Home Equity Loan
Student Loan
Student loans are loans offered to students to assist in payment of the costs of professional education. These loans usually carry lower interests than other loans, and are usually issued by the government. This article details how the systems work in different countries.
Australia
In Australia, students can pay for university courses using the Higher
Education Contribution Scheme (HECS). The selection criterion for HECS is based
on the rank achieved in the secondary school final examination. HECS fees are
government-subsidised, and are substantially cheaper than full-fee paying places
which have lower entry requirements.
Courses are ranked into three bands, with a year's tuition costing around
$4000-$6000 AUD. Students have the option of deferring the HECS fee until they
start earning above a certain threshold, whereupon they will repay the
government through the tax system; the amount owed is indexed to inflation.
Alternatively, students can pay upfront at the beginning of the semester; this
option provides a 25% discount (2004).
Recent legislative changes that allow a high proportion of full-fee paying
places, and lower upfront payment discounts have been a source of controversy.
Canada
Government loans
Canadian students are normally eligible for loans provided by the federal
government, in addition to loans provided by their province of residence. The
loans are normally interest-free until one graduates, and are sometimes
supplemented with grants, depending on need.
Students must apply for the Canadian and provincial loans through their province
of residence. The rules for what determines your province of residence vary, but
normally the province or territory of residence is defined as where you have
most recently lived for at least 12 consecutive months, not including any time
you spent as a full-time student at a post-secondary institution. In other
words, the province of residence is normally the province where you lived before
you were a student.
The Canada Student Loan (CSL) provides for a maximum of $165 per week of
full-time study, and more money from their province of residence. All Canadian
students may also be eligible for the Canadian Millennium Scholarship Foundation
Bursary (CMS Grant), and other grants provided by their province of residence.
For students in British Columbia for example, they may be eligible for a maximum
of $14,300 combined loan and grant funding per year.
History
From the Department of Human Resources:
The CSLP was created in 1964. Since its inception, the Program has supplemented
the financial resources available to eligible students from other sources to
assist in their pursuit of post-secondary education. Between 1964 and 1995,
loans were provided by financial institutions to post-secondary students who
were approved to receive financial assistance. The financial institutions also
administered the loan repayment process. In return, the Government of Canada
guaranteed each Canada Student Loan that was issued, by reimbursing the
financial institution the full amount of loans that went into default.
In 1995, several important changes were made to the CSLP, reflecting the
changing needs of the parties involved in the loan process. The Government of
Canada developed a formalized "risk-shared" agreement with several financial
institutions, whereby the institution would assume responsibility for the
possible risk of defaulted loans in return for a fixed payment from the
Government. During this period, the weekly federal loan amount was increased to
a maximum of $165.
On July 31, 2000, the risk-shared arrangement between the Government of Canada
and participating financial institutions came to an end. The Government of
Canada now directly finances all new loans issued on or after August 1, 2000.
The administration of Canada Student Loans has become the responsibility of the
National Student Loans Service Centre (NSLSC). There are two divisions of the
NSLSC, one to manage loans for students attending public institutions and the
other to administer loans for students attending private institutions.
Professional students
Most charter banks in Canada have specific programs for professional students
which can provide more funds than usual in the form of a line of credit,
sometimes with lower interest rates as well. Students may also be eligible for
government loans that are interest free while in school on top of this line of
credit, as private loans do not count against government loans/grants.
Republic of Ireland
Although third-level tuition has been free in the Republic of Ireland since 1997, for other student expenses most of the major banks offer interest-free or cut-rate loans to students. There has been discussion on re-introducing fees, as recommended by the OECD, with deferred payment similar to the Australian system; i.e. a loan from the government repaid after graduation. The suggestion has however, been quite unpopular.
New Zealand
The New Zealand state provided student loans and allowances are available to
tertiary students who satisfy the funding criteria. Full-time students can claim
loans for both fees and living costs while part-time students can only claim
training institution fees. A non-refundable means-tested student allowance for
living expenses can be claimed by students who are over 25 years old or whose
parents have a low income.
Loans are repaid by a 10% tax surcharge on income, once the student graduates
and is in employment. There is a minimum income level, roughly equivalent to the
unemployment welfare benefit payment rate, that is exempt from assessment and an
interest rebate that can be claimed for low income and while the student is
studying full-time. Loan recipients who leave New Zealand are assessed on their
world-wide income for repayment purposes, with a minimum annual payment being
required.
In recent years, large student loan debts have meant that many recent graduates
have sought higher paying overseas work in preference to remaining in New
Zealand. This has led to skill shortages in some professions as local employers
have been unwilling or unable to match international salaries. Medical-related
professions have been particularly hard hit due to recent graduates, having high
loan debts and health employers, having tightly controlled government funding.
In the 2005 general election one of the election policies from the Labour Party
was:
During our next term in govt, we will abolish all interest charges on student
loans for all students and NZ based graduates from 1 April 2006.
Sweden
Study support and student loans in Sweden is administered by the Swedish National Board of Student Aid, a Swedish government agency.
United Kingdom
British undergraduate and PGCE students can apply for a loan through their
local education authority (LEA) in England and Wales, the Student Awards Agency
for Scotland (SAAS) or their local education and library board in Northern
Ireland. The LEA, SAAS or education and library board then assesses the
application and determines the amount that the student is eligible to borrow, as
well as how much tuition fees, if any, the students' parents must pay. The
family's income, whether the student will be living at home, away from home or
in London, disabilities and other factors are taken into account. 75% of the
full loan (around £3,000) is available to all students, with only the final 25%
being means-tested (taking the total available up to as much as £4,000). It is
paid in three instalments during each year of the student's course (one per
term). Special rules apply for some courses and for part-time courses.
Loans are provided by the Student Loans Company and do not have to be repaid
until students have completed their course and are earning £15,000 a year
(£10,000 until April 2005). The interest rate is updated annually and is tied to
inflation (currently 2.6%), making the loan interest-free in real terms. The
loan is normally repaid using the PAYE system, with 9% of the graduate's gross
salary over £15,000 automatically being deducted to pay back the loan. There is
no particular schedule for clearing the debt, but, if it has not been cleared 25
years after repayment began, or the student turns 65 years old, the remaining
debt will be cancelled.
The Higher Education Act 2004 will make significant changes to the loans system
in England, Wales and Northern Ireland from 2006. Up front tuition fees will be
abolished, with the fee being added to students' loans for them to pay back
after their course is finished. However, instead of the tuition fee being fixed
at around £1,150 for all universities (which, due to means-testing, not all have
to pay), universities will be able to charge variable fees of up to £3,000.
Critics claim these top-up fees will create tiers of "expensive" and "cheap"
universities, and make university financially inaccessible to many students. As
a result, there have been national demonstrations and protests by students'
unions.
United States
Loans for Higher Education
While included in the term "financial aid" Higher Education Loans differ from
scholarships and grants in that they must be paid back. They come in several
varieties in the United States:
(a) Federal Student Loans made to students directly: No payments until after
graduation, but amounts are quite limited
(b) Federal Student Loans made to parents: Much higher limit, but payments start
immediately
(c) Private Student Loans made to students or parents: Higher limits and no
payments until after graduation.
FEDERAL LOANS TO STUDENTS
Federal student loans in the United States are authorized under Title IV of the
Higher Education Act as amended.
The first type are loans made directly to the student. These loans are available
to college and university students and are used to supplement personal and
family resources, scholarships, grants and work-study. They may be subsidized by
the U. S. Government, or may be unsubsidized depending on the student's
financial need.
Both subsidized and unsubsidized loans are guaranteed by the U. S. Department of
Education either directly or through guaranty agencies. Nearly all students are
eligible to receive them (regardless of credit score or other financial issues).
Both types offer a grace period of 6 months, which means that no payments are
due until 6 months after graduation, or 3 months after the borower becomes a
less-than-full-time student without graduating. Both types have a fairly modest
annual limit regardless of the student's actual cost of education. The present
limit in January 2006 is $2,800 per year.
Subsidized Federal student loans are offered to students with a demonstrated
financial need: generally requiring a low family income. For these loans, the
federal government makes interest payments while the student is in college. For
example, those who borrow $10,000 during college will owe $10,000 upon
graduation.
Unsubsidized federal student loans are also guaranteed by the U. S. Government,
but the government does not pay interest for the student, rather the interest
accrues during college. Those who borrow $10,000 during college will owe $10,000
PLUS INTEREST upon. The accrued interest will be "capitalized" into the loan
amount, and the borrower will begin making payments on that accumulated total.
For example, those who have borrowed $10,000 and had $2,000 accrue in
interestwill owe $12,000. Interest will begin accruing on the $12,000. Students
will also choose to pay the interest while college.
FEDERAL STUDENT LOANS TO PARENTS
Usually these are described as PLUS loans (Parent Loans for Ungraduate
Students). Unlike loans made to students, parents are able to borrow much more -
usually enough to cover any gap in the cost of education. However, there is no
grace period whatsoever. Payments start immediately.
Parents should be aware that THEY are responsible for repayment on these loans,
not the student. This is not a 'cosigner' loan with the student having equal
accountability. The parents are on the hook to pay and if they do not do so, it
is their credit that will suffer. Also, parents are advised to consider "year 4"
payments, rather than "year 1" payments. What sounds like a "manageable" debt
load of $200 a month in freshman year can mushroom to a much more daunting $800
a month by the time 4 years have been paid for through borrowing. The
combination of immediate repayment and the ability to borrow substantial sums
can be dangerous.
Parents should also be aware that current legislation will raise the interest
rate on these loans significantly, to 8.5% as of July 1, 2006.
PRIVATE STUDENT LOANS
These are loans made to students by private finance companies: sometimes
banks, sometimes specialized education lenders. Advocates of private student
loans suggest that they combine the best elements of the different government
loans into one: They generally offer higher loan limits then direct-to-student
federal loans, ensuring the student is not left with a budget gap. But unlike
to-the-parent government loans, they generally offer a grace period with no
payments due until after graduation. This grace period ranges as high as 12
months after graduation, though most private lenders offer 6 months.
Rates and interest Private student loan rates are lower than non-specialized
private loans (e.g. "signature" loans) but slightly higher than government loan
rates. That may be changing, as pending legislation would raise government
student loan rates to similar rates as private student loans.
Most private loan programs are tied to one or more financial indexes, such as
the Wall Street Journal Prime rate or the BBA LIBOR rate, plus an overhead
charge. Because private loans are based on the credit history of the applicant,
the overhead charge will vary. Students and families with excellent credit will
generally receive lower rates and smaller loan origination fees than those with
less than perfect credit. Beginning a few years ago, money paid toward interest
is now tax deductible.
Fees Private loans often carry an origination fee. Origination fees are a
one-time charge based on the amount of the loan, they can be taken out of the
total loan amount, or added on top of the total loan amount, often at the
borrower's preference. Some lenders offer low-interest, 0-fee loans; but these
are usually available only to those with high credit scores of 800 or more. More
commonly, loan origination fees are from 3-9%. While a 0 fee loan at Prime+3%
interest might not sound bad, some contributors suggest that borrowers are
better off paying a modest fee to get a lower interest rate, as is often done
with mortgages. Each percentage on the front-end fee gets paid once, while each
percentage point on the interest rate is calculated and paid throughout the life
of the loan.
Eligibility Private student loan programs generally issue loans based on the
credit history of the applicant and any applicable co-signer/co-endorser. This
is in contrast to federal loan programs which deal primarily with need-based
criteria, as defined by the EFC and the FAFSA. For many students, this is a
great advantage to private loan programs, as their families may have too much
income or too many assets to qualify for federal aid, but insufficient
assets/income to pay for schooling without assistance.
Additionally, many international students studying in the United States can
obtain private loans (they are ineligible for federal loans in many cases) with
a co-signer that is a United States citizen/permanent resident.
Disbursement: How the Money gets to Student or School
There are two distribution channels for Federal student loans. The channels are
identified by their names: Federal Direct Student Loans and Federal Family
Education Loans. Federal Direct Student Loans, also known as Direct Loans, or
FDLP loans are funded from public capital originating with the U. S. Treasury.
FDLP loans are distributed through a channel that begins with the U. S. Treasury
Department, and from there passes through the U. S. Department of Education,
then to the college or university and then to the student. Federal Family
Education Loan Program loans, also known as FFEL loans or FFELP loans, are
funded with private capital provided by banking institutions (ie: banks, savings
and loans, and credit unions). Because the FFELP loans use private capital as
their source, students who use FFELP loans are able to take advantage of payment
options that are similar to those available to customers who take out a home
loan or a consumer loan. For example, some institutions will allow a discount
for automatic payments, or a series of on-time payments. In 2005, approximately
2/3 of all federally subsidized student loans are FFELP.
The maximum amount that any student can borrow is adjusted from time-to-time as
Federal policies change. A study published in the Winter, 1996 edition of the
Journal of Student Financial Aid, titled “How Much Student Loan Debt is Too
Much” suggested that debt for the average undergraduate should not exceed 8% of
total income after graduation. Some financial aid advisors have referred to the
8% level as “the 8% rule.” Circumstances vary for individuals, so the 8% level
is an indicator, not a rule set in stone.
For Private Loans it is far simpler. The lender generally disburses the money
directly to the school. Any funds borrowed beyond tuition and fees is given to
the student for living expenses, room, board, etc.