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A Cause for Celebration

To celebrate Independence Day, Higher Ed Watch will be going on hiatus next week. But before we go dark, we thought we'd remind you of some important changes coming to federal student aid that will save students money and hopefully eliminate some of the worst abuses that have occurred in the Federal Family Education Loan (FFEL) program in recent years.

Most of these changes are the result of two pieces of legislation enacted in the past year: the College Cost Reduction and Access Act (CCRA) and the Ensuring Continued Access to Student Loans Act of 2008 (which we will refer to as the "bailout bill"). Both contain provisions that go into effect on July 1.

The most substantial changes are to the federal student loan programs and the interest rates charged on these loans.

Under CCRA, the interest rate on subsidized Stafford Loans -- which generally go to students from families making less than $80,000 and accrue no interest for the borrower while in school -- will halve over the next four academic years. As a result, borrowers taking out a subsidized Stafford Loan after July 1 will have a fixed interest rate of 6.0 percent, 0.8 percentage points lower than available today. [Borrowers with unsubsidized federal loans will continue to pay a 6.8 percent fixed rate] In subsequent years, interest rates will drop to 5.6 percent, 4.5 percent, and then 3.4 percent by the 2011-2012 academic year. After that, absent any further Congressional action, rates will return to the previous level of 6.8 percent.

As we've written before, the actual amount borrowers will save from these cuts varies. An incoming freshman this fall will receive up to $3,900 in total savings over the lifetime of their loans -- roughly $22 a month. Member of the class of 2009, however, will see only about $424 in total savings, or $2 a month. (Click here for an excel spreadsheet showing the maximum benefits of the rate cut for students graduating in the years 2009-2016. U.S. PIRG also released a study showing average expected borrower savings by state).

While only some borrowers will benefit from the interest rate cuts, a provision enacted in the bailout bill will allow all borrowers to take out an additional $2,000 in unsubsidized Stafford loans. This increase in loan limits means dependent freshmen will now be able to take up to $5,500 in Stafford loans, sophomores $6,500, and upperclassmen $7,500. This additional $8,000 in borrowing over the course of a student's enrollment should help lessen the need to take out high-cost private student loans.

The bailout bill also included changes to the repayment terms of federal PLUS loans for parents. Borrowers now have the option to begin repaying PLUS loans six months after their child graduates, rather than having to do so 60 days after disbursement, as is currently the case. The change is meant to allay parents' concerns about having to immediately repay the loan in a time of economic uncertainty and thus encourage them to take out PLUS loans rather than encouraging their children to take out more expensive private loan debt.

Borrowers in repayment will also have some new opportunities. As we wrote two weeks ago, members of the class of 2008 will be able to consolidate their variable rate federal loans into a 3.61 percent fixed-rate loan. This could allow borrowers to save as much as $2,542 over the course of repayment. Those who have already refinanced their federal loans, meanwhile, will have the option to consolidate their debt into the Direct Loan program, making them eligible for Public Service Loan Forgiveness -- a program that forgives borrower's debt if they make 120 payments on their loans while holding a full-time public service-oriented job.

Student loan borrowers are not the only ones who will see changes on July 1. Grant recipients will also see increases in their benefits. First, the maximum Pell Grant award is set to rise to $4,731, a $421 increase over the current level. This increase is primarily financed using mandatory money provided by the CCRA. Second, students will now be eligible for additional aid known as TEACH grants. This program provides students $4,000 a year in grant aid if they promise to go into teaching in a high-need area for four years. As both Higher Ed Watch and others have noted, however, there are some concerns about these grants. Most troublesome is that they convert to unsubsidized loans if students don't fulfill their four year commitment or their school is no longer deemed high need. That is worrisome, but it would still be preferable to see a student take on an additional $16,000 in federal loans rather than having to rely on private loans.

Finally, July 1 also marks the day that Department of Education regulations on inducements and preferred lender lists officially go into effect. (Secretary of Education Margaret Spellings asked colleges to adopt these regulations last August, but doing so was voluntary.) The changes include prohibiting lenders from offering financial aid officers any gifts worth more than a nominal value, performing student-aid functions at colleges, and offering payments to get on a preferred lender list. College aid officials, meanwhile, are subject to similar requirements, but also must include multiple loan companies on any preferred lender list (originally three, but temporarily loosened due to the credit crunch). They also must disclose the criteria they used to select the lenders they recommend.

So sit back, enjoy the fireworks and the day off and know that increased student benefits are on their way. We'll see you in a week.

UPDATE: The Institute for College Access and Success has a guide for borrowers detailing all the July 1 changes. It can be found here.

Student Savings from HR 2669 Rate Cuts.xls29 KB


Cause for celebration? You gotta be kidding me.

Lets face it. Even with the new changes to the higher education laws, the government has still failed to address one critical issue and that is its neglegence over the last 30 years, when it comes to the Higher Education Assistance laws.

It cannot be argued, that congress did not know about the predatory lending and predatory schools out there that were leaving students with useless educations, and nothing to show for it but a debt that they could not pay. No one can argue that the congress did not know about it, when the Senate's own records not only shows that it knew about it in 1991, but knew about it in 1975, and they still know about it.

The "income based repayment" option is not an option at all; its just more of the same ole crap, served a different way. And that way is the government being an accessory to the criminal practices of the predatory schools and loan industries that existed during the 70's 80's and into the 90's before the congress finally started doing its duty to regulate those industries.

But still consumer protections that were taken away from students, have yet to be restored, thus we have a huge number of people that are in effect, in debtors prison, although that prison has no walls.

Sorry. But as far as I am concerned, there is no cause for celebration. Not yet.

One man's trash...

is another's treasure.

If the rates for Stafford Loans had simply remained variable, students would be saving much more than they will with all the bells and whistles of the new legislation.

Instead, the majority of borrowers are paying double the actual rate.

Of course, that does not seem to be the real issue for certain parties.

Thomas Heneghan

Still no market forces involved . . .

This is more evidence that interest rates should not be established through a political process. During the late 1980s, stafford and consolidation interest rates were fixed, at a relatively-high level, so borrowers could not enjoy "the ride down." During the early 1990s, stafford interest rates were changed to variable-rate, so lenders could enjoy "the ride up." Consolidation interest rates were changed to variable as well, but were changed back to fixed-rate during the late 1990s so that borrowers would lock-in at a relatively high level and could not enjoy "the ride down." When market interest rates plummeted during the early 2000s, there was intense advocacy, apparently by loan holders, to switch consolidation back to variable-rate so that borrowers would stop locking in at low rates. The end result was the same, as NAF has noted. Instead of "lining up" variable-rate staffords with variable-rate consolidations, Washington switched staffords to fixed-rate, lining them up with the fixed-rate consolidation and thus reducing the "churning" effect which was so disruptive to loan holders' portfolios.

Instead of marching into Washington to change the interest rate formulae every time the market changes, it would make a lot more sense to move to a market-based loan program. All borrowers would pay the same rate -- in the spirit of a social welfare program which federal student lending is -- but that rate would be determined by some type of bidding process. Alternatively, the rate that lenders are paid could be market based, rather than determined politically as it is now.