Recent Changes in Federal Student Loan Programs
Due to recent ramp-ups in federal spending without a matching rise in tax receipts, the U. S. government has been running unprecedented deficits. To combat the rising red ink, the government has decided to cut some spending, spending that happens to affect a significant number of students, costing us more in student loans. Remember that come November.
Effective July 1, 2006, PLUS and Stafford loans will be issued with fixed interest rates. On one hand, this is a good thing, as it makes for more predictable loan costs. For example, if one year interest rates go sky-high, your adjustable rate student loan would see significantly higher interest costs. On the other hand, fixed rate loans can have much higher interest rates than adjustable rate loans, especially in times of low interest rates, which we are still currently in. As a result, student loans issued this year will have moderately higher interest rates than in years past.
Going from adjustable to fixed
In years past, Stafford and most other Federal loans have been adjustable rate loans. This means that every year, the interest rates would change. In the past several years, we have gone through wild swings in federally-set interest rates, which led to rather unpredictable rates, and thus, payments, on student loans. For greater predictability, some borrowers and student groups have been pressing for fixed rate loans. Fixed rate loans are just that, the interest rates are fixed for the entire length of the loan. Studies have shown that fixed rate student loans generally do not benefit the borrower compared to adjustable rate loans. So, for the benefit of knowing your payments for the life of the loan, you will pay more (on average) over the life of the loan for these fixed payments.
Other Changes
-Stafford Loans will no longer have a lower in-school rate for the unsubsidized loans.
-Origination fees are being phased out. Historically, they have been as much as 3% (though many lenders have lower or no origination fees). Starting July, 1, 2006, origination fees will be capped at 2%, falling 1/2% every year till reaching zero in 2010. (The default fee of 1% will continue to be charged, however this fee is often paid by the lender.)
-Stafford Loan limits for freshmen and sophomores will be raised to $3,500 and $4,500 from $2,625 and $3,500, respectively.
-Graduate and professional students will be permitted to take out Plus loans.
-Set Plus loan interest rates at 8.5% fixed on new loans.
Consolidation
Some borrowers may want to consolidate their loans to get a better rate. The time has past to get the best rates, as interest rates on these consolidation loans are based in part on the rates of the debt being consolidated. However, students may still be able to lower their costs by consolidating their debt. A minimum of $5,000 of student debt is needed to get a consolidation loan.
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