Student loans are a form of debt designed to help undergraduate and graduate students pay for college costs. Student loans are made by the federal government, state government, colleges, and private lenders.
Like other types of borrowed money, student loans must be repaid, usually with interest.
There are, however, important differences between student loans and other types of consumer loans.
Eligibility for federal student loans does not depend on credit scores or debt-to-income ratios. While borrowers of a PLUS Loan must not have an adverse credit history, eligibility for Direct Subsidized and Unsubsidized Loans does not depend on the borrower’s credit history.
Most private student loans are available only to borrowers with very good or excellent credit. However, because most students have a thin or non-existent credit history, most private student loans will require a creditworthy cosigner.
Repayment on a student loan is deferred while the student is enrolled in college on at least a half-time basis, and for a 6- or 9-month grace period after the student graduates or drops below half-time enrollment status.
Student loans offer more flexible repayment terms. Borrowers who encounter short-term financial difficulty may qualify for a temporary suspension of the obligation to repay the debt, such as a deferment or forbearance. Repayment plan options include longer repayment terms, loan payments that start off small and gradually increase and loan payments that are based on the borrower’s discretionary income.
Student loans are unsecured, while most auto loans and mortgages require the borrower to provide collateral that may be seized and sold to repay the loan if the borrower defaults or fails to repay the loan according to the terms and conditions listed in the loan promissory note.
Federal student loans offer lower interest rates than other forms of unsecured debt. Interest rates are also fixed, not variable.
The federal government may pay the interest on certain types of loans, called subsidized loans, while the borrower is in the in-school or grace periods or other periods of authorized deferment. Subsidized loans are awarded to students based on demonstrated financial need.
Federal student loans offer loan forgiveness to borrowers who work in particular occupations, such as teaching, the U.S. Armed Forces or other forms of public service including, but not limited to, law enforcement and nursing.
Some student loans may be discharged if the borrower dies or becomes totally and permanently disabled.
The student loan interest deduction allows borrowers to deduct up to $2,500 in interest on federal and private student loans on the borrower’s federal income tax return, even if the borrower does not itemize deductions.
Student loans are almost impossible to discharge in bankruptcy, unless the borrower can demonstrate in an adversarial legal proceeding that repaying the loans represents an undue hardship on the borrower and the borrower’s dependents.