Federal changes on student loans creating anxiety
Published: Tuesday, November 1, 2011
Updated: Wednesday, November 2, 2011 12:11
WASHINGTON - Graduate students will pay more for loans taken out next July, and recent graduates will lose rebates for on-time repayment under a law Congress passed this summer to keep the federal deficit in check while protecting Pell Grants for low-income students.
The Congressional Budget Office estimates that the changes will save the government $21.6 billion - meaning students would pay that much more or borrow less - over the next 10 years.
Another change that a key Senate committee voted to include in the 2012 federal budget would "save" an additional $6.1 billion by getting rid of a grace period subsidy for undergraduate loans.
The elimination of repayment rebates and loan subsidies for graduate students was included in the bipartisan deal reached in July known as the Budget Control Act, the law that set 10-year spending caps while raising the federal debt ceiling.
Financial aid departments at colleges and universities are now starting to notify graduate students that Stafford loans they take out next summer will no longer include a subsidy that keeps interest from accruing while they are in school.
"This was one of the few federal subsidies provided to graduate students," said Haley Chitty, communications director for the National Association of Student Financial Aid Administrators. "It is a pretty significant blow."
Under the new law, students seeking advanced degrees will start owing interest immediately on loans issued after July 1, though they will have the option of deferring payments until they finish school.
"They can defer it but it adds to what they owe, and we always encourage students to pay as they go so in the end it's not so expensive," said Ivon Nunez, financial aid director at the New Jersey Institute of Technology in Newark.
Exactly how much the subsidy is worth depends on how much a student borrows and how many years he or she is in school.
Nunez said a student borrowing the federal maximum of $65,000 could end up owing an extra $200 a month over 10 years.
Chitty said an analysis by NASFAA found that a medical or dental student taking out the maximum subsidized loan of $8,500 a year for four years got a $4,624 subsidy while in school.
Even if it's a much smaller amount, however, students are worried about the impact.
"Students can barely make it now," said Jacqueline Velastegui of Kearny, who's seeking an advanced degree in industrial engineering at NJIT. "We don't live. We survive."
Evan Toth is working full time as a teacher at the Community School in Teaneck while pursuing his master's degree in English at Rutgers University in Newark. He said he's borrowed nearly all of the roughly $20,000 in tuition and fees, and "it was really helpful" not to have to pay interest while studying.
"I looked at that as being a great benefit," Toth said. "An extra $1,500, or whatever it would end up being, would be a great financial burden."
He expects to finish his coursework next semester, so the change in the law won't hit him. But he said that in the future, it will hurt "the self-driven student who lacks independent wealth."
"This is exactly the kind of student that our country must encourage to stay in the classroom," Toth said.
Congress also voted to end subsidies, starting with loans issued next July, that reward graduates who pay back their loans on time.
Under the program that is ending, borrowers who signed up for automatic debit repayment got a bonus equal to half the loan origination fee they paid, said Vincent Tunstall, financial aid director at Fairleigh Dickinson University. Borrowers could keep the rebate if they made their first 12 payments on time.
From the $21.6 billion the two changes to loans are expected to save, Congress applied $4.6 billion to deficit relief and $17 billion to the Pell Grant program, which benefits lower-income students.
A spending bill for 2012 approved last month by the Senate Appropriations Committee would end another interest subsidy, this time for undergraduates. Right now, there's a six-month grace period after graduation during which students who have taken subsidized Stafford loans do not have to make loan repayments.
Under the current system, the government pays the interest during those six months, but that would end under the proposal that the Senate committee said in a report it adopted "reluctantly."
If the proposal becomes law, there will still be a six-month grace period on loans issued after July 2012, but interest will accrue during those six months.
Over the next 10 years, the change is expected to save the government $6.1 billion, according to the office of Sen. Tom Harkin, D-Iowa, who is chairman of the appropriations subcommittee that controls education funding.