Student Loans

An education loan is a form of financial aid that must be repaid, with interest. (Scholarships, on the other hand, do not have to be repaid.)

Education loans come in three major categories: 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. A recent innovation is peer-to-peer education loans. 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 US 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.

Making payments of at least the new interest that accrues during the in-school and grace periods avoids negative amortization. This can save borrowers 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.

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). Among graduating 4-year undergraduate students who applied for federal student aid, 86.3% borrowed to pay for their education and the average cumulative debt was $24,651. (For just federal student loan debt, excluding PLUS Loans, the figures are 61.6% and $17,878.) Average cumulative debt increased by 5.6% or $1,139 a year since 2003-04. When one includes PLUS loans in the total, 66.0% of 4-year undergraduate students graduated with some debt in 2007-08, and the average cumulative debt incurred was $27,803. (About two in fifteen (13.5%) of parents borrow PLUS loans for their children's college education, with a cumulative PLUS loan debt of $23,298.)