A student loan is money borrowed to help pay for higher education. Due to limited availability of grants and scholarships, loans help many in the United States obtain a college degree.
Most student loans are federal government loans, but there is also a growing volume of private student loans, which are generally riskier and more expensive for borrowers. Borrowers should only consider private student loans if they have already obtained the maximum amount of federal loans for which they are eligible.
As of July 1, 2010, all federal loans will be made through the Direct Loan program, under which students will borrow directly from the federal government. In past years many students have also received loans through the Federal Family Education Loan (FFEL) program. Although FFEL loans were made by private lenders, they are considered "federal" loans because repayment is guaranteed by the federal government and they are governed by most of the same rules and regulations on terms, costs, and repayments.
President Obama signed this change into law on March 22, 2010. Although it will make shopping for a student loan simpler and less confusing, the impact on student borrowers will be relatively minor. The major impact of the law will result from ending tens of billions of dollars of needless subsidies to the private lenders, and channeling that money to increased Pell grants to students, aid to community colleges, and other productive uses.
Undergraduate students who graduate with loans have an average of $22,700 in debt.
Nearly two-thirds of students at four-year colleges and universities graduate with student loan debt. By comparison, in 1993 less than one-half of four-year graduates had student loans.
Private loans, which are more expensive and riskier than federal loans, now comprise about 24% of the nation’s total education loan volume.
Federal loans are regulated by Congress and the U.S. Department of Education to protect borrowers. Visit Student Loan Borrower Assistance and the Project on Student Debt to read more about federal loans.
No credit checks: Undergraduate students do not have to pass credit checks to get most student loans. This is generally a good thing because many students are young and have not yet had the opportunity to establish credit. However, many borrowers are unsophisticated and end up borrowing more than they can ultimately afford on the assumption that higher education will lead to financial rewards.
Loan limits: With the exception of PLUS loans for parents and graduate/professional students, there are limits on how much a student can borrow through the federal loan programs.
Many payment options: Borrowers have many options to repay student loans, including income-contingent repayment in the Direct Loan program and income-based repayment starting July 2009 for both FFEL and Direct Loans. Visit Student Loan Borrower Assistance for more information.
Very hard to get rid of: There is no time limit on the government’s right to collect student loans. The government can come after borrowers in a variety of ways, including tax refund seizures, administrative wage garnishment, and Social Security benefit offsets.
Bankruptcy: Student loans are extremely difficult to discharge in bankruptcy. Borrowers must show “undue hardship” in order to discharge these debts.
Adverse effects of default: Defaulted student loans may prevent borrowers from getting certain professional licenses.
Trade schools: Borrowers may fall victim to unscrupulous trade schools whose primary mission is to make profits, not educate students. These borrowers may end up leaving school with nothing but shattered dreams and debt.
Lack of information: Student loan borrowers have extensive rights, but they generally lack information about flexible repayment, cancellation, and other rights.
Private loans are made by banks and other financial institutions without any financial backing from the federal government. In theory, these loans are used to fill the gap between available federal aid and what students and families can afford to pay on their own. In practice, unfortunately, many borrowers take out these higher cost loans without first exhausting their federal options.
There are many different types of private loans, each program with its own rules and requirements. Because the government does not subsidize private loans, the rates and terms are not regulated the way they are for federal loans, which makes private loans more risky and expensive.
Interest begins right away: Interest accrues on all private loans from the time they are disbursed, although interest costs can sometimes be deferred and capitalized when repayment begins.
Abusive terms: Private student loans may include abusive terms such as high interest rates and high up-front fees. Borrowers may be confused about whether they are taking out a government loan or a private loan since many companies offer both.
Credit checks: Private loan terms and conditions, including interest rates and fees, are generally based on the borrower’s credit history. This means that low-income students or those with negative credit histories will likely receive more expensive loans.
More expensive than federal loans: Borrowers may be pushed into taking out private loans even when they are eligible for more affordable government loans.
Fewer discharge options: Private loans do not offer the same types of discharge options as federal loans. The same is true for deferments and forbearances, which are offered only in some cases and only at the lender’s discretion. Lenders are not required by law to offer certain programs, such as income-based repayment, as they are for federal student loans.
Bankruptcy: Just like federal loans, private student loans are extremely difficult to discharge in bankruptcy. Borrowers must show “undue hardship” in order to discharge these debts.
Your loan could be sold: Your lender might sell your loan to another lender without informing you, making it difficult to make payments to the right place.
AFFIL is grateful to the National Consumer Law Center and Student Loan Borrower Assistance for their help with this page.
Last Update: April 2010.
Americans for Fairness in Lending (AFFIL) and Americans for Financial Reform (AFR) are partnering to reform the nation's lending industry and financial system to protect Americans' neighborhoods, homes and pocketbooks.
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