INDIANAPOLIS, Ind. — New changes in the terms of federal student loans will benefit college students and former students who have loans through the Federal Family Education Loan Program.
“Legislation enacted by the U.S. Congress will reduce the cost of borrowing for college and provide relief for federal student loan borrowers whose monthly payments make up a significant portion of their income,” said Gregory A. Ayers, USA Funds senior vice president, policy and administration.
Legislation enacted by the U.S. Congress will reduce the cost of borrowing for college and provide relief for federal student loan borrowers whose monthly payments make up a significant portion of their income.
Among the changes in federal student loan terms effective July 1 are the following items:
Lower interest rates. Interest rates on subsidized Stafford loans to undergraduate students will decline to 5.6 percent, from the current rate of 6 percent, for loans with initial disbursements between July 1, 2009, and June 30, 2010. Rates on all other newly issued Stafford loans will remain at 6.8 percent. These rates are fixed for the term of the loan. In addition, students and former students with Stafford loans issued prior to July 1, 2006, will benefit from a more than 1.7 percentage point reduction in their rates due to declines in prevailing interest rates. These Stafford loans carry variable interest rates that adjust annually on July 1. For example, the interest rate on a Stafford loan first disbursed between July 1, 1998, and June 30, 2006, that is in repayment will decline to 2.48 percent from the current rate of 4.21 percent. Stafford loans are the most common federal student loan type. Subsidized Stafford loans are available to students who demonstrate financial need. The federal government subsidizes the interest on these loans while the student attends college at least half time and for six months after the student leaves college or drops below half-time enrollment.
Reduced loan fees. Upfront borrower fees on Stafford loans will be reduced by 0.5 percentage points. The maximum upfront fee that may be deducted from a student’s Stafford loan funds will decline to 1.5 percent from the current 2 percent, for loans with initial disbursements between July 1, 2009, and June 30, 2010.
New income-based repayment option. Federal student loan borrowers also may qualify to repay their loans under a new income-based option beginning July 1. To qualify, standard loan payments must exceed 15 percent of the former students’ discretionary income, which is defined as the amount by which their adjusted gross income exceeds 1.5 times the federal poverty level for their family size. Borrowers who qualify can limit their payments to 15 percent of their discretionary income. If their payments are less than the interest accruing on the subsidized portion of their loans, the federal government will pay the interest for up to three years. Borrowers repaying under income-based terms also may qualify for forgiveness of any outstanding loan balance that remains after 25 years of repayment, although the amount forgiven will be taxed as income. In addition to income-based repayment, federal student loan borrowers continue to have the option to repay their loans under standard, graduated or income-sensitive repayment plans, as well as an extended repayment option for borrowers with more than $30,000 in student loan debt.
For additional information on student loan interest rates and repayment options, students and former students can visit the Borrowers section of the USA Funds Web site at www.usafunds.org/borrowers.
