When taking out student loans, most borrowers are aware of two options: federal student loans and private loans. But amid new limits on federal loans for graduate students in particular, the availability of a third option — state-backed student loans — is becoming increasingly widespread.
While technically “states have had their own student loan offerings for decades,” a number of them have “recently moved to expand their loan offerings in anticipation of the added restrictions on federal borrowing,” said CNBC. These loans do not necessarily offer the same protections as federal loans. Still, they may be an alternative to private loans worth considering.
What are state student loan programs?
State student loan programs are offered by select states as opposed to the federal government or a private lender, and they are often overseen by a state’s department of postsecondary education. As of July, “at least 16 states offer state-run loan programs for students pursuing a postsecondary degree or credential,” said the National Conference of State Legislatures, a bipartisan organization that serves the legislators and staff of all 50 states.
In general, state-backed loan programs “have similar requirements and benefits to federal loans: low, fixed interest rates and flexible repayment plans,” said SoFi. Specifics, however, vary by state, among other factors. For instance, “interest rates on state education loans vary by state, and can also depend on the degree program and borrower qualifications, such as income and credit score,” said CNBC. Eligibility requirements and borrowing limits can also vary.
How do state student loans compare to federal loans?
It’s “important that borrowers understand state student loan programs are excluded from federal relief options and protections,” Tiara Moultrie, a fellow at The Century Foundation, a left-leaning think tank, said to CNBC. This includes federal repayment plan options like income-driven repayment and Public Service Loan Forgiveness (PSLF), though some states do offer their own alternatives.
Further, while interest rates can be comparable to federal loans, they can also be a good bit higher. Interest rates on “some state student loans can exceed 10%,” according to a July analysis by The Century Foundation, whereas the “U.S. Department of Education’s Direct Unsubsidized Loans for graduate and professional students currently come with a flat interest rate of 8.07%,” said CNBC. But the opposite can also be true: “The interest rate for a borrower with a co-signer and a 10-year repayment term, for instance, is 6%” in Minnesota’s SELF Grad Loan program, said The New York Times.
Another major difference is in the qualification process. Federal direct subsidized loans do not have credit score requirements, but state loans may. Debt-to-income ratio and financial history could also be taken into consideration.
Who can use state loan programs?
State residency may or may not be a factor in eligibility, depending on the specific program. For example, “Minnesota’s program is open to students who are either residents of the state or out-of-state students attending a participating in-state college or university,” while “Connecticut’s program is available to Connecticut residents, or residents of seven other states (Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont) who are attending an eligible Connecticut institution,” said the Times. Additionally, approval usually takes into consideration factors like “credit score, annual income, credit history, debt-to-income ratio and whether a borrower is attending a qualifying institution,” said The Century Foundation.