All About Student Debt

Written by: David Scott

It is no secret that an education is a costly investment to make in yourself. Whether you are a first-generation college student or a child of college graduates, finding a way to pay for the expenses involved with a university education can be a daunting and complex task to approach

Paying for the litany of expenses involved with college, from tuition to rent, often causes students to turn to student loans to fill the financial gaps. Once you complete your studies, it is important to understand how student debt works and the options you have for payment. 

Student Debt

Student debt is most commonly derived from taking out student loans. A student loan is a lump sum of money granted to a student for education expenses provided by the federal government, the state government, or a private organization. 

During the student’s time in school, they are not required to make payments on their student loans. Once the student graduates, they are expected to begin making payments on the entire loan including interest in most cases. 

Student debt is the combined value of all outstanding student loans an individual has accrued. The cost of higher education has never been higher in history and continues to grow year by year. For this reason, 70% of undergraduate students are forced to borrow money in some form. On average, students graduate college with $29,400, a staggering number for individuals looking to establish financial security for likely the first time in their life. 

Many economists have argued that student debt has become a detriment to the economy. When economic downturns or recessions hit, graduates struggle to stay on top of their student loan payments. Furthermore, college graduates are forced to allocate large percentages of their income to student loan repayment, leaving them less money to spend on other commodities driving the economy. 

Types of Student Loans

In general, there are two main types of student loans: federal and private. Private student loans are issued by banks, while federal student loans are issued by the Department of Education. Federal loans have the flexibility of individualized repayment plans and the possibility of student loan forgiveness by the Federal Government. Federal loans are limited, however, to a yearly grant based on a variety of factors including the income of a student’s parents. In total, independent students can borrow up to $12,500 annually, and $57,500 over the course of their education. 

Direct Subsidized Loans: 

Direct subsidized loans are granted to undergraduate students to provide aid to individuals with exceptional financial need. The borrower is granted only what they need for higher education, and interest is not accumulated during their schooling years and six months after graduation. 

Direct Unsubsidized Loans:

Both undergraduate and graduate students can apply for direct unsubsidized loans regardless of their financial needs. The respective school will decide the amount to be granted based on other financial aid the student has received for the year. Direct unsubsidized loans differ from direct subsidized loans as they begin accruing interest to be paid as soon as the loan is granted to the student, making the loan more expensive in the long term. 

Direct PLUS Loans: 

Direct PLUS loans allow graduate and professional access to federal financial aid. Parents or guardians of undergraduate students also are eligible for direct PLUS loans. Interest on direct PLUS loans must be paid in all periods and include an origination fee that is deducted from the loan disbursement. 

Perkins Loans:

Perkins loans are based on a student’s financial needs and are administered to the student through their respective university or academic institution. 

Direct Consolidation Loans: 

Direct consolidation loans allow borrowers to combine a variety of federal loans into one single loan. To prevent the risk of default, direct consolidation loans are often accompanied by lower monthly payments and flexible repayment schedules. Direct consolidation loans also allow borrowers to apply for various loan forgiveness programs administered by both the federal government and, in some cases, the student’s school. 

Benefits of Student Debt

The main benefit of student debt and student loans is the ability to get a higher-level education even if you do not have the money to do so at the time. For many students, higher education is an expense that both themselves and their family are not in a position to feasibly pay for in full. By utilizing a plan that fits the student as an individual, they have the opportunity to chase their dream job through a college education. 

Unlike most other loans, a credit history is not required for individuals to attain student loans. Compared to other private loans, student loans often have a lower interest rate with fixed interest rates that prevent the terms of the loan from changing overtime. 

Another key benefit of student loans is the flexibility of repayment plans offered in some scenarios. Most student loan payments are not required until 6 months after a student’s graduation, allowing them time to find a job to begin payments. 

Detriments of Student Debt

Owing a large sum of money, especially to a financially unstable college student, is never a situation someone wants to be in. Although student loans do not require a credit history, some loans require a cosigner to reduce the risk of default on payments. Defaulting on student loans can be a detrimental hit to an individual’s credit. 

Many student loans analyze both the students financial need and their parent or guardians financial standing. For students with parents that earn a high income but have told the student they will not help pay for college, the student may be faced with a large education bill without access to proper financial aid. 

One of the most common determinants of acquiring student loans is the stipulation that the student will successfully complete their studies and receive a degree. If a student takes out student loans for any number of periods but does not complete their studies, they are still faced with paying off their loans. Payment plans are expected to begin within six months of a student dropping out. 

More Information

Paying for college is expensive. It is important to understand your options of financing an education and find a plan that fits your situation. For more statistics on student debt and student loans Student Loan Hero has composed a variety of statistics on both historical and current information regarding student loans.

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