Introduction
Higher education student loans are a form of financial aid given to students which must be subsequently paid off. This differentiates the loans from scholarships or even grants. In the United States, student loans come in various forms like federal higher education loans directly given to students, federal loans given to parents, and loans privately made to students which could be either to the parent or the student.
Types of student loans and student loan repayment policy
The main student loan types are the federal student loans which are regulated and authorized by the amended Higher Education Act under Title IV. They include federal Perkins law, staffed student loans, federal loans made directly to parents, and federal loans made to students. Federal loans are obtained by students in college or university through funds made straight to the university. These funds are used to add on individual and family property, work-study, scholarships, and grants (Human Resources Manual, 2007, p.3). According to the financial needs of the student, the U.S government may at times subsidize the loans. Department of education also outlines how the loans can be used like tuition fees, purchasing books and equipment, personal computers, and rent, among the others. Federal loans are guaranteed and nearly open to all students despite financial concerns and credit scores. They both have a grace period of six months after graduation of the student.
The annual limits are also modest as dependent student’s limit for loans expended on or after 1st July 2008 for both loans (subsidized and unsubsidized). That is annual $5,500 for freshman undergraduates, $6,500 for sophomore undergraduate students, and $7,500 for junior and senior undergraduates. Additionally, students registered in teacher documentation or graduate programs for preparatory coursework are also awarded. Independent graduates’ limits for the same period are higher; they are $9,500 for freshman undergraduates annually, $10,500 for sophomores as well as an annual $12,500 is for both the junior and the senior undergraduate students, plus students enrolled in teacher certification (Human Resources Manual, 2007, p.7).
At the federal state, subsidized student loans are only allowed to students with verified financial needs, which differ between schools. For these loans, the interests payments through the U.S federal government are paid when the student is still studying at the university or college. Moreover, the government offers loans that are not subsidized. However, it does not cover the sum of the interest. Thus, the loans, which are guaranteed for the students, who are going to graduate, by the state, are marked with higher limits depending on the level and course of study. Many students also make use of the Federal Perkins Loan, which limit is $6,000 annually (Human Resources Manual, 2007, p.7).
Stafford loans have maximum limits for both subsidized and unsubsidized loans. The students are always dependent on the loans they took as they have aggregate limits of $57,500 for both the loans and the maximum of $23,000 for subsidized loans (Sampson, 2008). After borrowing the maximum amount, the student can opt for a loan in an extra less or equal amount eligible for subsidized loans depending on his/her level. However, the student cannot borrow extra funds from Strafford unless some amount of the lent money is refunded after limits have been met for both the loans. After paying back some funds, the eligibility of the student is restored to the aggregate limits.
Federal loans to parents commonly referred to as PLUS (Parent Loan for Undergraduate Students) enable the parents to borrow much more to cater for any niche in education cost. However, payments are to be immediately covered since there is no grace period. Parents have often to pay away from the loans for their children to enable them to continue studying. In such a case, the student does not bear the necessary responsibility. It is the credit rating of the parents that suffer in case the funds are not repaid. This is because they sign their master promissory note. Mostly, parents are encouraged to view it as ‘year 4’ instead of ‘a year 1’ payment, which is quite ‘manageable’. It is also true that if there is a capacity to borrow considerable sums, the arrangement of instant repayment is expensive. Under the new-fangled law, graduate students can receive PLUS loans using their names having similar terms and interest rates of PLUS loans for parents. On July 1, 2006, the legislation remarkably elevated interest rates on PLUS loans to 8.5%.
Private student loans
These loans are not guaranteed by any government agency; moreover, banks or finance companies give them to students. In the argument of their advocates, they are deemed to offer the best-combined aspects of the various government loans combined into one. Usually, they have higher limit offers compared to federal law, which is far much better because students are not left to grapple with a gap in the budget. This kind of offer is opposed to the federal PLUS loans; however, in most cases, they allow a grace period without payments until graduation. The grace period could go for as long as 12 months although many private lenders allow only six months (Human Resources Manual, 2007, p.10).
Private student loans are either school-channel or direct-to-consumer. School-channel loans charge lesser interest rates, though they require more time for processing. They are certified by the school by signing off on the borrowing sum. Then, the costs are covered and directly repaid to the school. Thus, so-called direct-to-consumer loans are independent of the school and hence not certified by the last. In this case, the student is just required to provide enrollment verification to the lender after which the loan is directly released to the student. They attract higher interest rates since the funds are processed quite easily (actually, in several days) and hence easily available to the student.
Private student loans’ terms and conditions of borrowing
Private loans have variable interest rates, and in many instances, they ask for origination fees up-front. This has the effect of reducing funds for education purposes by increasing borrowers’ real costs. They are also tied to financial indexes and overhead charges, which are different from the previous credits made by the applicant. Bad credit record attracts high-interest rates and loan limits, which are as high as 6%-9%, thus, the limit of too-thirds figures in adverts (Clarkson and Jentz, et.al, 2010, p. 1014).
In the case of private student law, the origination fee has gained more weight than the interest rate. However, there seems to be a legal solution to the fee-rate debate because according to the law, every lender must provide the borrower with a statement of APR (Annual Rate Percentage). This should be before the borrower signs the promissory note and commits to it. APR is arguably the most efficient yardstick for gauging loans with similar repayment terms. However, total financing is instrumental for loans with different terms. It also becomes easy for the students to get loans because consignors can be easily available in terms of family or other citizens. The terms differ with lenders, so one can shop around for the cheapest ones, although this could be detrimental to the credit score. These terms are exclusively agreed upon by the borrower and the lender without a proper regulation from the Department of Education policies. In the case of loan consolidation, the new Act requires that the loans would not be dischargeable just like federal loans under bankruptcy. Interest rates on consolidations are major, but not superior to those available separately (Clarkson and Jentz, et.al, 2010, p. 1012).
Standard repayment and discharge of student loans
Federal loans automatically enroll in standard repayment as soon as repayment begins (American Student Assistance, 2012). The borrower can repay the sum of his loan under it for 10 years. The loan servicer resolves the bill by dividing the loan into 12 payments which are covered every month. Interest pending for each month is paid off by the payments as well as the original loan fund. The term can be shorter than 10 years, depending on the loan amount. The minimum monthly payment is $50.
Student loans (US federal and private) may be discharged under bankruptcy only with proof of “undue hardship.” Bankruptcy Code Section 523(a) (8) determines the discharge of student loans. However, they cannot be discharged via bankruptcy proceedings. Different jurisdictions have varying standards of undue hardships, which, in essence, are intricate to meet. Therefore, student loans are non-discharged by bankruptcy. Whereas the US Federal loans are dischargeable overall along with permanent disability, this is not available for private student loans since they cannot be discharged, except in the case of bankruptcy (Richards 2011).
Following the Higher Education Opportunity Act of 2008, there is a radical surgery underway about restrictions for permanent and total disability as a basis for discharge. A “substantial gainful activity” (SGA) following a disability of loan holders will have no requirements of earning income. Thus, the legislation changes were effected in July 2010 (Jackson, 2011).
The legal implications and beneficiaries
The failure to pass the bankruptcy bill has led to loans becoming free from credit risk-free loans for the lender. There were also the infamous anti-competitive lending practices and relationships amid universities and student lenders according to which the attorney general had to interfere in 2007. Universities had their apparent preferred creditors pushing to higher interests for the lenders. However, this has seen a radical change in lending policy in U.S universities. Lenders have also taken advantage of the legal gap. For instance, in 2007, Sallie Mae and Nelnet were in court with research from the department of education for false claims and had to settle the lawsuit by paying $55 million (Richards, 2011).
There should be bankruptcy protection for private loans, especially when tuition fees increase after an economic downturn. The student loan debt had gone beyond the credit card debt in the hands of Americans by June 2010. The debt was a whopping $830 billion with 20% of the sum held by the private loans, while the majority 80% included federal student loans. In addition, by October 2011, the debt had surpassed the $1 trillion mark. Many college students decried that they could not repay their student loan debts given the economic tantrums and costs (Richards 2011).
The Obama Administration is still contemplating another amendment to allow the “Pay As You Earn” offer to trim down monthly payments. Before 2014, the loan holders will have been able to lessen monthly loan payments to 10 percent of the borrower’s flexible income. There have also been wider consolidations beginning this year. Existing law permits borrowers to increase loan payments to 15% of their flexible income and discharge all the rest of debt during the past 25 years. However, only a little percentage of students are aware of this provision. There have also been proposals by the President to lower IBR loan repayment and reduce the forgiveness limit to 20 years from today’s legal provision to the one of 2014 (Jackson, 2011).
Congress enacted the Student Aid and Fiscal Responsibility Act in 2010, which was a section of President Obama’s ultimate health care revamp. It resulted in federally assured student loans in addition to substituting them with the direct loans using the Education Department. This lessened the federal budget by $61 billion in 10 years. This was a short-term political choreography; however, finally, the question is if there will be a massive financial liability in case the students fail to repay their full loans. The perceived gains from interest revenues on direct student loans will be a great liability (Caher, 2008).
Conclusion
From the Higher Education Act of 1965, there have been several amendments made concerning student loans. This is to benefit both the students and the state in terms of debt and repayment. However, the attempts have not yielded much success as graduates continue to grapple with huge debts after graduation. The state has also had to contend with a great finance budget. There are also arguments concerning some types of loans, especially in case there is no third party involved for certification of loans, the students may get loans for inappropriate use. Direct-to-consumer private loans are growing at the highest rates, especially due to the lack of the third party’s certification. However, they also attract higher costs than federal loans do because of numerous fees, higher interest rates, over and above the absence of borrower legal protections (Morgan, 2007, p.140). Anyway, the proposed amendments are yet to prove their effectiveness in leading to laws that will benefit all.
Reference List
American Student Assistance. (2012). Standard Repayment. Web.
Caher, J. (2008). Personal Bankruptcy Laws for Dummies. New York: McGraw Hill.
Clarkson, K., and Jentz, G. et.al (2010). Business Law: Text and Cases-Legal, Ethical, Global and Corporate Environment. U.S.A: Cengage learning
Human Resources Manual. (2007). Student Loan Repayment Policy. Web.
Jackson, D. (2011). Obama sets rules for student loan payments. Web.
Morgan. T. (2007). The Loan Officer’s Practical Guide to Residential Finance-SAFE Act Version. U.S.A: Quick Start Publishers.
Richards, J. (2011). For profit colleges facing federal security: Bankruptcy and law. Web.
Sampson, V. (2008). The Ensuring Continued Access to Student Loans Act of 2008 (DCL ID: GEN-08-08 FP-08-07).