New federal laws affect interest rates, other loan terms
Student-loan rules change
INDIANAPOLIS — Students and their parents will notice some changes when they take out federal loans for college this year. USA Funds®, the nation’s leading education-loan guarantor, reports that recently enacted federal legislation made some significant changes in the terms and conditions of loans issued under the Federal Family Education Loan Program, the largest federal source of student financial aid for higher education. Many of the changes take effect July 1.
“Fixed interest rates, reduced loan fees and expanded loan eligibility for graduate and professional students are among the key changes,” said Gregory A. Ayers, USA Funds vice president, policy and compliance. “These changes were approved by the U.S. Congress as part of its periodic review of the federal laws that authorize student financial-aid programs.”
The major student-loan changes include the following items:
PLUS loans for graduate and professional students. Previously available only to parents of dependent undergraduate students, PLUS loans now also are available to graduate and professional students to help defray their own costs of attending college. PLUS loans are federally sponsored loans that may permit students to borrow on more favorable terms than private loan programs offer. The chief benefit of a PLUS loan is that the student or parent can borrow up to the student’s total cost of attendance, less any other financial aid.
Lower loan fees. Prior to July 1, federal law permitted upfront fees of up to 4 percent of the loan amount to be assessed to Federal Stafford-loan borrowers. Beginning July 1, the maximum upfront Stafford-loan fee is 3 percent, including a maximum 2-percent origination fee and a 1-percent federal default fee. The origination fee will be reduced in 0.5-percentage-point annual increments until the fee is eliminated beginning July 1, 2010.
Interest rates. Federal Stafford and PLUS loans whose first disbursement is on or after July 1 carry fixed interest rates of 6.8 percent and 8.5 percent, respectively. Previously, interest rates on these federal education loans were variable, with rates adjusted annually on July 1. Loans disbursed prior to July 1 will continue to carry variable interest rates.
Deferment for military personnel. Deferments permit borrowers who meet certain criteria — for example, unemployment, economic hardship or attending school — to temporarily postpone their student-loan payments. Effective July 1, the new law permits borrowers serving in the military on active duty or performing qualifying National Guard duty during a war or other military operation or national emergency to defer payments on loans that were disbursed on or after July 1, 2001.
Consolidation loans. Loan consolidation permits federal student-loan borrowers to bundle multiple student loans into a single loan, and depending on the borrower’s total education debt, extend the period for paying back the loan. The new law eliminated a provision that had permitted students to consolidate their loans while they attended college. Borrowers now have to wait until they are in their post-school grace period or in repayment on their loans to consolidate them. In addition, the law eliminated a provision that had permitted spouses to include their loans in a single, joint consolidation loan. As part of a separate change in the law, borrowers whose loans are owned by a single entity no longer will have to request a consolidation loan from that entity. They can shop for consolidation loans from any eligible lender.
Higher loan limits next year. Beginning July 1, 2007, some students will be able to borrow more each year in Federal Stafford loans. The maximum annual loan limit for first-year undergraduate students will increase to $3,500 from $2,625; the annual loan limit for second-year undergraduates will increase to $4,500 from $3,500. The unsubsidized Stafford-loan limit for graduate and professional students will increase to $12,000 from $10,000.
For additional information students and parents may visit the USA Funds Web site.