International students and students from India may find studying in the United States to be incredibly expensive. Not all students can get family resources, scholarships, or grants to help them pay for their studies at American universities. In these situations, student loans USA are a fantastic option to bridge the gap and overcome the financial barrier. In this blog, we will discuss the various options for education loans in the USA for Indians and international students.
- What Is an Education Loan?
An education loan is a sum of money borrowed to finance post-secondary education or higher education-related expenses. Education loans are intended to cover the cost of tuition, books and supplies, and living expenses while the borrower is in the process of pursuing a degree. Payments are often deferred while students are in college and, depending on the lender, sometimes they are deferred for an additional six-month period after earning a degree. This period is sometimes referred to as a "grace period."
Table Of Content
- Complete Understanding Of Education or Student Loan
- How an Education Loan Works?
- Types of Education Loans
- Criticism Against Education Loans
How an Education Loan Works
Education loans are issued for the purpose of attending an accredited college or a university and pursuing an academic degree. Education loans can be obtained from the government or through private-sector lending sources. Federal loans often offer lower interest rates, and some also offer subsidized interest. Private-sector loans generally follow more of a traditional lending process for application, with rates that are typically higher than federal government loans.
Types of Education Loans
Although there are a variety of education loans, they can be broken down generally into two basic types: federal loans sponsored by the federal government and private loans.
- Federal Student Loans
Most borrowers first seek federal government financing if they need to borrow funds for education expenses. The first step in seeking education loans through the federal government is to complete a Free Application for Federal Student Aid (FAFSA). Depending on the applicant's status, particularly in regard to their parental dependency, different information may be required to complete the application. A credit check is not generally required as part of the application process.
In the U.S., federal education loans make up the majority of education loans. Borrowers of education loans typically seek financing from the federal government first. The applicant information required to facilitate the application process varies in different cases, depending on the applicants’ status.
The amount of the loan that a borrower can receive usually depends on one’s state of residence, family income, parental dependency, as well as tuition fees and living expenses. A credit check is not necessary for the application process.
Federal education loans can be further categorized into direct subsidized loans, direct unsubsidized loans, and direct consolidation loans.
- Direct subsidized loans can be availed by undergraduate students only. Applicants need to demonstrate financial need in order to be eligible.
- Direct unsubsidized loans can be availed by both undergraduate and graduate students without requiring financial need demonstration. Both types can be converted into consolidation loans.
- Direct consolidation loans allow the borrower to combine several federal education loans into one. It charges interests based on the average rate of each loan.
- Private Student Loans
In some cases, the student loan package that a student is issued through the federal government may suggest that the borrower applies for additional funds through private lenders. Private student loans also include state-affiliated lending nonprofits and institutional loans provided by the schools. These types of loans will generally follow a more standard application process (like what is typical of any private-sector loan). Applications for private student loans typically require a credit check.
Borrowers can apply directly to individual private-sector lenders for funds. Similar to federal funds, the approved amount will be influenced by the school a borrower is attending. If approved, funds for educational expenses will first be disbursed to the school to cover any pending bills; the remaining amount is then sent directly to the borrower.
Income-Based Repayment (IBR) Plan
The income-based repayment (IBR) plan allows borrowers to make repayments based on their income. The IBR program is offered by the federal government as an alternative to settle loans. It is not available for private education loans, which makes federal loans more favorable to borrowers.
The IBR plan caps repayments at 10% of the borrower’s income. If the interest that should be paid exceeds 10% of the borrower’s income, the exceeded parts will be deferred and added up to the balance owed. If the education loan cannot be fully repaid after a certain period, the remaining balance of the loan will be forgiven. The period is ten years for the borrowers working in the public sector or 25 years for the ones working in the private sector.
Criticism Against Education Loans
The U.S. education loan system remains a controversial matter for many. Without a credit check, the interest rate of federal education loans is not adjusted for credit risks. It results in an inefficient allocation of resources in higher education and high default rates.
Additionally, the debt level’s been high and keeps rising. The amounts of education loans owed by students exceed the amounts owed for their credit cards almost all the time. The combination of a high debt level and default rates creates burdens to taxpayers in general.
The IBR plan is criticized for moral hazard and adverse selection, as it encourages borrowers to borrow as much as possible with loan terms as long as possible. The program is most beneficial to the ones with the highest debt-to-income ratio, which significantly increases the possibility of default.