DALLASA new federal law revamping education financing provides good news for students eligible for financial aid: Interest rates on subsidized student loans will be cut in half over the next four years.
The College Cost Reduction and Access Act, which President Bush recently signed into law, has been called the largest overhaul of aid to college students since World War II.
While it doesn’t change the strategy and approach that families should take when shopping for college financing, it will give them more benefits to go with the financial aid options that are available.
Major provisions of the new law include:
_ Pell Grant increase. Recipients of the popular federal Pell Grant will see a gradual increase in the annual limit over the next five years. This is big news for students.
Under the new law, the annual limit on federal Pell grants will rise from the current level of $4,310 to $5,400 in 2012.
_ Interest rate cut.The law phases in a reduced interest rate on new subsidized federal Stafford loans to undergraduate students. The rate will be reduced from the current 6.8 percent to 6.0 percent starting in July, 5.6 percent in July 2009, 4.5 percent in July 2010 and 3.4 percent starting July 2011. In July 2012, it will revert to 6.8 percent unless Congress acts.
_ Income-based repayment.The program assures past, present and future students with federal loans that their payments will be “fair and manageable and will not extend indefinitely.”
The program, which becomes available in July 2009, is open to anyone with federal student loans, whether they borrowed in the past or are current or future students.
The program caps student loan payments at a reasonable percentage of income. It’s a sliding scale, so the lower the borrower’s income, the lower the percentage cap.
The program also limits buildup of interest. When capped payments aren’t enough to cover interest charges, the program covers the interest on subsidized loans for up to three years, and any further interest doesn’t compound.
The program cancels most remaining balances after 25 years. For those in public service careers, remaining debts can be forgiven after 10 years.
_ Higher income protection allowance. The law raises the amount of money students can earn before it affects their eligibility for financial aid.