An education loan is a form of financial aid that must be repaid, with interest. Scholarships, awarded generally because of academic or athletic merit, do not have to be repaid. Few students can afford to pay for college without some form of education financing. Two-thirds (65.6%) of 4-year undergraduate students graduated with a Bachelor's degree and some debt in 2007-08, and the average student loan debt among graduating seniors was $23,186 (excluding PLUS Loans but including Stafford, Perkins, state, college and private loans).
Education loans come in three major categories: government student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans) and private student loans (also called alternative student loans). A fourth type of education loan, the consolidation loan, allows the borrower to lump all of their loans into one loan for simplified payment. More than $100 billion in federal education loans and $10 billion in private student loans are originated each year.
Since July 1, 2010, all new federal education loans have been made through the Direct Loan program. The loans are made through the college's financial aid office with funds provided by the U.S. Department of Education. This includes the Federal Parent PLUS loan in addition to student loans. The terms of the Federal Stafford, PLUS and Consolidation loans are similar to the terms
of the federal education loans previously available through the federally-guaranteed student loan programs. However, the interest rate on the Federal Direct PLUS loan is lower (7.9% vs. 8.5%) and the approval rate is higher.
Government (Stafford) Loan
The main federal loan for students is called the Stafford Loan and has two variations:
All Stafford Loans are either subsidized (the government pays the interest while you're in school) or unsubsidized (you pay all the interest, although you can have the payments deferred until after graduation). To receive a subsidized Stafford Loan, you must be able to demonstrate
financial need. About 2/3 of subsidized Stafford loans are awarded to students with family AGI of under $50,000, 1/4 to students with family AGI of $50,000 to $100,000, and a little less than 10% to students with family AGI over $100,000.
With the unsubsidized Stafford loan, you can defer the payments until after graduation by capitalizing the interest. This adds the interest payments to the loan balance, increasing the size and cost of the loan. All students, regardless of need, are eligible for the unsubsidized Stafford Loan.
Repayment begins six months after the student graduates or drops below half-time enrollment. The standard repayment term is 10 years, although one can get access to alternate repayment terms (extended, graduated and income contingent repayment) by consolidating the loans.
Making payments of at least the new interest that accrues during the in-school and grace periods avoids negative amortization. This can save borrowers a lot of money and help them pay off the debt sooner that borrowers who defer payments of principal and interest.
Federal law sets the maximum interest rates and fees that lenders may charge for federally-guaranteed loans. Nothing prevents a lender from charging lower fees. Many lenders offer a variety of student loan discounts to attract borrowers.
Private Education Loans
Private Education Loans help bridge the gap between the actual cost of your education and the limited amount the government allows you to borrow in its programs. Private loans are offered by private lenders and there are no federal forms to complete. Eligibility for private student loans often depends on your credit score.
Some families turn to private education loans when the federal loans don't provide enough money or when they need more flexible repayment options. Private education loans tend to cost more than the education loans offered by the federal government, but are less expensive than credit card debt. Private student loans typically have variable interest rates, with the interest rate pegged to an index, such as LIBOR or PRIME, plus a margin. The interest rates and fees you pay on a private student loan are based on your credit score and the credit score of your cosigner, if any.