New Student Loan Rules Will Disappoint Many

A new law will help a lot of struggling students and parents -- but others will be very disappointed.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

October 19, 2007

The good news is very good: If you're an undergraduate and eligible for subsidized loans, the rates will be a lot lower. Congress passed a law cutting them in half, from 6.8% to 3.4%, over the next five years. The lower rate affects Stafford loans for students who qualify for federal subsidies, meaning Uncle Sam pays the interest on the loans while you're still in school. Plus limits on Pell Grants for low-income students will gradually rise from $4,800 in 2008 to $5,400 in 2012.

The bad news is that many other students won't get help and may even end up paying more. That includes undergraduates with unsubsidized federally backed loans, graduate students and graduates who may want to refinance their loans. Unsubsidized undergrad rates as well as all graduate school rates will remain at 6.8%, while loans taken out by parents under the federal PLUS program will hold at 8.5%.

Students seeking to consolidate all their federal loans into one loan under a fixed rate will see plenty of perks vanish. Why? Congress also is eliminating $21 billion in federal subsidies to student lenders. And that is going to cut deep into lenders' bottom lines, meaning lenders will need to scale back incentives they use to lure business away from their rivals.

Discounts and rate reductions are on the chopping block at many lenders, such as Chase, Nelnet, Sallie Mae and Wells Fargo. Typically, student borrowers have been able to get an interest rate lowered if they signed up to have payments automatically taken from their bank account. Borrowers might also get their rate reduced if, for example, they were to make consecutive payments for three years straight without being late. Some lenders would even agree to waive origination or default fees to sign you up.

While we don't expect lenders to do away with incentives altogether, they will water them down. For instance, some may require four to five years of on-time payments to qualify for a discount, instead of three years. Also look for lenders to more aggressively market private loans, which carry higher rates and earn them more profit than federally backed loans.

Help of a different sort for students may ease some of the pain. States are trying to reduce college textbook costs, which can run close to $1,000 a year for undergrads. Figures indicate that textbook prices have grown 6% a year for about two decades, roughly twice the rate of inflation.

States including Minnesota, Oklahoma, Oregon and Washington are barring the automatic bundling of books with supplemental materials -- lab manuals, study guides, CDs, online resources -- a technique publishers use to add to the total price tag. Arkansas and Tennessee are insisting that professors place their book orders early in the year so students can shop around and avoid paying rush shipping fees. The University of North Carolina system has instituted buybacks of large introductory-level books and has set up book rental options for students.

Expect Web sales of discounted books to continue to grow. About 25% of students already buy their books online.

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