Standard repayment

Student loans in the United States are a form of financial aid used to help more students access higher education. Student loan debt has been growing rapidly since 2006, rising to nearly $1.4 trillion by late 2016, roughly 7.5% GDP. Approximately 43 million have student loans, with an average balance of $30,000. Loans usually must be repaid, in contrast to other forms of financial aid such as scholarships, which never have to be repaid, and grants, which only rarely have to be repaid. Research indicates the increased usage of student loans has been a significant factor in college cost increases.

Student loans play a very large role in U.S. higher education. Nearly 20 million Americans attend college each year. Of that 20 million, close to 12 million – or 60% – borrow annually to help cover costs. In Europe, higher education receives much more government funding, so student loans are much less common. In parts of Asia and Latin America government funding for post-secondary education is lower – usually limited to a few flagship universities, like the Mexican UNAM – and there are no special programs under which students can easily and inexpensively borrow money. However, in the United States, much of college is funded by students and their families through loans, although public institutions are funded in part through state and local taxes, and both private and public institutions through Pell grants and, especially with older schools, gifts from donors and alumni. Some believe this substantially increases intergenerational correlations in income (having two generations of a family have similar earning ability), although other factors, including genetics, have been estimated to play a larger combined role. Nonetheless, higher education in the United States has been shown to be an excellent investment both for individuals and for the public, even though differences in the returns to educational investment across schools has been overstated in many cases.

Student loans come in several varieties in the United States, but are basically split into federal loans and private student loans. The federal loans, for which the FAFSA is the application, are subdivided into subsidized (the government pays the interest while the student is studying at least half-time) and unsubsidized. Federal student loans are subsidized at the undergraduate level only. A subsidized loan is by far the best kind of loan, but an unsubsidized federal student loan is far better than a private student loan. Some states have their own loan programs, as do some colleges. In almost all cases, these student loans have better conditions – sometimes much better – than the heavily advertised and expensive private student loans.

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