Federal Student Loan Settlement

What is the Student's Loan?

A student loan is a form of financial aid made available by the United States government for the benefits of students who don't have the money to finance their education and parents who are not financially buoyant enough to finance their children's education. Student loans are often taken by parents or by students to cover all educational expenses. 

However, a recent report shows that, in the United States, the debt owed by the student loan has been on the rise since 2006. In 2019, it was reported that 20 million students were enrolled in the universities and colleges, and half of the students applied and received federal loans from the William D. Ford Federal Direct Loan Program. The total amount of money loaned to the student was $93 billion. This implies that each of the 10 million students that applied for a loan received about $9,300 per student. The total debt owed by student loan rose to $1.6 trillion, which is 7.5% of 2019 GDP 

In relation to this report, Mark Kantrowitz of the savingforcollege.com reported that the average student loan debt for 2019 college graduates was $29,900. 70% of the student owing this money leaves school without paying their debt.

Student loans, unlike other financial aids like scholarships and grants, must be repaid. There are two major sources of student loans: the federal and the private student loan. Nevertheless, the federal student loan is the most widely used one because of the amount of money it has to offer and the rules and regulations guiding the loan.

Although both federal and private sectors offer student loans, students are often advised even by privates sectors to exhaust their chances of obtaining loans in the federal sector before applying for the private one. One of the reasons for this is that the private student loan is more difficult to obtain and has strict terms and conditions guiding the loan. Most time, the student or participant would need to get a co-signer or good credit before obtaining the loan. 

Also, there are some terms in the private student loan that is not available in the federal and the interest rates in private student loans are usually higher than the federal. These are parts of the reasons why the federal student loan is better and easier to obtain than the private.

Types Of Federal Student Loan

Student loans come in different forms, shapes, and sizes. The rules and regulations guiding this loan also come in different shapes. There are five different types of loans under federal student loans, these loans include:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Parent PLUS Loans
• Graduate PLUS Loans
• Direct Consolidation Loans

Types Of Private Student Loan

Like the federal student loan, the private student loan offers the student the opportunity to choose from the different types of loans available. However, private student loan does not offer as many choices as the federal student loan. Private student loan only has two choices:

• Private Student loans
• Private Parent loans

Direct Subsidized loan

The Federal Direct Student Loan is also known as Stafford loan. In this type of loan, the money is gotten directly from the federal government. Federal Direct Student Loan is available for both graduate and undergraduate students. 

If the type of direct loan you got is subsidized, it means that you won't be required to make any payment until after you have graduated. As of 2019-2020, the interest rate of direct loans is 4.53%.  But because the loan is subsidized, the federal government pays the interest for you while you are still in school. 

A direct subsidized loan is not available for all students. It is only available for students who can demonstrate their level of financial hardship. It usually goes to students from families with a $50,000 or less annual income. 

If you are an undergraduate, the amount of subsidized rate you can get on the direct student loan would depend on your level in school. Usually, the maximum amount of direct loan that can be borrowed for freshmen is $5,500 while the amount that can be subsidized is $3,500. For a sophomore, the direct loan amount is $6,500 while the subsidized rate is $4,500. For students in the third year and beyond, the amount that can be given as a loan is $7,500 and the subsidized loan is $5,500.

The maximum amount that can be loaned to students is $31,000 and the amount that can be subsidized is $23,000.

Direct Unsubsidized Loans.

The direct unsubsidized loan is the opposite of the subsidized direct loan. This implies that, if you have an unsubsidized direct loan, you would be responsible for your interest. The federal government would not be paying any subsidized ratio on your behalf. 

As of 2019 to 2020, the interest rate for the unsubsidized direct loan is 4.53%. However, payment can be deferred or postponed until the time you graduate. Also, unlike the direct subsidized loan, there is no restriction on the type of student that can apply for this loan. All students are eligible for direct unsubsidized loans. 

The maximum amount of money that can be obtained in the unsubsidized direct student loan as an undergraduate begins from $5,500 to $12500. However, the amount you would get would depend on your level in school and your financial ability. On the one hand, if you are financially independent, you would be eligible for larger loans. On the other hand, if you are financially dependent, you won't be able to get a large loan. But if you are financially dependent and your parents are ineligible for the Parent Plus loans, you would be permitted the same amount of money a financially independent student would get. 

Both graduate and undergraduate have access to the direct unsubsidized loan. Also, students are not required to demonstrate any financial need. 

For graduates, the maximum annual limit that can be borrowed is  $20,500. The maximum amount that can be borrowed as both undergraduate and graduate is $138,500. The only category of students that are exempted from this is medical students. For medical students, the maximum amount that can be borrowed annually is $40,000 while the maximum amount that can be borrowed is $224,000.

Direct Consolidation Loan 

There are situations whereby a student can apply for up to 5 or 10 different types of loans before the end of their education program. In situations like this, the student might have to pay for these different loans pay every month. To simplify the payment of these different loans, the direct consolidation loan can be used.

The direct consolidation loan allows a student owing to different types of loans to simplify his or her method of monthly payment. With this loan, the student would be able to pay his or her debt one loan at a time. Direct consolidation loans operate a fixed but flexible interest and allow the student to choose the amount for monthly payment depending on his or her financial ability.

Consolidating your student loan does not come with a price, however, you are only permitted to do this once. The aim of consolidating your loan is to reduce your monthly payment and extend the duration needed to pay off the loan.

Also, direct consolidation keeps you focused on just one fee at a time and makes you spend less than when you are trying to keep up with the monthly payment of each loan. 

The disadvantages of direct consolidation include

• It makes you spend more time paying the loan than you would spend when you are paying all the loans monthly. With his extension in time, comes extension in interest. 
• Also, direct consolidation can make you lose out of the benefits attached to loan payments like interest rate discounts and loan forgiveness program.

Note: direct consolidation loan is not available for private student loans.

PLUS Loans

There are two types of PLUS Loans, the Parent PLUS Loan and the Grad Loan. The Parent PLUS loan is specifically for the parents of dependent undergraduate while the Grad PLUS loan is for students who are graduated. 

Unlike the traditional student loan, the parents plus loan does not have a maximum amount that can be borrowed. Also, the money can be used to cover expenses that the other financial aids cannot cover. The two types of PLUS loans are funded by the federal government

As of 2019, the interest rate on the two loans is 6.08% for Direct PLUS Loans for Graduates and 7.08% for loans given to parents. 

Comparing the Stafford Student Loan to the former Perkins Loan

• Perkins Loan was extremely popular before the administration of Donald Trump, the current president of the United States. On June 30, 2018, Perkins loan was brought to an end and replaced by Stafford Loan. 

• When compared to Stafford loan, the Perkins Loan was more subsidized and has lots of benefits.
• Also, the Perkins loan gives students a longer grace to start paying loans, usually nine months interval.

Other types of loans to consider aside from the above include:

Private education loan

Private Education is a term used to refer to the two types of loans under the private student loan. Most times, it is referred to as an alternative education loan. It is a special kind of loan made available for students and parents who could not meet up with the educational expenses even with all the federal loans made available.

The way Private Education Loan operates is very similar to personal loans because the condition for qualifying for the loan is usually the credit history of the student. However, you can still be qualified for the loan even with a bad credit history. The interest on loans is usually higher than the federal loan but lower than most personal loans like credit cards. The interest can be fixed or variable  

Furthermore, the Private Education loan is not subsidized and can even be required that you start making payment while still in school. There are no forbearance and deferment benefits 

Comparison Between Federal Student Loans And Private Student Loans.

There are many students who through the federal loan could complete their education and there are others who have to go to the private student loan before they could complete their educations. Usually, the student who needs extra helps to complete their education seek assistance from private lenders like credit unions or banks. Irrespective of the type of loan the student settled for, the goal is to cover all educational expenses. This is the major reason why the federal student loan and private student loan was put into place.

The major difference between the two types of loans is the maximum amount of money available for loans and the use of credit card history to be qualified for loans. 

For federal loans, an undergraduate applying for the loan might not need a credit card but this is not the same for graduate students. Most times, graduate students are disqualified because they could not meet the required credit card conditions.

Another difference between federal student loans and the private loan is that interest on the federal loan is fixed while interest on the private loans can be either fixed or variable. Also, interest on private loans is higher than the federal loan.

The private loan does not offer any subsidized benefit to students. But students who could prove their poor financial circumstance to the federal government often received subsidized payment. 

In federal loans, students don't start repaying until they graduate. In private loan, student start repaying even while they are still in school

The repayment options for a federal loan is quite flexible and easier than a private loan. Additionally, federal loan offers loan forgiveness programs than private.

Federal Student Loan Settlement

Although it is usually not easy to get a loan settlement, it is possible if you have a large sum to offer. A loan settlement is also known as compromise. The major student loan department that can settle or terminate loans is the Department of Education. This department can settle or terminate any student loan irrespective of the amount. 

There are standard, nonstandard, and discretional types of student loan settlement. Under the standard compromise are waivers of fees, 50% interest + fees, and 10% P&I 

• In waivers of fees, the borrowers pay all the principal and interest.  The account eligibility is all debt. 
• In the 50% interest + fees, the borrowers pay all principal and 50% interest, while the eligibility is all debts. 
• In 10% P&I, the borrower pays 90% principal and interest and the eligibility is all debts.

Aside from the Department of Education, the Guaranty Agency can also settle the loan on behalf of the borrower. To summarize the guideline for obtaining settlement:

• Total loan cost can be waived
• Interest and principal can be waived by 30%

When applying for a loan settlement, there may be tax consequences attached to the loan payment. Hence it is advisable to consult a professional when applying for settlement. Ensure to get the final agreement of settlement in writing