditworthiness.
B) Federal Loans
Federal college student loans are supported by the federal government through the Department of Education. They constitute most of the student loans in the US. You’ll be borrowing under the William D. Ford Federal Direct Loan Program.
Federal involvement in funding education begun in 1958 after the formation of the National Defense Student Loan. The Higher Education Act of 1965 firmly established the financial assistance program for post-secondary students. The motivation was to decrease the credit barriers students confronted.
Various Types of Federal Loans
Individuals who obtain federal loans are parents, graduate, and undergraduate students. Available credit options include:
a. Direct Subsidized Stafford Loans
You must demonstrate a higher financial need. Your level of need is determined by a financial needs test.
b. Direct Unsubsidized Stafford Loans
They are suitable for undergrad, professional, and graduate students. Borrowers don’t demonstrate high financial need. But this is not the primary difference between subsidized and unsubsidized loans.
With a subsidized loan, interest does not increase as you study. That’s because the federal government will pay any interest that accrues on the subsidized loan. Though the government pays a portion of the interest, you still have to repay the sponsored loan.
c. Direct PLUS Loans
Expect to pay higher rates and fees than for Direct Loans. You’ll encounter two loan types:
- Grand PLUS – Used by graduate or expert-study students for additional costs that Direct Unsubsidized advances can’t cover. Like private advances, borrowers need good credit.
- Parent PLUS – Taken out by parents to pay for overruns not covered by other credit products.
d. Direct Consolidation Loans
If you take out a few loans, you need to pay separate installments on each. That’s stressful. Luckily, you can unite them into one package and work with a single servicer.
Congress’s Role in Federal Loan Rates
Congress determines the financing costs for federal student loans. They typically review them each year. For the 2019-20 school year, the rate for Direct Loans is at 4.53% and 7.08% for PLUS advances.
Other Fees for Government Loans
You pay origination fees. These cater for the cost of originating the loan. The fee is expressed as a percentage of the total loan amount and is deducted from each loan disbursement. For the 2019-20 academic year, borrowers will pay 1.059% fees for Direct Loans and 4.236% for Direct Plus Loans.
How Do I Check Student Loan Balance?
Why is this a relevant question? Well, many students have several loans concurrently. Keeping track of all of them can be confusing. Fortunately, you can know your student loan balance when you log in to your Federal Student Aid Account at studentaid.gov.
Advantages and Drawbacks of Federal Student Loans
|Credit checks are not necessary for Direct Loans||Lower loan sums than private advances. (There are lifetime loan caps)|
|Flexible reimbursement option||Probably won’t offer enough funds to cater for education at expensive institutions|
|Student debt forgiveness is available||The debt forgiven is declared as income that you have to pay taxes on|
|Low financing costs (useful for borrowers without sufficient history of credit)||Financing costs are set by federal law (You may pass up a low-loan fee if you have good credit)|
|No cosigner demanded||The government can collect by having your wages garnished for up to 15%|
|Option for forbearance and deferment when you run into financial troubles||They are impossible to discharge even under Chapter 7 or Chapter 13 Bankruptcy.|
Just complete the FAFSA online application to get started. Note that you’ll have to complete it every year to receive your financial aid.
4) How Are Student Loans Reimbursed?
Private advances don’t have flexible reimbursement plans like federal loans. The repayment period ranges from 7 to 15 years. But you might find a lender offering an extended term of up to 30 years.
You’ll get 4 repayment options:
- Immediate – Upon full credit dispensing, you begin making principal + interest repayments. Repayments may start while you’re still studying.
- Interest-only – Once the credit is completely dispensed, you begin with interest-only installments. Then after leaving school, you graduate to interest + principal installments.
- Fixed – The lender charges you a small fixed installment every month until you clear the loan. This sum is as low as $25. You still make the payments while in school.
- Full Deferment – Don’t make any payments while you’re still enrolled. There is a hold up of half a year after graduating before you begin making interest + principal installments.
Federal Loans reimbursement plans:
- Standard reimbursement – You clear off your loan by making fixed regular scheduled installments for 10 years.
- Graduated reimbursement – In the first two years, your payments are low before increasing to a higher amount. You reimburse the advance inside 10 years.
- Extended reimbursement – Get a stretched repayment plan that lasts for up to 25 years.
- Income-driven plans – If you feel that your month to month debt burden is unmanageable, you can change to a salary driven repayment plan. Rather than reimbursing your loan in 10 years, the term is extended up to 25 years. There are four types of salary-driven plans, including PAYE, ICR, IBR, and REPAYE. (P.S. Discover how they work in our past article on what is student loan forgiveness)
5) What Is Student Loan Forgiveness?
It’s just as it sounds: “Getting your loan obligation forgiven or excused.”
Student loan pardoning is for government loans only. Private loan borrowers have the option of refinancing their loans to reduce their loan fees.
Forgiveness is offered through different avenues:
- Public Service Loan Forgiveness (PSLF) – This program has had some issues in the past, where people on PSLF thought they could qualify for forgiveness only to find out otherwise. You’ll need to fulfill several requirements, including working for a qualified employer. It can be a nonprofit or government institution. You should make 120 qualifying installments for 10 years, after which, any outstanding advance sum is pardoned.
- Income-driven – It works if you change to a pay-driven repayment plan like REPAYE or PAYE. Your student loan debt will be pardoned after 20 to 25 years.
- State forgiveness – Most states have student loan forgiveness programs. They are meant to incentivize graduates to fill positions in areas of need.
6) Is There Any Student Loan Debt Crisis?
We can tell if there is trouble by examining student loan debt statistics:
- The outstanding student debt amount is $1.5 trillion. About $140 billion is in private loans.
- 43 million people in the US have student debt.
- Student loans are the second main source of household debt after mortgages.
- In 2017, the average college student debt was $37,172.
The agonies of student debt are felt more by borrowers who have low earnings but are still expected to meet their student loan obligations on time. Some factions have argued that there is no student loan crisis. That’s because getting a college education is still a great pay-off. However, the fruits of a college education are taking more time to mature.
7) What Is the Maximum Student Loan Amount for Lifetime
When talking about “what is the maximum student loan amount for lifetime,” you just have to look at the loan limits availed to borrowers. With private loans, students can take on as much debt as they can handle.
Federal loan limits include:
|Dependent (traditional) borrowers||$31,000|
|Independent undergraduate students||$57,500|
|Graduate and professional students||$138,500|
8) Why Do People Default on Student Loans?
You might have heard that student loan defaults are through the roof! That’s true because more than 1 million people are defaulting on federal loans every year. The causes of defaults include:
- Facing a poor labor market after leaving school.
- Having a high debt burden.
- Missing some payments, which makes it harder to get back on track.
- Trouble landing a high paying job.
- Increased monthly installment amounts, for instance, if you’re under the graduated repayment plan.
- Living on a tight budget where a small emergency throws everything off balance.
How Does a Default Happen?
Defaulting on student loans starts when the borrower misses one payment. The lender will deem the borrower deliquescent. Credit bureaus will receive information about the delinquency from the lender inside 90 days.
On the chance that the loan stays delinquent for 270 days, it will enter default. It’s then handed over to a collection agency. Never let your loan enter default. It taints your credit. You must pay for collection costs and any interest that has accrued as the loan is in delinquency.
Collection agencies typically sue and have the borrower’s wages garnished. The federal government also collects on loans in collections through the Treasury Offset Program. You might have your tax refunds or Social Security benefits withheld.
What Are the Protections Against Defaults?
What Is a Student Loan: Conclusion
You have learned all you need to know to start borrowing loans for college students. Of course, there is a lot more to learn, for instance, what’s required during the application process for federal loans. So, keep learning about student loans and remember to check out some of our articles on related topics.