Student Loan Agreement

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Student Loan Agreement

A Brief Introduction About the Student Loan Agreement

The Federal Government provides financial assistance to the student in the form of a student loan to cover the costs of textbooks and allied expenses. There are certain expenses that the student loan does not cover, such as rent, electricity, airfare, insurance, or fines.

There are times when the student is unable to repay the student loan according to the repayment schedule. It is in such situations, where the student is granted forbearance or the option to delay the monthly payments. Such a loan is known as forbearance agreement student loan where the interest is added to the principal of the loan, and the monthly repayment amounts are higher.

When a student receives a federal loan that exceeds the borrowing limit, then they cannot apply for an additional loan unless that loan is repaid. Repaying this loan is known as a reaffirmation agreement student loan. In order to qualify for the loan, there are certain eligibility criteria that the student must fulfill, and there is usually an upper limit when it comes to the final loan sanctioned.

The agreement will contain the complete repayment schedule, including the time period for approval of the loan. The penalties for repayment are also stated in the agreement.

Who Takes the Student Loan Agreement? – People Involved

Students pursuing a course at the post-secondary or undergraduate level require financial assistance for doing the course. The federal government provides financial assistance to the students in terms of student loans at subsidized interest rates. The parties to the agreement are the student and the federal government.

Purpose of the Student Loan Agreement – Why Do You Need It?

The costs of post-secondary courses are extremely high and would normally be out of reach for most students. They would require loans that have flexible repayment periods and are provided at low-interest rates compared to other loans.

The federal government provides loans to students at low-interest rates with longer repayment tenures compared to other loans. The students have the option of repaying the loans once they start earning. The student agreement enables them to apply for these loans, and after checking their eligibility, the federal government grants them the loan.

Contents of the Student Loan Agreement – Inclusions

The student loan agreement includes all the relevant terms and conditions regarding the loan. This information contained in a standard agreement is:

  • The effective date of the agreement
  • The details of the borrower (the student) and the lender (the federal government)
  • The amount of loan that has been sanctioned
  • The eligibility criteria of the student
  • The financial details of the applicant
  • Loan repayment details including penalties if any
  • The laws of the state governing the agreement
  • The details of the expenditure that will be covered under the agreement
  • Declaration by the student promising to pay back the loan

How to Draft the Student Loan Agreement?

Points to Consider While Preparing the Agreement

You can refer to a student loan agreement template online when preparing this agreement. The points to be considered are:

  • Competence to contract: The student who is entering the contract must be over the age of 18, of sound mind and not be coerced into this agreement
  • The loan amount as well as the tenure of the loan and the interest rates being charged
  • The terms of the contract must reflect that it was done in good faith and no fraud was involved
  • Penalties for non-payment of the loan installments on time
  • The laws governing the contract
  • The events leading to the termination of the agreement
  • The contract must be signed by both parties to the agreement to ensure its validity
  • The course being pursued by the student and the duration of the same
  • Provisions for extension of the repayment period if any

Negotiation Strategy

In the case of a student loan agreement, the amount of financial aid, and the terms of repayment, including the interest rate, depending on the financial background of the student. The student can negotiate a longer repayment tenure and a lower interest rate depending on his or her financial background.

Benefits & Drawbacks of the Student Loan Agreement

The benefits of a student loan agreement are as follows:

  • Facilitates higher education of the student: The student is able to pursue a course in the post-secondary level with the financial assistance available through these loans which have a flexible repayment schedule
  • The student can pay the loan once they get employed
  • The terms and conditions of the loan depend on the financial background of the student, so a student with a poor financial background will be entitled to more flexibility

The drawbacks of a student loan agreement are as follows:

  • Without access to a student loan, it will be difficult for a majority of the students to pursue higher education
  • The students will seek other loan options with higher interest rates

What Happens in Case of Violation?

In case of violation of the student loan agreement, the following consequences will be faced by the student:

  • The principal and interest become immediately due to non-payment of the loan
  • The student will not be eligible for deferment or forbearance
  • Additional financial aid won’t be available
  • Legal action will be taken against the student
  • Your credit score(1) will drop as this matter will be reported to the credit bureaus
  • You would face wage garnishment or withholding of your wages
  • There would also be a withholding of your social security and federal payments

Before entering into a student loan agreement, it is important for the lender to assess the financial background of the student. The student should also assess his or her capacity to repay the loan. The terms and conditions of the agreement should be carefully read by both parties.