Why is the federal Government involved in funding education? The answer is simple – it has to or millions of Americans would not go to college as the ‘debt burden’ would be too great to deal with!
A survey taken in 2004 revealed that 92% felt that federal financial assistance provided to low and middle income students and their families through the federal program is now more important than it was a few years ago. Furthermore student debts are on average greater than $30,000!
The amount of outstanding debt that you can accrue is up to $23,000 so for the average student there is a shortfall in funding – but at least this assistance represents about 75% of the total debt. This is especially true for graduate and health professional students. More often than not students also have part time vacation work (at least I did!) to offset the costs but this can and does, in many cases, harm academic results and therefore employability in an ever increasingly competitive work environment!
So how does it work?
To examine how it works is to look at the circumstances that would lead a student to apply. Students tend to accumulate debt over time and most lending companies are happy to lend for two reasons. Firstly to gain a customer and secondly to make money – no surprises here. However students from lower income families find that as each loan accumulates on the other the interest rate charge can increase. In this situation a ‘consolidation’ is usually considered i.e. the debts are merged into a single debt with a single payment.
There are two methods:
1. By going to private lenders such as banks directly or,
2. By Applying for a federal loan program.
The Private Sector
In some ways the private sector has adopted some of the mechanisms of the federal government. In April 2006 the Nations leading provider of education funding, Sallie Mae, introduced a new Private Consolidation Loan allowing holders of private education loans from any lender to combine ‘eligible’ loans into one loan with a single monthly payment.—either from Sallie Mae or another lender—to manage repayment by combining their eligible loans into a new loan with a single monthly payment, a potentially lower monthly payment amount and an extended repayment term.
The Federal Governments Role
The loan consolidation program is available to students currently in college or for graduates. The Government has set up the Federal Family Education Loan Program (FFELP) which provides low interest (usually substantially lower) consolidation for students from low income families. The Federal Direct Subsidized Loan is need-based. The benefits to the student include some tax deductability but one of the main benefits is the ability to pay back only the interest whilst the student is still at college and full payment of interest and principal does not start until the graduate has had a job for six months.
If the applicant fails to get a subsidized loan, usually a Stafford loan there is still the option of taking out an unsubsidized Stafford Loan – the main difference being only in the interest payment and grace period subsidy.
Conclusion
The federal student loan program is dynamic and competitive. It provides the opportunity to millions of American students to gain access to an education that they would not otherwise have. The resources of the Government and large lending companies like Sallie Mae ensure that rates and options available are continue to be accessible to those most in need.
Student Loans 