Breaking Down Student Loans
Student loan debt is legitimizing the stance that college may not be worth its hefty price tag; the class of 2016 graduated with a per-student debt of $37,000. Many young adults are now entering the workforce with massive financial burdens and a dearth of knowledge in financial planning and payment plans, both of which are critical in conquering student loans.
A student loan is described simply as any money borrowed for education-related expenses such as tuition, books, or housing. A student loan is recommended for undergraduates beginning their college career, or even graduates looking to further their education. Generally students are not expected to pay back these loans until they have graduated, in which the grace period ends.
Federal Loans vs. Private Loans
For a high school student hoping to progress to a level of higher education, getting into a good university is only half the battle. Reality sets in as teenagers are forced to become financially-minded adults. Grants, scholarships, and student loans are all options for those who have parents that are unable to fund their college education. Student loans are divided into private loans and federal loans, each of which contain notable advantages and disadvantages. The main difference between federal and private loans is where the money comes from. Federal loans are loaned out by the federal government and private loans are furnished through a bank or a credit agency.
Federal loans are the most common type of student loans and as aforementioned are obtainable exclusively through the federal government. A distinction to make note of while shopping for federal loans is the difference between direct subsidized loans and direct unsubsidized loans. Direct subsidized loans are offered solely to those who are in need of financial assistance. These loans are meant to subsidize a student’s education by counterbalancing the cost. By doing so, the government promises to pay the interest while the student is attending school on at least a part-time basis.
Contrastingly, direct unsubsidized loans are available to undergraduates without necessitating proof of a need for financial aid. These loans require the responsible party to pay interest all throughout the lending period. Unlike direct subsidized loans, there is no grace period while you are in school and if you fail to make payments, they will accrue and the interest will be added to the initial amount of your loan. Both subsidized and unsubsidized loans are often referred to as Stafford loans.
Another type of federal loan is a direct consolidation loan, which allows students to consolidate or combine multiple federal education loans into a singular loan. This is especially convenient for students who have a hard time keeping track of their list of monthly payments, with a direct consolidation loan the student will only be responsible for a single payment.
Direct PLUS loans are another type of federal loan in which the U.S. Department of Education is the lender. This loan allows for undergraduates or their parents to help pay for college expenses that are not covered by any other financial aid. The requirements for this are very specific and in order to be eligible, the applicant or applicant’s parents need to be devoid of any adverse credit history. This means that their record is free of any 90-day delinquent debts and also that there is no evidence of any adverse credit events such as bankruptcy or repossession.
Perkins Loan has been recently decommissioned however it is possible that politicians will work to reinstate and extend the program. Perkins loans were available to low-income undergraduates and were designed to fill the gap for students wherever financial aid fell short. Many students who are unable to receive federal loans from programs such as Perkins or Federal Student Aid look to private student loans for help.
Federal loans are often preferable to private loans, as the latter tend to offer much less flexibility and much higher interest rates. Private loans have lenders that are not affiliated with the government, such as a credit union, a bank, a school, etc. Often, a student who doesn’t receive enough federal assistance turns to a private lender to cover the rest of their needs. Private loans are harder to get as good credit and sufficient income are used as security indicators for repaying the loan.
Student Debt Industry
Student debt is a $140 billion-a-year industry and as students struggle to make payments on their loans, debt-collection profits rise. Student loans are arguably a necessary evil and because of certain societal changes, going into debt is often the only option. Tuition costs have increased tremendously due to states incrementally cutting back their funding.
Following World War II, the US appropriated a significant amount of funds for public higher education and by 1975, the government was affording 58 percent of the total cost. Since then, the funds have steadily decreased as money has been allocated to other causes such as Medicaid and prisons. According to the data from the US Bureau of Economic Analysis, government support is currently at 37 percent nationally.
Victimization is a common feeling expressed among students who are finding the correlation between raised tuition and raised student loan debt hard to ignore. In 2007 the Attorney General of New York State led an investigation into lending practices, specifically relationships between student lenders and universities. The Attorney General uncovered many universities guiding their students to “preferred lenders” who were in turn charging students higher interest rates and monetarily rewarding the university financial aid staff.
The Student Loan Justice group was formed in 2005 in hopes of righting the wrongs created by the student loan debt predicament. They are currently working hard to change legislation so that borrowers can more easily discharge their student loan debt in bankruptcy.
Student loan debt is an ongoing problem that affects students and their families long after graduation. The choice of both loan and repayment plan greatly impacts a student’s future and exploring all options and resources is key in fighting this uphill battle.