In the United States, there’s types of student loans: federal loans sponsored by the federal government and private student loans.The overwhelming majority of student loans are federal loans. Federal loans can be “subsidized” or “unsubsidized“. Interest does not accrue on subsidized loans while the scholars are in school. Student loans may be offered as part of a total financial aid package that may also include grants, scholarships, and/or work study opportunities.
Prior to 2010, federal loans were also divided between direct loans–originated and funded by the federal government–and guaranteed loans, originated and held by private lenders but guaranteed by the government. The guaranteed lending program was eliminated in 2010 because of a widespread perception that the government guarantees boosted student lending companies’ profits but did not benefit students by reducing student loan costs.
Federal Student loans are usually less expensive than private student loans. However, the federal student lending program still generates billions of dollars in profit for the government each year, because the interest payments exceed the government’s own borrowing costs, loan losses, and administrative costs. Losses on student loans are very low, even when students default, in part because these loans cannot be discharged in bankruptcy unless repaying the loan would generate an “undue hardship” for the student borrower and his or her dependents. In 2005, the bankruptcy laws were changed so that private educational loans also could not be readily discharged. Supporters of this alter claimed that it would reduce student loan rates of interest.