Revisions to student loan laws made in 2007 will make college more affordable to directing federal money to students instead of student lenders.
The College Cost Reduction and Access Act of 2007 increases funding for financial aid, offers tuition assistance for students who plan to teach and helps struggling graduates repay their student loans.
Lawmakers freed up money for the changes by cutting federal subsidies to student-loan companies by $20 billion.
Here's how students will benefit:
Need-based aid. For families that qualify for financial aid, the news is doubly good. Pell Grants, awarded to students with high need, will climb to a maximum of $5,400 per year over the next five years from the current $4,310. Students who qualify for the maximum will receive the first increase, of $490, in 2008-09, bringing the total that year to $4,800.
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Meanwhile, the interest rate on subsidized Stafford loans, also offered to families with need, will drop to 3.4% over the next four years. That's half the rate on unsubsidized Staffords, available to any family. Students who borrow a total of $13,800 at 3.4% will save $4,400 over the life of the loans.
Loan repayment. As of July 2009, borrowers "will have the assurance that their loan payments won't cripple them," says Robert Shireman of the Project on Student Debt. Rather than pay a fixed amount over 10 years -- the standard repayment schedule -- struggling grads can opt for a program that bases payments on up to 15% of their annual discretionary income, defined as gross income above 150% of the federal poverty level. (The 2007 poverty level for an individual is $10,210, plus $3,480 for every additional family member.)
The formula replaces less-generous income-based programs and applies to Stafford loans offered through the federal government as well as private lenders.
For borrowers faced with choosing between loan repayment and, say, three square meals, the short-term savings can be significant. For instance, a single borrower earning $28,000 will pay $159 a month on a $20,000 debt compared with $230 on the fixed-payment schedule. The payment will drop to $93 if the borrower has a dependent.
Uncle Sam will help by picking up the interest on subsidized loans for three years if the reduced payments aren't enough to cover it. Borrowers can increase payments as their income rises, but they will never have to pay more than the fixed amount on the 10-year schedule. The feds will forgive the balances on both subsidized and unsubsidized loans after 25 years.
Public-service incentives. Would-be teachers who hesitate to take out big loans for low-paying careers will soon have relief. As of July 2008, students in teacher-preparation programs who commit to teaching for four years can qualify for $4,000 annual grants to defray college costs. If they decide later not to teach, the grants will revert to loans.
Student borrowers also have an incentive to go civic. If they work for 10 years in public service, including law enforcement, public health and early education, the government will forgive the balances on their student loans. Only students who borrow directly from the federal government will get this deal. The clock will start ticking toward the 10-year mark for payments made after Oct. 1 of this year.
Protected income. Students will also be able to keep more income, including earnings from jobs, before crimping financial aid. For this academic year, $3,000 was ignored by the federal financial-aid formula; by 2011, that figure will rise to $6,000.
This article was reported and written by Jane Bennett Clark for Kiplinger's Personal Finance Magazine.