The US education system in the late 1800s catered to the rich and influential families in the society. The first world war revealed the strategic value of the US military in forging superior economic and political position in the world. Understanding the power dynamics, the American legion – a non-profit advocating for the benefit of veterans began persuading the politicians on incentivizing new recruits. Education and skill training that would benefit veterans transitioning to a civilian life became the focal point of the initiative. Since many veterans came from middle-income and low-income families, funding became the biggest hurdle.
To mitigate the challenge, the legion lobbied the Congress to pass the GI bill in 1944 that became the foundation of Federal Loans.
In this analysis of Federal Loans, we cover:
- History and Evolution of Federal Loans
- Federal Direct Loan Programs – US MBA Programs
- Direct PLUS Loans
- Direct Unsubsidized Loans
- Direct Consolidation Loans
History and Evolution of Federal Loans
The landmark GI bill gave millions of veterans the opportunity to enter college. While the initial support through Federal Loans were in careers that helped veterans effortlessly transition from the military to blue-collar jobs, the National Defense Education Act of 1958, signed by President Eisenhower, paved the way for low-interest student loans and graduate fellowships for those studying mathematics and engineering. The shift in leveraging technology to compete with the USSR, and the seismic shift in racial equity, was the impetus for the Higher Education Act of 1965 that expanded grants to be sanctioned based on student income, and racial minority.
The US economy was booming, and higher education enrollment was also on the rise until the bust in the 1980s. This led to large budget cuts that had a debilitating impact on education loans. Minorities were proportionally impacted. The Clinton government recognizing the misstep enacted the 1993 Student Loan Reform Act, that ensured that Federal Direct Loan Program - the largest financial aid program guaranteed by the US government, be sanctioned through the Department of Education and accounted for by the budget. The Act also sparked an end to the Guaranteed Student Loans that were previously masked behind private banks and unaccounted in government budget. President Obama officially eliminated the loan in 2010.
Federal Direct Loan Programs – US MBA Programs
Even today the Federal Direct Loan Program and the GI Bill are part of every US MBA program’s financial aid offering.
The GI Bill guarantees military personnel a maximum reward of 48-months of higher education for about 6 years of service.
The Federal Direct Loan Program offers Unsubsidized Loans and Direct PLUS Loans for graduate studies.
Direct PLUS Loans
The Direct PLUS Loan is the most likely loan option for US citizens considering an MBA.
The competition is high, and disbursal is lower (5% of all Direct PLUS Loans is for MBA programs), pushing the applicable interest rate to a high, 6.28%.
Since the Direct PLUS Loans is not a need-based loan but depends on the credit history of the loan applicant, those with adverse history might find it difficult to secure this loan. However, despite the adverse credit history, if the applicant can secure an endorser willing to pay the loan on the applicant’s behalf with no adverse credit history, Direct PLUS Loan should be an option.
An alternative is to receive written approval from the US Department of Education, explaining extenuating circumstances for the credit history, including the completion of ‘credit counseling for PLUS Loan borrowers’ session.
The fund is allocated to cover expenses beyond tuition and accommodation.
The various DIRECT PLUS loan repayment options are listed in the table below and range between 10 years to 25 years of repayment.
| Type | Amount | Interest Rate | Payback Period |
|---|---|---|---|
| Standard Repayment Plan | Variable (Dependent on Financial Needs) | 4.228% (Processing Fee for all applicants) | 10 years |
| 6.28% (Graduate/Professional) | |||
| Extended Repayment Plan | More than $30,000 outstanding | 4.228% (Processing Fee for all applicants) | 25 years |
| 6.28% (Graduate/Professional) | |||
| Revised Pay As You Earn Repayment Plan | Variable (Dependent on Financial Needs) | 4.228% (Processing Fee for all applicants) | 10 years |
| 6.28% (Graduate/Professional) | |||
| Pay As You Earn Repayment Plan | Variable (Dependent on Financial Needs) | 4.228% (Processing Fee for all applicants) | 10 years |
| 6.28% (Graduate/Professional) | |||
| Income-Based Repayment Plan | Variable (Dependent on Financial Needs) | 4.228% (Processing Fee for all applicants) | 10 years |
| 6.28% (Graduate/Professional) | |||
| Income-Contingent Repayment Plan | Variable (Dependent on Financial Needs) | 4.228% (Processing Fee for all applicants) | 12 years |
| 6.28% (Graduate/Professional) |
Direct Unsubsidized Loans
The unsubsidized loans charge interest from the point of disbursement. Unlike subsidized loans where there is a moratorium on the interest until 6-months after graduation, unsubsidized loans should only be considered if you are joining an MBA program known for excellent post-MBA salary and bonuses.
Any non-payment of interest is capitalized on which interest is charged again with an upper cap for borrowing set at $20,500.
| Type | Amount | Interest Rate | Payback Period |
|---|---|---|---|
| Standard Repayment Plan | Variable (Dependant on Financial Needs) | 1.057% (Processing Fee for all applicants) | 10 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Extended Repayment Plan | More than $30,000 outstanding | 1.057% (Processing Fee for all applicants) | 25 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Revised Pay As You Earn Repayment Plan | Variable (Dependant on Financial Needs) | 1.057% (Processing Fee for all applicants) | 10 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Pay As You Earn Repayment Plan | Variable (Dependent on Financial Needs) | 1.057% (Processing Fee for all applicants) | 10 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Income-Based Repayment Plan | Variable (Dependent on Financial Needs) | 1.057% (Processing Fee for all applicants) | 10 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Income-Contingent Repayment Plan | Variable (Dependent on Financial Needs) | 1.057% (Processing Fee for all applicants) | 12 years |
| 5.28% (Graduate/Professional) | |||
| 3.73% (Undergraduate) | |||
| Income-Sensitive Repayment Plan | Variable (Dependent on Financial Needs) | 1.057% (Processing Fee for all applicants) | 15 years |
| 5.28% (Graduate/Professional) |
Direct Consolidation Loans
All the federal loans can be consolidated into one loan at no additional cost where the consolidated loan rate of interest is the average interest of all loans. Through loan consolidation, debt repayment is made easier with a single monthly payment.
If you are not worried about lengthening the repayment period, direct consolidation offers extending the payment to 30 years with the opportunity to switch from variable to fixed interest rate. The only caveat is that applicants can’t take advantage of reduction in interest rates in the future as the terms are fixed for the entire tenure.
For applicants burdened by loans other than the Direct Loans from the William D. Ford Federal Direct Loan Program for their undergraduate degree, the Direct Consolidation is an option to access income-driven repayment plan and Public Service Loan Forgiveness (PSLF).
Related Services
References
2. Student Aid - Repayment Plan
5. Direct Subsidized vs. Unsubsidized Loans