Student loans are a form of financial aid given to students by the government and private lenders to fund their higher studies.
Background & history:
Student loans began in the late 1950s. President Eisenhower signed the order and started doling out money to students. Their need was felt after the Soviets beat the US in scientific prowess by launching a space satellite. The US felt defeated and in order to encourage more and more students to study science they decided to give loans for study. Initially the loan of the maximum value of US$1000 was given to the students. With the passage of time, the rising tuition fee and inflation, the loan amount has now increased to US$7,000. If you factor in interest the figure rises to US$30,000. The total student debt currently amounts to around US$1.6 trillion.
Since its inception student loans have helped tens of thousands of people to get higher education. It helped them get better jobs and have stable careers. They are mostly available at flexible terms and low interest rates. In some cases, the interest rate can be fixed or subsidized by the government, so you don’t have to worry about them rising. Their repayment is not that burdensome either. You can start repaying once your education is finished or when you actually get the job. If you lose your job you can stop repaying your student loan. In some cases, you can even have it waived completely. But all these aforementioned benefits must be mentioned and agreed upon by all stakeholders at the time of loan confirmation.
How student loans work:
Student loans can be obtained through government and private lenders. It is not like a commercial loan. Its terms are softer and it is easier to get. Your school’s financial aid office is the way to start if you want to get a student loan. You will be required to fill out an application form and declare your finances. Your school and the US government will determine your need for loan based on the supplied information. For private loans, fill application for that lender and get the loan. Private lenders mainly comprise banks, credit unions and online lenders. Usually they look for good credit rating and a steady source of income before they approve the loan. A student has neither, so his parent or guardian takes loan on his behalf and transfers it to the student. Now both the student and his guardian/parent are responsible for loan repayment.
Types of student loans:
Following are the popular types of student loans being offered by the US government;
It is the most sought-after loan by students due to its very favorable conditions for the borrower. It offers low, fixed interest rate. No credit history is required either. It is in limited supply and given to very needy students only.
They are also very popular among students. They offer bigger amount than Perkins loan. Interest rate is usually subsidized. Both grads and undergrads can avail this loan.
PLUS stands for Parents Loan for Undergraduate students. They are similar to private loan as they require a credit history. Repayment starts soon after loan is given. It is provided to the parents to cover their child’s education expenses.
Consolidation loans combine multiple student loans into one loan. It makes repayment simpler and has other benefits attached to it as well.
Student Loans: Boon or Bane?
Much debate surrounds the pros and cons of student loans. Due to it’s staggering size many experts question its economic viability. Those opposing them argue that it is just another tool to financially subjugate the populace before they even start earning. The echo of student loans is also heard in US Presidential elections. As 2020 is the election year in the US, students’ loan is already being hotly debated with each candidate presenting his or her own views and how to deal with it.
About two in three college seniors who graduated from public and private non-profit colleges have student debt. The average amount they owe is US$29,200. Many students are struggling to pay it off, according to Moody’s Investor Service. The aggregate net student loan repayment rate has averaged just about 3% in the last decade. There are a number of reasons behind it; job prospects are not that great. Students don’t get jobs, or if they do, they aren’t high-paying jobs so they find it hard to repay the loan. They also like to repay the loan based on the level of their income; the higher the income the higher the monthly loan repayment and vice versa. They also like to opt for a longer payback period so that they feel minimum burden of repayment. These factors make the process of repayment slow and erratic.
Ways to avoid Student loans:
A loan is a loan not matter how agreeable its terms are. Caution must be exercised before you get one. Here are some ways that can help you either avoid student loans or keep them to a bare minimum;
Ask for grants or scholarship: Before you recklessly jump into the loan’s quagmire look for other financing options. Nearly every school, college or university offers grants and/or scholarships to its students. See if you qualify for either. It will reduce your dependence on student loans.
Part-time Jobs: Find jobs that you can do after your college is over. You will make extra income which can be used to finance your education and other expenses to a great extent.
Cheaper Schools: Search for schools and colleges that offer cheaper programs. Institute doesn’t count that much its your learning that is more important.
Be thrifty: Since you are a student so a little belt tightening is in order. You should spend less on your leisure and entertainment activities. There can be many other ways where you can save money. So, spend wisely and think twice before spending.