FinAid | Student Loans

Student Loans

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An education loan is a form of financial aid that must be repaid, with interest. (Scholarships, on the other hand, do not have to be repaid.)

Education loans come in three major categories: student loans (e.g., Stafford and Perkins loans), parent loans (e.g., PLUS loans) and private student loans (also called alternative student loans). A fourth type of education loan, the consolidation loan, allows the borrower to lump all of their loans into one loan for simplified payment.

Federal law sets the maximum interest rates and fees that lenders may charge for federally-guaranteed loans. Nothing prevents a lender from charging lower fees. Many lenders offer a variety of student loan discounts to attract borrowers.

Few students can afford to pay for college without some form of education financing. Two-thirds (65.6%) of undergraduate students graduate with some debt, and the average federal student loan debt among graduating seniors is $19,202 (Stafford and Perkins Loans), according to the 2003-2004 National Postsecondary Student Aid Study (NPSAS). (The median is $17,120. One quarter of undergraduate students borrow $24,936 or more, and one tenth borrow $35,193 or more.) These figures increase by about 3% or approximately $550 a year. When one includes PLUS loans in the total, the average cumulative debt incurred is $21,814. (Approximately one in ten (10.7%) parents borrow PLUS loans for their children's college education, with a cumulative PLUS loan debt of $16,218.)

Graduate and professional students borrow even more, with the additional debt for a graduate degree ranging from $27,000 to $114,000. The following table shows the percentage borrowing and average amount of cumulative debt among graduating students according to degree program. It provides the amounts borrowed for just the graduate education and also the combined totals for undergraduate and graduate education.

Graduate Education Debt All Education Debt
(Grad & Undergrad)

Graduate & Professional Degree Programs Percent Borrowing Cumulative Debt Percent Borrowing Cumulative Debt

Total 60.1% $37,067 70.1% $42,406

Master's Degree 58.4% $26,895 69.3% $32,858

Doctoral Degree 51.0% $49,007 58.3% $53,405

Professional Degree 86.5% $82,688 88.4% $93,134

MBA 53.0% $35,525 63.6% $41,687

MSW 76.5% $27,136 81.0% $37,029

PhD 40.0% $36,917 46.8% $41,540

EdD 53.4% $49,050 65.7% $47,725

Law (LLB or JD) 87.7% $70,933 89.7% $80,754

Medicine 95.0% $113,661 95.0% $125,819

Grants, scholarships, work-study and other forms of gift aid just do not cover the full cost of a college education. Many students find that they must supplement their savings with government and private loans. The Federal education loan programs offer lower interest rates and more flexible repayment plans than most consumer loans, making them an attractive way to finance your education. You can also deduct up to $2,500 in student loan interest even if you don't itemize deductions on your income tax return.

The interest rate on the Stafford Loan for new loans first disbursed after July 1, 2006 is a fixed rate of 6.8%. The same rate applies to the in-school, grace and repayment periods. The interest rate on new PLUS Loans first disbursed after July 1, 2006 is a fixed rate of 8.5%.

The interest rates on existing variable rate Stafford and PLUS loans will continue to change annually on July 1, based on the last 91-day T-bill auction in May. The current interest rates on the Stafford Loan are 4.70% during the in-school and grace periods and 5.30% during the repayment period. The current interest rate on the PLUS Loan is 6.1%. These rates are expected to increase by 1.84% on July 1, 2006 to 6.54%, 7.14% and 7.94%, returning to historical average rates. FinAid recommends that students and parents who have not yet consolidated their variable rate loans do so before July 1 to lock in the current low rates. The era of historically low interest rates on student loans has ended, and families are extremely unlikely to see rates this low ever again. (Generally, it is best to consolidate your loans at least a month before the deadline, to give the lenders time to process the paperwork.)

Many student loan providers offer low cost government and private loans with consistently high quality servicing and flexible repayment terms. Citibank Student Loans is one of these lenders. FinAid maintains a list of education lenders, guarantee agencies, servicers and secondary markets who offer federal and private student loans, as well as advice on choosing a lender and tips on identifying the lenders that currently hold or service your loans.

Loan forgiveness programs (in which the borrower's loans are paid off in exchange for volunteer work or military service) offer an option for easy repayment. If you are having difficulty repaying your education loans, see Defaulting on Student Loans before you decide to skip a payment. It offers you some alternatives. Loan Cancellation and Discharge Forms can be found on the US Department of Education web site.

Also, FinAid provides numerous calculators that can help you better understand your borrowing options. The loan calculators offer estimates of monthly loan payments, estimates of the amount of debt you can afford to repay, an analysis of the cost of capitalizing the interest and tools for comparing loan costs.

Some students, because they do not have prior experience with debt and loan amortization, do not appreciate how much their loans will cost them. FinAid provides some tips concerning calculating the cost of interest.

If you are having a problem with your federal student loan, contact the FSA Ombudsman at the US Department of Education. The FSA Ombudsman is dedicated to helping students resolve disputes and other problems with federal student loans. The FSA Ombudsman will research your problem in an impartial and objective manner and will try to develop a fair solution. The FSA Ombudsman does not have the authority to impose a solution. Nevertheless, many students have found the FSA Ombudsman to be helpful in resolving disputes with lenders. You can contact the FSA Ombudsman by phone at 1-877-557-2575 or 1-202-377-3800, by fax at 1-202-275-0549, by mail at U.S. Department of Education, FSA Ombudsman, 830 First Street, NE, Fourth Floor, Washington, DC 20202-5144, or by email at fsaombudsmanoffice@ed.gov.