Student loans are an important tool for low-income students who do not have the financial means to finance their university degree. Federal loans provide support to families looking to cover the cost of this higher education, which is one of the pillars that drives upward social mobility, that is, economic growth to have a better life.
On average, college tuition in the United States is $29,150 per year for out-of-state four-year public schools, according to data from the nonprofit educational organization College Board. This figure increases to the incredible sum of $41,540 for private universities.
Like scholarships and grants, federal student loans are a way to bridge the gap between rich and poor. However, they can also be a double-edged sword. Statistics indicate that the lowest-income people are the ones who end up more indebted with student loans at the end of their career.
The Federal Government offers student loans to eligible families, which have several benefits, such as lower interest rates and greater repayment flexibility compared to those offered by private companies.
What Are the Types of Student Loans Available?
There are three types of student loans in force in the year 2024, which are:
Subsidized Direct Loans:
These are available to undergraduate students with demonstrated socioeconomic need. The main features of this loan are that the government covers the interest while the student is enrolled at least half-time and during the grace period after graduation.
This means that the student does not accrue interest during these periods, which reduces the total cost of the loan. Once the student enters the working world, he begins to pay the loan with the corresponding interest until the debt is paid off.
Unsubsidized Direct Loans:
They are available for both undergraduate and graduate students. These do not require the student to prove that he is in a vulnerable or needy economic situation, but they work differently in terms of interests.
Students who take out these unsubsidized loans are responsible for paying the interest for the entire duration of the loan, including during their college years and the grace period after graduation. This can result in a much larger debt due to the accumulation of interest during the study period.
If you are considering one of these loans, you should take into account this issue of interest, as it can become an important burden when starting to pay.
Direct PLUS Loans:
They are aimed at parents of undergraduate students and graduate students. These have much higher interest rates than subsidized direct loans and unsubsidized direct loans.
In the case of Direct PLUS Loans, the student’s parent assumes responsibility for the full repayment, while graduate students are responsible for their own repayment. These loans require a credit check to be approved.
How Can I Qualify for a Federal Student Loan?
To be eligible for any of these three student loans, you must meet the following requirements:
- Be a U.S. citizen or an eligible resident alien.
- Have a Social Security number.
- Be accepted or enrolled in an eligible school.
- Maintain “satisfactory academic progress” as determined by the school in which you are enrolled.
- Prove that you have financial need if you apply for a need-based loan.
Borrowing Limits for Federal Student Loans in 2024
The federal government sets limits on the amount of money you can receive per year in student loans. These limits depend on the school year you are in and your dependency status.
Federal borrowing limits for independent undergraduates
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Federal borrowing limits for graduate students
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How the Biden Student Loan Forgiveness Plan Work?
In August 2023, the Biden-Harris administration introduced the Saving on a Valuable Education (SAVE) plan to analyze various factors affecting the quality of life for student loan borrowers. While a university degree has traditionally been a reliable path to economic and social mobility into the middle class, university tuition has increased significantly more than family incomes over the past 40 years.
The most indebted students are often those from disadvantaged backgrounds, low-income families, or vulnerable socioeconomic situations. First-generation college graduates tend to accumulate more debt compared to those whose families have a history of higher education.
The SAVE plan aims to create a voluntary, income-based repayment system. Borrowers’ monthly payments are calculated based on their net income. This new formula introduced by the program excludes more income from the calculation and waives the monthly unpaid interest, which typically gets added to the principal, thereby increasing the overall debt.
