Home > Students > Debt Deal Costly For Some Student Borrowers

Comments 0 Comments

Students seeking new federal loans to finance college or graduate school may find the market somewhat less generous starting next summer. Congress’s last-minute debt compromise eliminates close to $1 trillion in spending, including the government’s subsidized interest payments on Stafford loans to graduate and professional students. The law applies to loans issued on or after July 1, 2012.

Currently, the government pays the 3.4% interest that accrues on subsidized Stafford loans while students are in school and until 6 months after graduation. The new deal will make students responsible for that accrued interest and, what’s more, starting next year—when the law takes effect—the interest rate on new subsidized Stafford loans will double to 6.8%.

Also beginning July 1, 2012 federal student loan borrowers will not be rewarded for good behavior. The 0.5 percent rebate of the 1% fee for students who pay their loans on time for 23 consecutive months is going away. Again, this only impacts new loans taken out on or after July 1, 2012.

Altogether, the Congressional Budget Office figures these cuts will save $21.6 billion over the next ten years, with much of the savings expected to help keep Pell Grants—government aid that assists low-income students—intact. The White House says the maximum Pell grant of $5,550 would remain for roughly 9 million undergraduates.

For other students, the debt deal means a greater financial burden upon gradation. CNNMoney ran the numbers, concluding that a graduate student who borrows the maximum of $65,500 in subsidized loans would owe $207 a month in interest payments over the course of 10 years. But with a subsidized loan, the government pays that $207 each month the student attends school until six months after graduation.

And as Mark Kantrowitz, financial aid expert and publisher of Finaid.org and Fastweb.com explained in a recent article:

Subsidized interest means the government pays the interest while the student is in an in-school or other authorized deferment period. It does not affect the interest rates for graduate and professional students. But if the borrower defers repaying the loans while in school, the accrued but unpaid interest will be capitalized, increasing the loan balance at repayment by about 16%. Since about one-third of student loan debt owed by graduate and professional students is subsidized, this change will increase the average debt at the start of repayment by about 6% overall (typically between $2,000 and $4,000), plus thousands of dollars of additional interest over the life of the loan.

And that’s just Round 1 of the proposed spending cuts. This November, Congress’s “Super Committee” is tasked with deciding upon an an even bigger round of cuts, estimated to be between $1.2 and $1.5 trillion over the next ten years. Given what’s already happened, it will be interesting (and a little scary) to see what other federal student aid will go on the operating table.

Image: Amberlemadisyn | Dreamstime.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team