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. Federal education loans are available in either the Direct Loan or federally-guaranteed student loan programs. More than $100 billion in federal education loans and $10 billion in private student loans are originated each year.

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.)

These figures were calculated using the data analysis system for the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education. (For comparison, cumulative education debt statistics from the 2003-2004 NPSAS are also available.) The 2007-2008 NPSAS surveyed 114,000 undergraduate students and 14,000 graduate and professional students. These statistics are not necessarily available from published NPSAS reports.

The median cumulative debt among graduating Bachelor's degree recipients at 4-year undergraduate schools was $19,999 in 2007-08. One quarter borrowed $30,526 or more, and one tenth borrowed $44,668 or more. 9.5% of undergraduate students and 14.6% of undergraduate student borrowers graduating with a Bachelor's degree graduated with $40,000 or more in cumulative debt in 2007-08. This compares with 6.4% and 10.0%, respectively, for Bachelor's degree recipients graduating with $40,000 or more (2008 dollars) in cumulative debt in 2003-04.

The following table shows the percentage of students borrowing and average cumulative debt per borrower (excluding PLUS Loans) at graduation according to type of educational institution but not restricted by degree program.

Graduate and professional students borrow even more, with the additional cumulative debt for a graduate degree typically ranging from $30,000 to $120,000. The median additional debt is $25,000 for a Master's degree, $52,000 for a doctoral degree and $79,836 for a professional degree. A quarter of graduate and professional students borrow more than $42,898 for a Master's degree, more than $75,712 for a doctoral degree and more than $118,500 for a professional degree. At the 90th percentile cumulative debt for graduate and professional degrees exceeds $59,869 for a Master's degree, $123,650 for a doctoral degree and $159,750 for a professional degree.

The following table shows the percentage borrowing and average amount of cumulative debt per borrower among graduating students according to degree program. It provides the amounts borrowed for just the graduate education and also the combined totals for undergraduate and graduate education. Undergraduate students who graduate with a Bachelor's degree and no debt are 1.7 times more likely to enroll in graduate and professional school than Bachelor's degree recipients who graduate with some debt.

The following table shows the percentage of graduating students at graduate and professional institutions who applied for federal student aid and graduated with debt and the average cumulative debt at graduation according to degree program. This demonstrates that graduating with debt is unavoidable for students pursuing degrees in law, medicine or business who need to apply for federal student aid.

Grants, scholarships, work-study and other forms of gift aid just do not cover the full cost of a college education. Many students find that they must supplement their savings with government and private loans. The Federal education loan programs offer lower interest rates and more flexible repayment plans than most consumer loans, making them an attractive way to finance your education. You can also deduct up to $2,500 in student loan interest even if you don't itemize deductions on your income tax return.

The interest rate on the Stafford Loan for new loans first disbursed on or after July 1, 2006 is a fixed rate of 6.8%. The same rate applies to the in-school, grace and repayment periods. (A lower interest rate is available on subsidized Stafford loans for undergraduate students for loans first disbursed on or after July 1, 2008 through June 30, 2012. The rate in 2008-09 is 6.0%, then 5.6% in 2009-10, then 4.5% in 2010-11 and 3.4% in 2011-12 and returning to 6.8% for new loans in 2012-13 onward.) The interest rate on new PLUS Loans first disbursed after July 1, 2006 is a fixed rate of 8.5% in the FFEL program and 7.9% in the Direct Loan program.

The interest rates on existing variable rate Stafford and PLUS loans will continue to change annually on July 1, based on the last 91-day T-bill auction in May. Borrowers can lock in the current rate on their variable rate loans by consolidating them. Borrowers can compare the current and new rates between the end of May and the end of June to decide whether it is worthwhile to consolidate before or after the rate change. There are 72 days left before interest rates change.

Borrowers may be concerned by the possible impact of the subprime credit crisis on the cost and availability of federal and private student loans. Federal loans will remain available, although loan discounts will likely be reduced significantly. A higher minimum balance may be required to consolidate. Private student loans will likely have stricter eligibility restrictions, requiring a higher credit score or a cosigner. There may be increases in the interest rates and fees on private student loans. Lenders will encourage borrowers to make payments of interest while they are in school.

Many student loan providers offer low cost government and private loans with consistently high quality servicing and flexible repayment terms. FinAid maintains a list of education lenders, guarantee agencies, servicers and secondary markets who offer federal and private student loans, as well as advice on preferred lender lists and choosing a lender and tips on identifying the lenders that currently hold or service your loans.

Borrowers of federal student loans will be required to undergo entrance and exit counseling before receiving a loan and before graduation. This loan counseling is often provided through interactive web sites.

Loan forgiveness programs (in which the borrower's loans are paid off in exchange for volunteer work, public service or military service) offer an option for easy repayment. Loan Cancellation and Discharge Forms can be found on the US Department of Education web site.

Also, FinAid provides numerous calculators that can help you better understand your borrowing options. The loan calculators offer estimates of monthly loan payments, estimates of the amount of debt you can afford to repay, an analysis of the cost of capitalizing the interest and tools for comparing loan costs.

Use FinAid's Student Loan Checklist to keep track of your student loans.

Some students, because they do not have prior experience with debt and loan amortization, do not appreciate how much their loans will cost them. FinAid provides some tips concerning calculating the cost of interest.

Loan Volume Outstanding

Based on an analysis of the Presidents FY2011 budget, in FY2009 there were a total of $605.6 billion in federal education loans outstanding, comprised of $149.4 billion in the Direct Loan program and $456.2 billion in the FFEL program. The projected totals for FY2010 are $672.0 billion and for FY2011 are $745.5 billion.

A total of more than $1.17 trillion in federal education loans (including consolidation loans) have been made since the beginning of the loan programs. This includes more than $878 billion in FFEL program loans from 1965 to 2009 and more than $292 billion in Direct Loan program loans from 1994 to 2009. Thus more than half of all federal education loans ever made in the FFEL and Direct Loan programs are still outstanding.

The total defaulted loans outstanding are around $40 billion to $45 billion, when accrued but unpaid interest and late fees are included in addition to loan principal. Cumulative defaulted loans outstanding in the FFEL program as reported in the budget are $22.4 billion. It is not possible to calculate cumulative defaulted loans outstanding in the Direct Loan program, but the US Department of Education's FY2009 Annual Report indicates that of the $156.8 billion outstanding in the Direct Loan program as of September 30, 2009, $11.5 billion of loan principal was in default. These figures, however, are not entirely consistent with the monthly statistics and collections reports, which show $23.6 billion in defaulted loans in the FFEL program and $23.8 billion in defaulted loans in the Direct loan program, for an overall total of $47.4 billion. (The Direct Loan program has a higher default volume because more than a fifth of FFEL program collection activity is through consolidation of defaulted loans into the Direct Loan program.) The total defaulted loan inventory represents about 8.2% of federal loans outstanding and 4.2% of all federal loans ever made.

The estimated total private student loans outstanding as of June 30, 2009 are approximately $157.8 billion, based on an analytical model developed by Mark Kantrowitz.

Thus the overall total education loans outstanding, federal and private, is about $763.4 billion.

Help with Loan Problems

If you are having difficulty repaying your education loans, see Solutions for Borrowers Who are Having Trouble Repaying Student Loans and Defaulting on Student Loans before you decide to skip a payment. These articles offer you several alternatives for repayment relief. (See also loan repayment protection for repayment assistance you can arrange for in advance when your loan is disbursed.)

If you are having a problem with your federal student loan, contact the FSA Ombudsman at the US Department of Education. The FSA Ombudsman is dedicated to helping students resolve disputes and other problems with federal student loans. The FSA Ombudsman will research your problem in an impartial and objective manner and will try to develop a fair solution. The FSA Ombudsman does not have the authority to impose a solution. Nevertheless, many students have found the FSA Ombudsman to be helpful in resolving disputes with lenders. You can contact the FSA Ombudsman by phone at 1-877-557-2575, by fax at 1-202-275-0549, by mail at U.S. Department of Education, FSA Ombudsman, 830 First Street, NE, Fourth Floor, Washington, DC 20202-5144, by visiting fsahelp.ed.gov or by email at fsaombudsmanoffice@ed.gov.

Another source of assistance is the Student Loan Borrower Assistance Project run by the National Consumer Law Center. Their web site includes a detailed loan FAQ, a step-by-step guide to resolving loan problems and a list of lender and guarantor ombudsmen. The National Consumer Law Center does not, however, provide legal advice about individual cases. The web site also includes a section devoted to policy and legal issues and analysis concerning education debt. They also publish Student Loan Law, a detailed legal guide to remedies for borrowers who are having trouble repaying their student loans.

The American Bar Association has launched SafeBorrowing.com to help the public understand the risks associated with student loans and other forms of consumer debt.