The role of bank loans and student loans in different world nations
A highlight of the federal student loans in the USA
Thesis statement – Student loans are widely preferred by students, therefore are better than bank loans, mainly because of their easy accessibility and convenience.
- Main Body
Role of government in higher education – the government continues to play the most important role in education, as compared to banks, since most college students have benefited from the government student loans more than bank loans.
Comparison of conditions and requirements for qualification of federal student loans and bank loans – Federal loans are easily accessible than bank loans.
Flexibility of bank loans and federal loans – Federal loans are more flexible, starting from application to repayment process.
Elements of loan forgiveness and guarantee in both loans – Federal loans are entitled to loan forgiveness and are guaranteed in case of death or disability. Bank loans are not.
Interest rates – Federal loans have lower and fixed interest rates, while bank loans have higher and unstable interest rates.
Counter-argument based on efficiency and student satisfaction – bank loans cater for all student needs as the loan amount is not fixed. The application procedure of bank loan is not cumbersome.
Importance of both the federal student loans and bank loans in higher education
Future of the education aid in United States, in form of bank loans and federal student loans
Student Loan Vs. Bank loans
In most developed and developing countries of the world, students are considered for loans to facilitate their higher education. These are in the form of government student loans or the private loans, including bank loans. This is one of the ways in educational policies to ensure higher education for all in a country. In the United States, student loans are provided under the federal student loans. However, these loan types have different conditions for their accessibility by students, which makes one form to be more preferred than the other. Nonetheless, different researches point to the fact that student loans, apart from being easy to qualify, have many more other advantages, which makes them to be more preferred and more convenient than bank loans.
Forest observes that the state government plays the greatest role in financial aid for education of students in higher institutions of learning (259). However, he does not ignore the contribution of the private sector, especially banks, in offering students loans for their higher education. Nevertheless, Forest insists that the US federal government plays the most important role in financing students’ higher education as compared to the private sector, including banks. For instance, between 1998 and 1999, the federal government was responsible for 70 percent of financial aid to college and university students in the form of student loans. This was a total of $46 billion, inclusive of student loans and grants (Forest 260). This therefore points to the great influence of federal student loans in higher education, with bank loans having a lesser influence.
According to Forest, what makes federal student loans to be more preferable is their limited requirements and conditions for one to qualify for. In the US, the federal student loans are easy to qualify for, and have fewer restrictions. On the other hand, bank loans are hard to qualify for and highly restrictive. For one to qualify for a bank account, they have to show a reliable credit history, and possess sufficient income as shown by one’s bank account balance. However, most students in the world are still young, with no reliable income or bank account balances, which can serve as collateral for the bank loans. This therefore makes student loans a good option for students, as they do not require any collateral as a qualification condition (Forest 263).
“Kiplinger’s Personal Finance” records that the flexibility of federal student loans applies even during the loan repayment period, and this boosts their likeability by students. After studies, and upon getting employment, a student may choose the most convenient way for them to repay the loan (71). In the US, repayment of the Federal student loans depends on the approach one chooses to follow. First, one may opt for the extended payment. Here, the interest rates will be slightly high, but the repayment period is greatly prolonged, and includes lower monthly payments. Additionally, the monthly payments will change according to the changes in salary amount. Federal loans also allow one to pause loan repayment. This could be due to personal reasons of unemployment, among others. Unlike the federal loans, bank loans are generally less accommodating for students as their flexibility is limited. Different bodies offer bank loans, and therefore there is lack of uniformity in their lending process. Students interested in bank loans have to go an extra mile of researching on the different banks and coming up with the most preferred one after weighing different conditions, they present. On the other hand, government student loans application procedure and terms of repayment are clearly stated in different documentations available in multiple sources (“Kiplinger’s Personal Finance” 72). This makes student loans to be more convenient than bank loans.
According to Woodhall, the state government guarantees student loans in the US and other countries. This means that in case of failure for the student to repay their loan due to various reasons, the taxpayer will foot in the deficit created (42-43). On the other hand, most banks require a guarantor before loaning out their money, due to their lack of guarantee on their money. The guarantor is responsible for loan repayment in case the loanee fails to repay. According to “Kiplinger’s Personal Finance” magazine, the federal student loans in the US also offer loan forgiveness. When this is granted, it means the loan debt is cancelled and therefore not repayable. This may be possible if the student dies or is becomes disabled. However, this is hard to achieve, and does not apply to banks (71-72). Additionally, most bank loans require students to start their repayment plan while still in college. Like any other bank loans, students need to start repayment immediately after the grace period. This is unlike the federal student loans that require repayment six months after college graduation. This way, a student will have gotten employment, therefore well placed to repay their loan (“Kiplinger’s Personal Finance” 75). Thus, this emphasizes the convenience of student loans.
Woodhall (47) and “Kiplinger’s Personal Finance” magazine (79) share the view that bank loans come with high interest rates as compared to the federal student loans. The federal student loans come with fixed interest rates, and therefore these cannot change in case of economic instability. Bank loans on the other hand, have interest rates that are subject to change depending on the economic climate. Therefore, a borrower is not in a position to pre-plan for the loan repayment. Additionally, interest on student loans is kept low with government subsidies (“Kiplinger’s Personal Finance”82). Similarly, Forest (263) notes that federal student loans, unlike bank loans, come with additional packages such as educational grants for needy students, and these are not repayable. This puts the federal student loans in a higher position.
On the contrast, Hussain argues that bank loans too are as advantageous as student loans, but in their own different ways. First, he states that the overdraft form of a bank loan is simplistic. In this case, the person borrowing the loan does not have to open another account, after the confirmation of their current account (54). Thus, students do not have to undergo tiresome procedures in their application of a bank loan. There is also an argument that, bank loans have grown more popular among students today, meaning they are the most preferred than federal student loans (“Money-Zine” WEB). The author argues that the federal loans have not lived up to the expectations of the increasing tuition, and room and board costs. Therefore, more students seek bank loans, which meet their needs. To back this up, several researches has shown that most students, who go for private loans such as bank loans, are not left with any unmet need, compared to those who solely relied on federal loans (“Money-Zine” WEB). Thus, bank loans are hailed for satisfying student needs as students can apply for the amount that their needs cost. This is unlike the federal student loans, where the amount is fixed. Nonetheless, this does not lower the position the federal student loans hold in the financing of higher education.
Conclusively, both the bank loans and student loans play important role in furthering higher education in countries. However, as seen in the case of USA, federal student loans are more convenient as compared to bank loans. This ranges from the element of accessibility of the loans, to repayment procedures involved. Despite the various arguments by different researches and authors against the federal student loans, they remain the most preferred by students, considering they have lasted for years, in addition to their vast benefits. The importance of banks cannot be disregarded either. Although the federal student loans are subject to politics and national economy, opinion polls in the US have shown that Americans highly value education; given this is the age of information economy. Therefore, this makes the future of financial aid programs, including bank loans and federal student loans, to generally be considered promising.
“Kiplinger’s Personal Finance” Vol. 62, No. 6. Jun 2008. WEB.
“Money-Zine” Web, Retrieved 5 December 2012, <http://www.money-zine.com/Financial-
Forest, James. “Higher Education in the United States: An Encyclopedia.” New York: ABC-
Hussain, Ashiq. “A Textbook of Business Finance.” London: East African Publishers, 1989.
Woodhall, Maureen. “Student Loans: Potentials, Problems, and Lessons from Interpretational
Experience.” Boston College & Council for the Development of Social Science Research
in Africa, 2004. Pdf.
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