Federal aid for student loans is going down, interest rates are going up and grants are being created under a new law.
As of July 1, the $40 billion Deficit Reduction Act, signed into law February 8, will put into effect $12.7 billion worth of cuts to student loans over the next five years. It is the largest such cut ever made to student loans, according to CNNmoney.com.
“They’ve been high-spirited about it, but when I see $12.7 billion cut, you can’t tell me it won’t have an impact,” Anna Reese, Eastern’s financial aid director, said.
Lenders are initially affected the most, because the cuts are aimed at government subsidies of loans such as the Stafford and PLUS loans.
Under the current law, when the interest rate students pay (borrower rate) is less than the percentage of loans that lenders should receive in payment (lender rate), the government pays the difference, said Conway Casillas, the director of affairs for Sallie Mae, a Stafford loan lender.
When the borrower rate exceeds the lender rate, lenders have been allowed to keep the difference, he added.
Under the new law, lenders will have to pay this difference to the government. The new law also reduces the amount the government pays on defaulted student loans from 98 percent to 97 percent, according to Casillas.
Whether these cuts will discourage companies from lending to students and how much these cuts will affect students is still unclear, according to Reese and Casillas.
Casillas said, however, that Sallie Mae has no intention of leaving the loan program, and several sources said that student loans will not be reduced as a result of the cuts.
What more immediately affects students is the new interest rates for Stafford and PLUS loans, which will be fixed at 6.8 percent and 8.5 percent respectively. Currently, the interest rates on these loans are variable. Stafford loans are between 4.7 percent and 5.3 percent and are capped at 8.25 percent.
Those rates mean that under the new law, a student with $20,000 of debt will pay $2,000 more in interest over 10 years, according to CNNmoney.com.
“I thought the cap was the best of both worlds,” Reese said. “Students could take advantage of low interest rates but know that they wouldn’t be paying more than eight or nine percent.”
However, if interest rates get above 6.8 percent, as they may this summer, students will benefit from the fixed rate for loans, according to Casillas.
The bill also offers new benefits for students, including academic competitiveness grants for first year and sophomore low-income students. During students’ junior and senior years, the grants would be called SMART grants and would be applied only to students studying math or science who had at least a 3.0 GPA, according to Reese.
The new law also includes an expanded loan forgiveness program for teachers and increases the amount of money first-years and sophomores can borrow in Stafford loans, according to Reese.
Students interviewed knew little about the new law.
“It’s a brash move by the government,” first year Bob Beaver said when told about the law.
Reese is unsure of the law’s benefits.
“The bill is a double-edged sword,” she said.