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Where Does the Money for Student Loans Come From?

Updated: Jul 28

Student loans are a common way to finance higher education in the United States. However, many people are not aware of where the money for student loans comes from. In this blog post, we will discuss the sources of student loan funding and how they have changed over time.

Federal Student Loans

The federal government is the largest provider of student loans in the United States. Federal student loans are funded by the U.S. Department of Education. These loans are available to both undergraduate and graduate students who meet certain eligibility criteria.

The government provides two types of federal student loans: Direct Subsidized Loans and Direct Unsubsidized Loans. Direct Subsidized Loans are based on financial need, and the government pays the interest on these loans while the borrower is in school. Direct Unsubsidized Loans are not based on financial need, and the borrower is responsible for paying all interest on these loans.

In the fiscal year 2020, the federal government issued $93.9 billion in Direct Loans to students, and the total amount of outstanding Direct Loan debt was $1.4 trillion.

Private Student Loans

Private student loans are offered by banks, credit unions, and other financial institutions. These loans are not guaranteed by the federal government and may have higher interest rates and stricter repayment terms than federal loans. Private student loans are often used to fill the gap between the cost of attendance and the amount of federal aid a student receives.

According to data from MeasureOne, a student loan data company, in the academic year 2020-2021, private lenders issued $12.6 billion in student loans to undergraduate students and $17.6 billion in student loans to graduate students.

State-Sponsored Student Loans

Some states have their own student loan programs to help residents pay for college. These loans may have lower interest rates or more favorable repayment terms than private loans. State-sponsored student loans are typically offered to students who attend college in-state.

According to data from the National Council of State Higher Education Loan Programs, state loan agencies held $30.4 billion in outstanding loans in the fiscal year 2020.

Student loans are a significant source of funding for higher education in the United States. The federal government is the largest provider of student loans, followed by private lenders and state-sponsored programs. Understanding where the money for student loans comes from is an important part of managing the cost of higher education.

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