Good news on student lending

A new law is the biggest overhaul of student
lending in decades.

DALLAS MORNING NEWS

DALLAS — A new federal law revamping education financing provides good news for students eligible for financial aid: Interest rates on subsidized student loans will be cut in half over the next four years.

“The financial aid package gets better for those who are eligible for need-based financial aid, since interest rates are dropping,” said Joseph Hurley, chief executive of Savingforcollege.com, a Web site on college financing.

The College Cost Reduction and Access Act, which President Bush recently signed into law, has been called the largest overhaul of aid to college students since soldiers returned from World War II battlefields and headed into the classroom.

Though it doesn’t change the strategy and approach that families should take when shopping for college financing, it will give them more benefits to go with the financial aid options that are available.

Major provisions of the new law include:

UPell Grant increase. Recipients of the popular federal Pell Grant will see a gradual increase in the annual limit over the next five years. This is big news for students.

“Lower-income students increasingly have had to rely on loans because need-based grant aid has not kept pace with college costs,” said the Project on Student Debt, a nonprofit organization working to make higher education more available and affordable for people of all backgrounds.

Under the new law, the annual limit on federal Pell grants will rise from the current level of $4,310 to $5,400 in 2012.

Tuition and fees at four-year public colleges averaged $5,836 in 2006-2007, up 6.3 percent from the previous year, according to the College Board.

The new law also expands eligibility for the Pell Grant.

UInterest rate cut. The law phases in a reduced interest rate on new subsidized federal Stafford loans to undergraduate students. The rate will be reduced from the current 6.8 percent to 6.0 percent starting in July, 5.6 percent in July 2009, 4.5 percent in July 2010 and 3.4 percent starting July 2011. In July 2012, it will revert to 6.8 percent unless Congress acts.

A subsidized loan is one on which the federal government pays — or subsidizes — the accruing interest during in-school, grace and deferment periods.

“This means that each year, your new loans are going to get a different rate,” said Mark Kantrowitz, publisher of FinAid.org, a college-savings Web site. “This doesn’t alter the basic advice for subsidized Stafford loans, which are excellent loans. You should accept them if you get them.”

UIncome-based repayment. The program assures past, present and future students with federal loans that their payments will be “fair and manageable and will not extend indefinitely.”

The program, which becomes available in July 2009, is open to anyone with federal student loans, whether they borrowed in the past or are current or future students.

The program caps student loan payments at a reasonable percentage of income. It’s a sliding scale, so the lower the borrower’s income, the lower the percentage cap.

The aim is to ensure that students who invest in a college education don’t later find themselves unable to pursue public sector careers, raise a family, save for retirement, or contribute to their own children’s college goals because of high loan repayments.

The program also limits buildup of interest.

When capped payments aren’t enough to cover interest charges, the program covers the interest on subsidized loans for up to three years, and any further interest doesn’t compound.

The program cancels most remaining balances after 25 years. For those in public service careers, remaining debts can be forgiven after 10 years.

UHigher income protection allowance. The law raises the amount of money students can earn before it affects their eligibility for financial aid.