Cambridge English Dictionary

Student Loan [noun] — an agreement by which a student at a college or university borrows money from a bank to pay for their education and then pays the money back after they finish studying and start working

ELI5

We’ll keep it simple since I assume most people have an idea what a student loan is. Given rising tuitions and related costs, many college or university students elect to take out student loans as a way to fund all, or a portion, of their college education.

 

Detailed Definition

Student loan offerings date back to the 13th century, where students in Oxford would “deposit” a valuable object as collateral in exchange for the loan. The United States began to see student loans in the mid-1800s and onwards, including interest-free and no-collateral loans for students of need at Harvard University. In the1950’s, as pressure began to build on America following Russia’s launch of the Sputnik satellite, the government began to accelerate innovation by refocusing college education on STEM (science, technology, engineering, and math) related degrees. As part of this effort, Congress approved the release of low-interest student loans. Today, student loans are available via both the public sector, sponsored by the federal government, and private sector, and there is over $1 trillion in national student loan debt in the United States.

Federal Loans

The main categories of federal student loans are Direct Subsidized, Direct Unsubsidized, Direct PLUS, and Direct Consolidation loans.

Direct loans are offered as part of the US Department of Education Direct Loan program. Direct loans comprise a majority of the government offered student aid. These loans include both subsidized and PLUS loans.

Direct Subsidized Loans – These loans are available to undergraduate students who demonstrate financial need to help cover education-related costs. The US Department of Education will pay the loan interest while the student is in school, during a six-month grace period post-graduation, and during any deferment periods during which loan payments are delayed. The amount of the loan is determined by the school, and is limited to the determined level of financial need.

Direct Unsubsidized Loans – These loans are available to undergraduate, graduate and professional students. Unlike Direct Subsidized Loans, (a) the interest is paid by the individual lender, rather than the government, at all times and (b) a borrower does not need to specifically show financial need.

Direct PLUS Loans – These loans are specific to graduate and professional students, as well as parents of dependent undergraduate students. Unlike Direct Subsidized Loans and Direct Unsubsidized Loans, Direct PLUS Loans often have higher interest rates and fees, and require a credit check.

Direct Consolidation Loans – This loan allows you to join all eligible federal student loans into one loan.

To receive a federal student loan, individuals must fill out a Free Application for Federal Student Aid (FAFSA) form, which the educational institution will then use to build and offer a financial aid package.

Federal loans offer a number of types of repayment plans. By default, borrowers are placed in the standard repayment plan, which involves fixed payments paid off within 10 years. Other federal repayment plans include graduated repayment plans, which involve increasing payments over time, and income-based repayment plans, which involve payments based on a borrower’s income. Eligibility may vary depending on the specific plan.

Private Loans

Private loans, on the other hand, are often made by state-based entities, banks, and credit unions. Whereas federal loans offer additional benefits such as repayment plans and fixed interest rates, private loans can have higher, variable interest rates and fixed repayment plans. Many argue that individuals should exhaust their federal student loan options before looking to private loans.

The private student loan application process is done entirely through the lender, rather than via a FAFSA form and the college/university. The entire loan amount is typically available immediately after approval, and there are generally no prepayment penalties (whereas federal loans have much stricter guidelines on how the loan payment is spread out).

Private loans offer flexible interest rates, repayment terms, and other extra features. As you compare private loan offers, it is important to read all the terms and conditions, so you have a full understanding of what’s expected in regards to repayment. Not all lenders offer the same terms. Lenders typically complete a soft pull on an individual’s credit, so the inquiry will not affect credit score. You should try to get as many offers as possible so you can compare the terms and settle on the best offer with the lowest possible rates and fees.

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