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.