Student Loan Changes: Wins and Losses

College students won a small victory this week when Congress, facing a July 1^st deadline, extended low interest rates on undergraduate Subsidized Direct Loans for a year. The Subsidized Direct Loan is a federal loan program for needy college students.  The loan is interest-free while the student is enrolled in school, and begins accruing interest at a fixed interest rate after the student graduates or drops below half-time attendance.  The interest rate, fixed at 6.8% in 2006, was gradually lowered for loans borrowed since 2008 to the 3.4% rate, in effect for the 2011-2012 academic year.  This reduced rate was set to expire on July 1^st, which would have doubled the interest rate for future borrowers. Fortunately, after much contentious debate, Congress passed a compromise bill on Friday, extending the current 3.4% interest rate on all undergraduate Subsidized Direct Loans borrowed for the 2012-2013 academic year.  President Obama is expected to sign the bill into law this week. Though only a temporary reprieve (as rates will double in 2013-2014 without further Congressional action), college students can celebrate this small triumph on the student loan front. Receiving far less fanfare, however, are three more changes to the Direct Loan program, which took effect on July 1^st:

• Origination fee rebates were eliminated on all Direct Loans.  Borrowers will now be charged a full 1% origination fee on Subsidized and Unsubsidized Direct Loans and a 4% origination fee on Direct PLUS Loans.
• In-school interest subsidies were eliminated for graduate students.  All graduate and professional-level Direct Loans will be Unsubsidized.  These loans begin accruing interest immediately upon disbursement.
• Grace period subsidies were eliminated for loans borrowed between July 1, 2012 and June 30, 2014.  Subsidized Direct Loans borrowed during these two academic years will accrue interest during the 6-month grace period between graduation/withdrawal and repayment.

These lesser known student loan changes, while disappointing, should be understood by students weighing loan options.  A wise borrower must acknowledge the losses on the student loan front as well as the wins.