Changes Coming for Student Loans

A new law provides more money for high-need students and better repayment terms for borrowers with a lot of debt.

The bill that put the finishing touches on health-care legislation also changed the rules regarding student loans for higher education. As of July, the feds become the sole lender for the federal student loans known as Staffords as well as PLUS loans, the federally sponsored loans for parents and grad students. These loans currently originate from private lenders as well as the federal government.

Now your student may have to deal with more than one servicer when the loans come due. Loans made after July 1 will be serviced by four companies or agencies. Older loans that originated under the federal Direct Loan program, or that were bought by the feds during the recent credit crisis, will be transferred to those companies. The rest will be serviced by the original lenders -- at least for now, says Tim Ranzetta, of Student Lending Analytics, an industry analyst.

Students who are confused about who will be handling their loans should contact their financial-aid office, says Ranzetta. Once they graduate, they can consolidate the loans to avoid having to write checks to more than one company. The new law makes a one-time exception for the 2010–11 academic year to the rule that students must wait to consolidate until after they graduate. If they consolidate their loans as undergrads, however, they lose the six-month grace period for repayment after graduation.

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As for PLUS loans, these, too, will be available only from Uncle Sam, through your student’s financial-aid office. PLUS loans under the Direct Loan program carry a fixed rate of 7.9%.

Better terms for repayment. The new law offers a more generous version of an existing program known as income-based repayment, which offers relief to borrowers whose student debt is high relative to their income. For those who take out federal student loans after July 1, 2014, the program caps monthly payments at 10% of discretionary income and forgives any remaining debt after 20 years. The current program caps repayments at 15% of discretionary income and forgives any balance after 25 years.

More money for Pell grants. This federal program for high-need students will receive a $36-billion infusion over the next ten years, bringing the maximum annual grant per student to an estimated $5,975, up from the current maximum (in 2010) of $5,550. The money will sustain the chronically underfunded program but won’t make much of a dent in the cost for students who attend four-year institutions. The total annual tab for in-state students at public institutions runs an average of $15,213, according to the College Board. The annual average cost of a private institution approaches $36,000.

A boost for some colleges. Community colleges will receive $2 billion over four years to help them develop education and career-training programs. Historically Black Colleges and Universities and Minority-Serving Institutions -- which represent one-third of all degree-granting institutions and enroll nearly 60% of minority undergraduates -- will receive $2.55 billion, fortifying them against the heavy losses they suffered during the recession.

Jane Bennett Clark
Senior Editor, Kiplinger's Personal Finance
The late Jane Bennett Clark, who passed away in March 2017, covered all facets of retirement and wrote a bimonthly column that took a fresh, sometimes provocative look at ways to approach life after a career. She also oversaw the annual Kiplinger rankings for best values in public and private colleges and universities and spearheaded the annual "Best Cities" feature. Clark graduated from Northwestern University.