New Laws for Regulating Student Loans Going into Effect

With college education becoming expensive every year, students’ loans are playing an increasingly important role. The student loan system is however up for some major changes now.

The health care bill, which was recently passed in the Congress, was part of a legislative package that also included an overhaul of the student loan system. In the new system, loans will be given to the students directly by the government and not a private lender. Earlier any student of a school that participated in the Direct Loan program could borrow directly from the government while a student from a school that participated in the Federal Family Education Loan program was required to borrow from a bank.

The new law will come into force from July 1, 2010. There are not too many changes for the borrowers though. The bill does not change the rate of interest or the cap on the loan. The penalties for failure to pay the loan are also similar.

The loan application process under the Direct Loan program is simpler as the school takes care of most of the procedural requirements students have to just sign the documents. Borrowing from private lenders was also seen as risky, as students may make mistakes like consolidating education and other loans and thus losing out on tax benefits.

The Act also increases the amount of Pell Grants to $5,550 from $5,350 for this year. This grant is given to students from a low income background in order to reduce their loan burden. The amount will remain steady for next two years after which it will be indexed to inflation rate for the next five years.

When it is not possible to cover education expenses through loans alone, parents often take out a federally guaranteed Parent Loan for Undergraduate Students (PLUS), which has an 8.5% interest rate if taken from private lenders. Loans under the Direct Loan program have an interest rate of 7.9%. It is easier to qualify for a PLUS loan under the Direct Loan program.

Further, low income earning graduates will be able to get their loan payments limited to 10% of discretionary income as compared to the 15% cap currently. This policy will come into place from 2014. If these borrowers pay their loan for 20 years, they will be eligible for loan forgiveness. The current law has a limit of 25 years for such eligibility.


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