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11 Things You Didn’t Know About Student Loans

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Photo: The Fiscal Times/iStockphoto

July 26, 2012
 

It’s been a busy time for student loan legislation. As student debt continues to skyrocket, the government has been busy tweaking eligibility requirements, interest rates, and funding for federal loans – with many changes going into effect on July 1. Private student loans have also been under the microscope lately, with a number of policymakers pushing for reforms. Here are 11 recent changes and surprising facts about student loans.

1. Grad students can no longer receive subsidized loans. One little-known provision in the Budget Control Act that was signed into law on August 2, 2011 eliminated subsidized loans from the federal government for graduate and professional students. They can still receive unsubsidized federal loans, but they are responsible for the interest that accrues on the loan while they’re in school. That change took place on July 1, 2012.

2. Funding has been cut for families making between $23,000 and $32,000 a year. Another surprising change, effective July 1 this year will affect low-income families. When filling out the FAFSA, families receive an Expected Family Contribution number, and typically any family with an income of $32,000 or less received a zero, which made them eligible for more aid. The income limit has now been reduced to $23,000.

3. Congress approves low student loan rates, but they may not help much. Though Congress recently prevented the low interest rate of 3.4 percent from doubling for students with subsidized federal loans, the savings will not be substantial for borrowers. A third of fourth year student who borrowed the maximum $5,500 would save only about $9 a month. The 3.4 percent rate would also not be extended to higher-rate loans issued before the 2011-12 school year.

4. A rise in defaults. About 5 million federal loan borrowers are in default (meaning they have failed to make payments for 270 days or more), and 850,000 private loans are in default. In total, this adds up to about $67 billion of defaulted student loans. To help collect payments from students who have defaulted on their federal loans, the Education Department has started hiring private debt-collection companies.

5. The perils of private student loans. The private student loan market went from less than $5 billion in 2001 to over $20 billion in 2008 – a 300 percent increase (though due to tighter credit standards and regulations today, that number has since decreased), according to a recent report from the Consumer Financial Protection Bureau (CFPB). Some 2.9 million students currently have private loans, owing about $150 billion total. In 2007, 70 percent of private loans were made to undergraduates without their school’s involvement, and interest rates on private loans can range from 5 percent to 18 percent, with no limits on fees and penalties.
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