Understanding student loans in default

Student Loan Debt

Student loan debt is extended to students to help them fund their college education. These loans, which are granted by a range of different sources have to be repaid with interest in the years following graduation.

These days, borrowing for educational purposes is commonplace. In the US, more than two-thirds of undergraduates use some kind of student loan debt to fund their education. And in 2005 the average amount borrowed per student each academic year was over $20000 (Stafford and/or Perkins Loans). This figure rises to $24000 if PLUS loans are taken into account.

Most student loan debt is repaid over 10 years (although it can be extended to 30 years if the debt is consolidated) and the interest rate is set annually on 1st July.

There are four types of student loan debt available to students in the US.

1) Stafford Loans

Also known as federal loans, these are granted by the federal government to students at approved educational establishments. Their course of study must be at least part time and repayment begins once they graduate.

The interest on the loan can take two different forms;

Subsidized: This means that interest on the loan only begins to mount up once repayment has begun. In other words, the student gets an interest free loan until they start to repay it.

Unsubsidized: Interest starts to accrue on the amount borrowed from the moment the money is lent. This option means that the size of the debt becomes larger than under the subsidized option. From July 2005, the interest rate on Stafford Loans is 5.3% during the repayment period.

2) Perkins Loans

Unlike Stafford Loans, Perkins Loans are granted by the education establishment that the student attents. Again, they must be at least a part time student and the institution has to be approved. The main advantage of these loans, it that the interest rate charged is slightly lower than Stafford Loans (around 5%).

3) Private Loans

These are offered by a wide range of banks and other lenders. And as you would imagine, the interest rates are higher (although different lenders charge different amounts) and the repayment schedule is not so generous.

4) PLUS Loans

Unlike the previous options, these loans are taken by parents to help with their child's education. Again the dependent child has to be enrolled at an approved institution and study at least part time. And this time, it's the parents who are responsible for repaying this student loan debt.

Students can apply for any of these loans, or even a combination of them, to help fund their studies. If they have a number of these loans, they can consolidate them into a single monthly repayment plan (usually at a lower rate of interest, but over a longer period).

by Stuart Laing

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More Useful Resource and Updates on student loans in default

• Student loan agency to run out of money (Lexington Herald-Leader)
  The state agency that provides loans to Kentucky's college students will .effectively run out of money. Friday until about Aug. 21 as it awaits new federal funds intended to alleviate a national crisis in student loans. The Kentucky Higher Education Assistance Authority, and its lending arm, The Student Loan People, will finish giving out the available funds Thursday, said James R. ...



• Die, Student Loan, Die! (The Motley Fool via Yahoo! News)
  Make fun of the so-called "professional students" all you want. You know, the ones who, unlike the TAs, remember the original Dukes of Hazzard TV show. But would you be in a huge hurry to check out of the ivory tower and into debtors' prison?



• Student loan co-signer feels pinch (The Morning Call)
  Dear Mary: Our daughter graduated from college with more than $100,000 in student loans. Her first job did not pay enough for her to begin repaying the loans. The only loan that we co-signed is more than $600 a month. We did not know that it was in default until she was several thousand dollars behind. This came at us after a home remodel and a wedding. We are not prepared to pay this loan, and ...



• Capturing the Youth Vote: McCain, Obama Target Concerns About Paying for College (Marketwire via Yahoo! Finance)
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• Schools Receive Grant to Curb Student Loan Default (KOLR - KSFX Ozarks)
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• State using $50 million bond to solve student loan crisis (Lexington Herald-Leader)
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• Nova Scotia touts direct student loan program (CBC Nova Scotia)
  Nova Scotia's new direct lending program means university and college students pay less in interest, Education Minister Karen Casey said Thursday.



• Where to Find College Funding in a Credit Crunch (Carteret County News-Times)
  (ARA) - This year alone, more than 60 lenders have exited the federal student loan market and in the private market, most lenders have significantly tightened restrictions or left the business altogether.



• Corinthian Caught In Student Loan Trap (Forbes)
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• Student Loan Guide
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• Federal Student Loans: Avoiding Default
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• Repaying Your Student Loans, Federal Student Aid
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• Student Loans and Default Legal Information Letter
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