Are Student Loans Considered Financial Aid

Last Updated on December 15, 2022

There are a lot of confusion about student loans and financial aid, so it’s important to understand the difference between them. Loans allow you to defer payment until after graduation and can help pay for a variety of expenses ranging from room and board, tuition and supplies. However, they are not considered part of your financial aid package, but rather an added expense.

Student Loans are Not Financial Aid

It should be obvious that student loans are not really financial aid. Yet, colleges and policymakers often refer to student loans as though they are a form of financial aid. Student loans may make it possible for some families to pay the college bills. But, student loans do not cut college costs or make college more affordable.  

Student loans are education financing, not financial aid. Student loans are loans, just like credit cards, auto loans and home mortgages. Each has special features customized to the needs of borrowers, but they are still borrowed money. 

When a college claims that student loans are financial aid, it is like a car dealership claiming that a new car is free because you can finance the purchase with a zero down, zero interest auto loan. This is patently ludicrous, yet colleges persist in promoting the mythology that student loans are financial aid. 

How Does Financial Aid Work?

Student Loans Are Not Charity

Let’s stop the fiction of characterizing student loans as financial aid. Loans are not charity. 

Like all loans, student loans must be repaid, usually with interest. The interest increases the cost of the debt. Most lenders make a profit off of the interest, since the interest paid by borrowers exceeds the lender’s cost of funds.

Just because a student loan is offered by the college, don’t assume that it is a form of charity. Colleges are not tax exempt because of a charitable mission, but because of an education mission. Most 4-year colleges do not have a charitable purpose as part of their official charter or mission statement. A few community colleges identify affordability as a goal, but most do not. 

Use our Loan Calculator to estimate monthly payments on both federal and private student loans.

Student Loans Do Not Make College More Affordable

Some colleges claim that student loans make college more affordable, in that student loans provide cash-flow assistance, allowing the family to pay the college bills. But, this does not reduce the net price, which would make the cost more affordable. Rather, it just spreads the costs out over time. 

Colleges promote student loans because it serves the colleges’ financial interests, not because it is in the students’ best interests. Without student loans, most students would not be able to pay the college bills, just like most families would not be able to buy a home without a mortgage.

Student loans cost a college a lot less than grants. Every dollar of a grant costs the college a dollar, but every dollar of a student loan costs the student about two dollars by the time the debt is repaid, with no cost to the college.

Even if student loan debt were a form of financial aid, colleges have no basis for asserting that student loans make college more affordable, because few, if any, colleges track whether their alumni are graduating with affordable debt.

Student loan debt is excessive if the total student loan debt at graduation exceeds the borrower’s annual income. When total student loan debt exceeds annual income, the borrower will struggle to repay the debt over a 10-year repayment term. 

Student loan debt is good debt, to the extent that it is an investment in the student’s future. But, too much of a good thing can hurt you. 

Some colleges point to a low cohort default rate as evidence that their students are graduating with affordable debt. The cohort default rate, which is prone to manipulation, reports the percentage of borrowers entering repayment who default by the end of the second following federal fiscal year. The cohort default rate does not measure whether borrowers graduate with a reasonable amount of debt that they can afford to repay in a reasonable amount of time. 

Borrowers who are delinquent or in a deferment or forbearance are struggling financially, yet they don’t factor into the cohort default rate. Borrowers who are in graduated repayment, extended repayment or income-driven repayment cannot afford to repay their student loans under a standard 10-year repayment term, yet their financial challenges aren’t measured by the cohort default rate. Defaults on private student loans and parent loans are not factored into the cohort default rate.

Student Loans Are Almost Unavoidable

Among students in Bachelor’s degree programs, more than two-thirds graduate with student loan debt (68.9%), based on data from the 2015-2016 National Postsecondary Student Aid Study (NPSAS:16). 

Of those who filed the Free Application for Federal Student Aid (FAFSA), 84.7% graduated with student loan debt. Student and parent loans represent nearly half (45.4%) of the financial aid packages of these students. 

Many Financial Aid Award Letters Are Misleading

Many financial aid award letters and notifications blur the distinction between grants and loans.

Grants and scholarships are gift aid, which is money to pay for college that does not need to be repaid or earned through work. Student loans are not free money.

Financial aid award letters often list grants and loans together, without distinguishing between them. Loans are listed without markers that identify them as loans, such as the interest rate, monthly loan payment or total payments. 

How is a family to know that a cryptic abbreviation, such as L or LN, signifies a loan? Some loans are identified by a name that doesn’t even include the word “loan” or an acronym. Most students do not have any experience with debt. 

Many colleges see the financial aid award letter as a type of marketing, not counseling. The purpose from their perspective is to explain how the student can pay the college bills even when the college costs are unaffordable, even with financial aid.

Some award letters subtract the loans from the college costs, as though they reduce the college costs. When families look at the bottom-line cost, they do not realize that the financial aid award letter includes debt, often a considerable amount of debt. Families need to know how much they are really going to have to pay for college, not a fictitious net cost.

The net cost subtracts the entire financial aid package, including student loans, from the college’s cost of attendance. It treats student loans as though they reduce college costs. This is in contrast with the net price, which subtracts just the gift aid from the cost of attendance. The net price is the amount of money the student and their family will have to pay from savings, income and loans to cover the college costs. 

Some colleges underestimate some of the allowances in the cost of attendance, such as textbooks and transportation costs. Others list just the direct costs like tuition and fees, which are paid to the college, and exclude indirect costs like textbooks and transportation, which are paid to third parties. Some colleges zero out the room and board costs for students who live at home with their parents, even though the income protection allowance is reduced by several thousand dollars per college student. These practices contribute to hidden costs that increase the amount the family must pay, leading to more debt. 

Is it any wonder that more students are graduating each year with more student loan debt than they can afford to repay? Students who drop out of college are even more likely to struggle to repay their student loans, since they have the debt but not the degree that can help them repay the debt. Total outstanding student loan debt continues to grow every year.

Increasing awareness of student loan debt is the first step in exercising restraint in borrowing. 

Colleges Do Not Really Meet Full Need

Some colleges claim to meet the full demonstrated financial need of their students. 

Almost all colleges that claim to meet full need rely on student loans to cover part of financial need. Even at colleges with “no loans” financial aid policies, most colleges redefine financial need by using their own financial aid formula instead of the federal need analysis methodology. A summer work expectation or minimum student contribution is used to reduce financial need. Their students must still borrow, just not as much as at other colleges. 

Most colleges do not meet full demonstrated financial need, leaving the student with unmet need. This gap between financial need and financial aid contributes to increased borrowing. The average unmet need at 4-year colleges has grown from $7,000 per year in 1999-2000 to almost $15,000 per year in 2015-2016. Even if one counts student loans as meeting financial need, unmet need is still more than $10,000 per year.

False Distinctions between Different Types of Debt

Some colleges distinguish between need-based loans and non-need-based loans, such as subsidized and unsubsidized loans. They count subsidized loans as part of the financial aid package because eligibility is based on financial need. 

Subsidized loans do not cut college costs. The federal government pays the interest on a subsidized loan during the in-school and grace periods. But, a zero interest rate for a short period of time does not transform a loan into a grant. 

Students do not repay subsidized and unsubsidized loans until after graduation, so the difference between the two types of loans only affects the cost of the loans after graduation, not the likelihood that the student will graduate. 

There are cheaper loans and there are more expensive loans, but a loan is a loan is a loan.  You still have to repay the debt. 

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