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The Federal Student Aid System is Changing. How Will You Be Impacted?


FP_student_loanBy Emily Driscoll

Feel like you're fighting an uphill financial battle to reach the golden gates, better known as a college diploma? Burdened with rising tuition costs and heavy student loan debt?

You are not alone.

The amount of outstanding student loan debt in the U.S. surpassed a previously estimated $1 trillion this year. Add in a weak job market and graduates are struggling to stay on top of payments while current students are trying to keep debt to a minimum.

Low rates extended–for a year. Undergrads across the country breathed a sigh of relief last month when Congress figured out how to extend lowered interest rates on subsidized student loans for another year.

Before the proposed solution was signed into law, 23% of 500 students polled by CengageBrain said they would consider dropping out of school if rates doubled and 66% of students planning on getting an advance degree said they would be less able to pursue graduate school. 

All the news isn't good. The subsidized loan rate got the most news coverage, but other important changes were made in federal aid programs.

Here's a breakdown showing why rates could go back up, how you could be affected by recent changes and how to plan for repayment if you have a loan.

Why rates could go up again

Interest rates on subsidized loans were originally set at 6.8%, but the College Cost Reduction and Access Act of 2007 gradually phased in lowered interest rates over the years to get to the current low of 3.4% for the past school year. 

With the provision set to expire, lawmakers had until July 1, 2012 to come up with a plan to pay an estimated $6 billion for another year of lowered interest rates.

After an 11th hour decision by Congress, the interest rate on subsidized Stafford loans for undergrads was left at 3.4%...until 2013.

If Congress can't come up with the necessary budget by July 1, 2013, interest rates will climb back to 6.8%.

How will students be affected?

If interest rates on these loans double next year, you will pay an additional $800 to $1000 over a 10 year loan period.

While $1000 may not seem like a ton of money spread over ten years, it's still a significant amount to tack onto a hefty bill, if you're cash-strapped.

Other changes by Congress: To pay for another year of lowered interest rates, Congress has made changes in other areas:

  • "Interest-free" grace period eliminated: If you have a subsidized Stafford loan, you will no longer have an interest-free grace period six months after graduation under a temporary provision lasting until July 1, 2014.

For the next two years, you'll still have six months after graduation before beginning to repay your loan, but you're now responsible for the interest accrued during that time.

  • Loss for graduate students: Thinking about going to grad school? You're no longer eligible for subsidized Stafford loans, but can continue to take our unsubsidized Stafford loans, accruing interest at 6.8% during school.
  • Restrictions on Pell Grants: The Pell Grant Program will--at least for now--still allow lower-income students to receive a maximum of $5,550, but they will only be able to use Pell Grants for 12 semesters instead of 18.

But temporary funding for the Pell Grant program will run out next year and the highest grant amount is scheduled to drop by half in 2014. It will cost another $6 billion to stop that from happening, as no new funding was allocated for the program.  

What next for you?

You'll have to wait to find out if the lowered rates will be extended another year provided Congress comes up with the money.

Help if you're concerned about making your payments: If you're worries you can't keep up with monthly payments, the Obama Administration has outlined a plan to make it easier for qualified borrowers to apply to the Income Based Repayment program. 

The program is available now for students experiencing a partial financial hardship, but a change to the 2009 law will lower the capped monthly loan payments from 15% of disposable income down to 10% beginning in 2014.

Potential interest savings for grads:If you're able to handle higher monthly payments, the standard repayment plan lets you repay loans more quicly and with the least interest by paying a fixed amount each month, which will be at least $50.

If you're still repaying loans under the standard plan after 25 years, all remaining debt is automatically forgiven.

Loan forgiveness for public servants: If you get a position working full-time at a non-profit or public service job, remaining debt is forgiven after 10 years of service.

Not sure which route to take? Reach out to your financial aid office to find the best option for repayment on government loans.

Incoming freshman? Figure out how much you can afford to borrow before signing on the dotted line–use a debt repayment calculator to make sure you don't get in over your head.

Remember that you do have a voice in this process and it's important to stay on top of issues that can affect you and your future. We'll do our best to keep you updated.

Helpful links:

Stafford Loans

CengageBrain Study

College Cost Reduction and Access Act of 2007

Pell Grant Program

Pell Grant Limitations

Repayment Plans

Income Based Repayment

Student Debt Calculator

US House of Representatives