Discover Student Loan Repayment Options
Discover Student Loans Review
What options are available to students who have received student loan from Discover? Like many other lenders, Discover offers a chance to choose the option that suits your situation for repayment. You can learn more about this topic by reading the article “Discover Student Loans Repayment Options” compiled from the institution’s own website, below.
— Student Eligibility Criteria Are Generally Not Risk-Based
The borrower eligibility criteria for federal student loans are fairly minimal, and generally not risk-based. A student must be enrolled in a program at an accredited higher educational institution “leading to a recognized educational credential” such as a degree or certificate, must maintain “academic standing consistent with the requirements of graduation” unless there are “special circumstances,” must not currently be in default on a federal student loan, must be a U.S. citizen or on the path toward citizenship, and if previously convicted of defrauding the federal student loan program, must have made restitution.
Eligibility can be suspended or terminated for drug offenses. The use of more restrictive eligibility criteria than those provided for by statute is generally prohibited.
— Only Exceptionally Poorly Performing Institutions Are Excluded
Similarly, the eligibility criteria for educational institutions are fairly minimal, with the Department of Education relying heavily on state accreditation agencies. Two sets of regulations have been established over the past two and a half decades to cull some of the worst-performing institutions from student loan eligibility, but regulations do not seek to make fine performance-based distinctions among eligible institutions.
First, in response to high student loan default rates at some “proprietary” or “for-profit” educational institutions in the 1980s, Congress passed the Student Loan Default Prevention Initiative Act of 1990 (SLDPA).
Under the SLDPA, institutions lost their eligibility for student loans if their cohort default rate (CDR) exceeded twenty-five percent for three years in a row.
The CDR measure helped eliminate some small and poorly performing institutions, but sophisticated educational institutions increasingly manipulated the CDR statistic by moving recent students into deferment or forbearance so that they would not count as defaulters. CDR had a positive but limited effect.
Recently, largely in response to another wave of high defaults at some proprietary educational institutions, the Department of Education established a Gainful Employment Rule (GER) that again attempts to cull the worst-performing institutions. GER may be more difficult to manipulate than the older CDR measure because GER measures performance based on repayment rates rather than default rates.
GER uses two tests—one that looks at whether former students are in fact repaying their loans and another that looks at debt-service-to-income ratios to determine whether graduates have sufficient income to enable them to have a reasonable chance of repaying their loans. An educational institution may remain eligible for student loans if it passes either test in at least two out of four consecutive years.
— Borrowing Limits Depend on Grade Level and Dependent Status
Federal student loan borrowing limits are set by statute. The loan limits are determined by the students’ grade level and, for undergraduates, students’ status as dependents. Annual Stafford Loan limits increase as undergraduates progress from year one to year three, and are higher for students who are “independent.” Stafford and Perkins Loan limits are higher for graduate students than for undergraduates.
The federal loan limits are less than the total cost of attendance at most private colleges and many flagship public colleges, and students with financial need may, therefore, turn to private loans to help make up the difference. Graduate students and the parents of dependent undergraduate students with good credit histories also have access to PLUS Loans, under which borrowing is limited by the students’ financial need rather than a fixed dollar amount.
The federal student loan limits could at best be described as crudely risk-based: as students exceed loan limits for less expensive lending programs, such as subsidized Stafford Loans and Perkins Loans, they will move on to more expensive programs such as PLUS Loans and their borrowing costs will increase. Students may also turn to higher-cost private student loans or credit card debt when federal student loans are inadequate to finance their education.
A fully risk-based approach to loan limits would focus on expected debt-service-payment-to-income ratios. The relevant question is not simply how much students borrow each year. Instead, the relevant question is whether students’ incomes at graduation and beyond will be sufficient to repay their debts over the next ten to thirty years.
— Federal Student Loan Pricing is Statutory, Not Risk-Based
In theory, rather than cut off access to credit entirely to poor performing institutions and ignore risk differences above a minimal threshold, the Department of Education could embrace a more nuanced approach by incorporating risk levels into loan pricing. However, in practice, federal student loan pricing is largely uniform and not risk-based.
Interest rates on government loans are set by statute at the same level for all eligible borrowers under a particular loan program. Federal student loan rates are currently set at a fixed rate between 3.4% and 7.9%, with lower rates available to undergraduates than to graduate students. The rates have changed over time, but have historically been either a fixed interest rate or a capped variable rate determined by adding a spread to a variable Treasury bill rate.
The interest rates are not risk-based. A successful medical student with virtually no risk of becoming unemployed or defaulting on her debts would pay the graduate student rate— between 6.8% and 7.9%—while a struggling art history major with rather less secure employment prospects would pay the undergraduate rate of 3.4%.
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