New Laws Impact Federally Guaranteed Student Loans

The economic situation has had an impact on those students seeking a college education. As the cost of college education continues to rise, fewer jobs are available to pay for college expenses and parents have less income and savings for college.  I don’t promote going into debt, but if you don’t have the money for college and are considering student loans you should be aware of a new law.

On July 1, 2010 The Health Care and Education Reconciliation Act of 2010 went into effect. The education portion of this act impacted the federal student loan program, which basically ended banks being the middle man for federal student loans and provides more options for paying them back.  All federal student loans will be processed through the Direct Lending Program instead of through private lenders.

This law applies to Stafford Loans which are federal student loans to supplement scholarships, grants, family resources and work study.  It is available for almost all students regardless of credit and can be subsidized or unsubsidized.  There are no payments due while enrolled in school.  In the past, students applying for these loans had to go thru the bank to get the loan and sign a promissory note.

Subsidized Stafford Loans are awarded based on financial need.  Interest is not charged until repayment or during periods of deferment and is subsidized by the federal government.  Unsubsidized loans aren’t based on financial needs and any eligible student can take one out. You are charged interest from the time the loan is effective until it is paid.

The key benefits of the law are:

• Loans will be easier to qualify for – More families will qualify for federal loans. The denial rate for federal loans offered through private lenders was twice as high as those in the Direct Lending Program.
  • Application process is simpler for the Stafford loans – Student fills out the Free Application for Federal Student Aid (FAFSA) and submits to the college or university.  The FAFSA is used to apply for federal financial aid and aid in states, everyone going to college completes this anyway.  The school submits the application to the government and the government gives the funds directly to the student.
  • Lower interest rates on new loans – For example, the rate for subsidized Stafford loans for 2010 to 2011 school year went from 5.6% to 4.5%. For Parent Plus program the rates were 9.4% and lowered to 7.9%.
  • Income-based loan repayment plan – It caps the payment to a percentage of income and is forgiven after a certain number of years.  If consolidate federal loans with the government, you can sign up for an income-based repayment plan that caps your monthly payments below 15% of your income. If you make 25 years of regular payments, the remainder will be forgiven.  If you work in public service, it is forgiven in 10 years.

For new loans beginning in 2014, the cap will be lowered to 10% of discretionary income (any income above 150% of the poverty line) and forgiven after 20 years and public service stays at 10 years.

• Parents Plus program – Parent Loan for Undergraduate Students (PLUS) program lets parents take out federally guaranteed loans to help cover college costs not covered by students’ own grants or loans. They pay directly to the school. They can be denied if they have flawed credit such as bankruptcy or foreclosure, but this program is more lenient than most private banks.

These are some things to consider when determining finances for college.  The first choice should be scholarships, grants, work study and or a part time or summer job.  Loans are an obligation, a long term commitment, and listed on your credit report.  You are paying for your education long after you have completed your degree.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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This post was written by John Ulzheimer