On Aug. 2, President Barack Obama signed the Budget Control Act of 2011, which will result in cuts to federal programming.
There will be changes to the federal student loan programs. Loans will ultimately be more expensive to students. The new law does not affect the amount of funding available, just the cost. In the end, loans will cost more.
Congress proposed the dissolution of the subsidy for all Stafford Loans. A Stafford Loan is a special type of borrowing program for eligible students at accredited and participating colleges in the U.S.
When a student is approved for a subsidized Stafford Loan, he or she receives money up front and does not have to repay it until graduation.
While the college student is attending school, interest does not accumulate on the loan. In a way, the loan account freezes and then reactivates upon graduation, requiring the borrower to make regular payments at that time.
Usually when someone takes out a loan, he or she can defer payment, or opt out of payment until the person graduates.
With the new law in effect for next school year, higher interest rates will immediately accrue at the time of disbursement.
The student has the option to make payments towards the interest while attending school or allow the interest accumulate until graduation.
These student loan changes will directly affect over half of Northern Kentucky University’s students, who rely on financial assistance to help pay for college.
“For the 2010-2011 academic year, 61 percent of NKU students received financial assistance in some form of student loans,” said Dyane K. Foltz, assistant director to the Office of Student Financial Assistance. Student loans include subsidized, unsubsidized, Perkins, alternative/private, institutional, PLUS, or Graduate PLUS.
Currently, there is a 1 percent origination fee on direct Stafford Loans. There is 0.5 percent assessed at disbursement and another 0.5 percent if the borrower fails to pay the first 12 months on time.
Therefore, as long as one paid his loan on time within the first year, the borrower would only be charged 0.5 percent. Under the new law, borrowers will be charged the full 1 percent, regardless of payment timeliness.
For example, with the current subsidized Stafford Loan, when student A takes out a loan for $4,000 for the current semester, he or she will be charged zero interest until they graduate. After they graduate, when it is time for repayment, the loan will accrue 0.5 percent per month, which is equivalent to $20 per month, assuming they make their payments on time.
Beginning in 2012, when student A takes out a loan from the same company, he will be charged 1 percent interest at time of disbursement, equivalent to $40 per month for the entire span of the loan. When it is time for repayment, after the student graduates, the accrued interest will be $1,920.
Instead of graduating with a $4,000 debt, the student will be responsible for repaying $5,920. The interest continues to be applied each month when making payments.
Currently for Grad PLUS loans, a direct loan program for graduate and professional students, the total interest fee is 4 percent after graduation. It is 2.5 percent assessed at disbursement or 1.5 percent if the borrower fails to pay on time within the first year. Under the new law, borrowers will be charged the full 4 percent at the time of disbursement, regardless of timely payments.
The new law states that if a student takes out a loan from the same company for $4,000, he or she will be charged 4 percent at the time of disbursement, which is equivalent to $160 per month.
After the student graduates, the interest will have accrued $7,680 after four years. Instead of graduating with only $4,000 of debt, one will be responsible for repaying $11,680 after graduation.
The interest continues to be applied each month when making payments.
“I can’t afford to pay for college, so either a scholarship or a loan is a must,” junior art major Eva Dames said. “If I could get a Pell Grant, that would be wonderful. Just because someone takes out a loan doesn’t mean they want to. They have to or they can’t go to college.”
Together, the elimination of the graduate and professional in-school interest subsidy and direct loan repayment incentives yield a savings of $21.6 billion.
In total, $17 billion of that is redirected into the Pell Grant Program, with the remaining $4.6 billion going toward deficit reduction.
The new budget cuts are redirecting money back to students to help them attend school, but others will have to look for other sources to pay for their education.
There are many options for students, whether it is a private loan, working hard at the local fast food restaurant or working hard for scholarships.
“Scholarships are a great source to help students pay less in the end,” Foltz said. “Also, graduate assistant-ships may be available for graduate students to help defray costs.”