State-Level Student Loan Programs
As the federal government restricts student loan options, state-backed student loans have become a trend. Some two dozen state lenders offer student loan options intended to help students pay for college. Some colleges have offered such options for years as a supplement, but they may become far more common for the right applicants.
But there are important nuances. State programs offer student loan options that are neither federal aid nor 100% commercial credit. While these programs sometimes offer lower interest rates and better contract terms than commercial lenders, they aren’t identical, and you should know the penalties for late payments and loan default the same way you would when buying a car or a house.
Federal Student Loans vs. State Student Loans
Federal loans traditionally offered standardized income-driven repayment plans and loan forgiveness options. But don’t assume state-level programs have the same structure or options.
Financial relief options under state student loan programs may offer modified repayment schedules or interest-only arrangements rather than debt cancellation or earnings-adjusted repayment options. It pays to read the fine print.
>> Find VA-approved schools — try our School Finder tool.
How do states raise the cash to offer such relief? Some entities such as the Massachusetts Educational Financing Authority (MEFA) rely on bonds to fund such programs.
State agencies answer to bondholders who demand returns, and administrators cannot let loan programs operate at a deficit. Some sources note that federal loan programs have struggled to pay for themselves because of income-driven relief structures. That is an issue state-level student loan funding will always face if it stays in business; the elephant in the room is finding a suitable alternative or properly funding income-driven repayment.
Lending Criteria, Credit Checks
The requirement to satisfy bond investors also complicates lending standards. Federal student loans do not use credit scores to evaluate applicants, but state lenders may.
Student loan applicants may face scrutiny over credit scores and debt-to-income ratios. In this context, getting a good education at an affordable rate may depend more on credit history or high-income co-signers than on academic potential.
And what happens to students who can’t pay on time? Student loans that go into default under a state-level program may include heavy-handed collection tactics.
A PBS report notes a critical review by advocacy group Protect Borrowers, authored by legal aid attorney Sophie Laing, warning that state lending often merges the most aggressive collection powers of government lenders with the strict underwriting of private finance.
>> Find VA-approved schools — try our School Finder tool.
Access to State-Level Student Loans
Access to these state-level programs may vary by state. Some restrict state-level student loans to legal residents attending local public or private institutions. Other agencies permit residents to take loans to attend out-of-state colleges, or allow non-residents to borrow if they enroll at an eligible institution within the state’s borders.
Consumer advocates stress caution before signing state-level loan contracts. Students should, according to some sources, exhaust all remaining federal options before turning to state, institutional, or commercial debt. This also applies to private student loans; it pays to try all your federal options first.
>> Find VA-approved schools — try our School Finder tool.
About the author
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.
