A Good Day for Student Aid

Some big changes are coming to the federal student aid programs tomorrow that will save students money and make it easier for struggling borrowers to repay their government-backed student loan debt.

Most of these changes are the result of three pieces of legislation that have been enacted over the last several years: the Deficit Reduction Act of 2005, the College Cost Reduction and Access Act of 2007, and the American Recovery and Reinvestment Act of 2009. All contain provisions that go into effect on July 1. These include:

• A $619 increase in the maximum Pell Grant, to $5,350 for the 2009-10 academic year.

• A 0.4 percentage point reduction in the fixed interest rate charged on new federally subsidized Stafford loans to 5.6 percent.

• A one-half percentage point decrease in the origination fees that borrowers must pay on their federal student loans to 1.5 percent of total amount borrowed.

Meanwhile, borrowers with variable-rate Stafford Loans originated before July 1, 2006 will see their rates drop to 2.48 percent on Wednesday. That’s two percentage points lower than the current 4.21 rate on these loans. Members of the Class of 2009 can lock in an even lower rate of 1.88 percent if they consolidate their variable rate loans during the sixth month grace period before they enter repayment.

But the most significant change that will go into effect on Wednesday is the introduction of the Income-Based Repayment (IBR) program, which is aimed at helping borrowers with low incomes who have taken on too much federal student loan debt. Under the new program, borrowers who have a pre-tax income below 150 percent of the poverty line will not have to make any payments until their incomes rise over those levels. Those with higher pay will not be asked to devote more than 15 percent of the portion of their income above that threshold to student-loan repayment until they are earning enough to make regular payments. Any debt remaining after 25 years of payment through the IBR program will be forgiven by the federal government. (Unfortunately, private student loans do not qualify for the reduced payments.)

According to our friends at the Project on Student Debt, who have championed the program, a single person making $30,000 a year with $30,000 in debt will see his or her monthly payments cut in half under IBR. The project has developed a calculator at www.ibrinfo.org to help borrowers determine their eligibility for the plan.

“In this tough economic climate, Income-Based Repayment will be a godsend for so many people, helping to guarantee that [federal] student loan payments won’t be the thing that breaks the bank,” says Lauren Asher, the president of the Institute for College Access and Success (TICAS), which runs the Project on Student Debt. [Disclosure: Higher Ed Watch is supported in part by TICAS.]

Independence Day is still a few days away. But with these new benefits, students already have a reason to celebrate.