A student loan is money that is borrowed to pay for education-related expenses, including tuition, books and room and board. Student loans must be paid back in full with interest. Interest is money paid to a lender as a cost of borrowing money and is typically calculated as a percentage of the unpaid amount (called principal) of the loan.
There are two main types of student loans available for borrowers to finance their college or career education: federal student loans and private student loans.
Federal student loans
To be eligible for federal student loans, applicants must first complete the Free Application for Federal Student Aid (FAFSA), participate in entrance counseling to learn about the student loan process and responsibilities, and sign a Master Promissory Note explaining the terms and conditions of the loan. There are several types of federal student loans available. Below are some of the most common types of federal student loans.
- Direct-subsidized loans are available to eligible undergraduate students with a financial need to cover the costs of college or a career school. The U.S. Department of Education pays the interest on these types of loans while the student is enrolled in school at least half-time and for the first six months after leaving school (called the grace period).
- Direct-unsubsidized loans are available to both undergraduate and graduate students. Unlike direct-subsidized loans, the borrower is responsible for paying the interest on these types of loans beginning when the money is released to the school or borrower.
- Direct-PLUS loans are loans made to graduate or professional students and parents of undergraduate students to pay for education expenses not covered by other available financial aid. Direct PLUS loans require a credit check.
- Direct-consolidation loans are loans that allow you to combine multiple federal student loans into one loan to allow for a single monthly payment. Consolidated loans are also eligible for various repayment plans and loan forgiveness programs.
Federal student loans are managed by companies selected by the U.S. Department of Education called loan servicers. These companies process the billing, accept payments and administer federal student loans.
Private student loans
Private student loans are an agreement between a borrower and a lender such as a bank, credit union or other financial institution. Private student loans will have terms and conditions unique to the lender and are not eligible for the different repayment plans and loan forgiveness programs available to federal student loan borrowers.
Paying back student loans
Student loans require you to pay back the full amount borrowed plus interest. The amount of interest charged depends on the terms of the loan. Federal student loan interest is fixed at the time the loan funds are released and typically will not change. Private student loan interest may vary during the life of the loan.
Student loans must be repaid even if the student is not happy with their education, cannot find a job in their area of study or if they leave school without completing a degree or program of study.
It is generally very difficult to have a student loan forgiven or discharged, but there are some limited circumstances where it is possible. Private student loans usually cannot be discharged through bankruptcy and are not eligible for the forgiveness and discharge programs available for federal student loans. Ways you can have your federal student loan forgiven or discharged include:
- Public service loan forgiveness – If you are a federal direct loan borrower on a qualified repayment plan (any income-driven repayment plan that adjusts payments based on what you earn) who works full-time for a qualifying employer, like a government or nonprofit organization, you can apply to have any remaining loan balance forgiven after 120 qualifying payments. To obtain forgiveness under this program, you must submit an application for forgiveness and proof of qualifying employment to be considered.
- Total permanent disability discharge – If you have a permanent disability, as supported by the U.S. Department of Veterans Affairs, Social Security Administration, or through certification by a physician, loans may be discharged by filing an application with the U.S. Department of Education’s discharge loan servicer.
- Income-Based Repayment (IBR) discharge – Under certain income-based repayment plans, after paying on your federal student loan for 20 or 25 years and filing an application, any remaining balance may be forgiven. Any amounts forgiven under this type of discharge may be considered taxable, requiring you to pay income tax on the forgiven amount.
If you can’t afford your payment, you should contact your loan servicer or lender immediately to discuss your options.
For federal student loans, there are several income-based repayment plans. Federal student loans may also be eligible for a deferment or forbearance where the borrower can temporarily stop making payments or reduce the monthly payment amount. You should keep making payments until the loan servicer approves your request for a deferment or forbearance. If your federal student loan goes into default because you stopped making payments, the government may withhold money from your federal tax return, Social Security benefits or other federal payments and apply that money to your federal student loan account.
For private student loans, you should contact your lender as soon as you think you will be unable to make your payment. Your lender may have options available to you, such as reduced payments, refinancing, or other lender-specific possibilities. If you are behind in your payments and have not contacted your lender, your account may be turned over to a collection agency.
How an attorney and other organizations can help
You should be careful who you share your loan specific information with, as student loan borrowers who are struggling or behind in their payments are often targets of scammers and identity thieves. Because of this, you should protect your sensitive identification related information. This information includes your FAFSA login and PIN, Social Security number, and your student identification number. An identity thief or scammer could use this information to steal your identity or damage your credit. Many student loan specific debt relief agencies will charge you fees for information and services that are available to you for free. Always talk with your loan servicer or lender first to learn about your options.
An attorney can help you understand the terms of your student loan and your responsibilities. Attorneys can also help you handle collection agency requests or lawsuits, assist with applying for disability benefits, advise you on issues related to bankruptcy and provide support for issues arising after the death of a borrower.
About the author – Dr. Bradley K. Adams is the owner of Adams Law, Ltd. in De Graff, Ohio, where he focuses his practice on issues related to education, health and business law. He is also a program counsel attorney for the Air Force Materiel Command Law Office at Wright-Patterson Air Force Base. He earned a Doctor of Philosophy in Educational Leadership from the University of Dayton and his law degree from the University of Dayton School of Law.
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Articles appearing in this column are intended to provide broad, general information about the law. This article is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.
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