Lower interest rates for student loans

On July 1, the new federal interest rates for student loans went into effect. Under the new reduced rates, students should find some relief for their student loan debt amid rising tuition costs and economic stagnation.

The decrease in interest rate is one of former President George W. Bush’s legacies in higher education. Passed by Congress in 2007, the College Cost Reduction and Access Act established a student loan forgiveness program and yearly declining interest rates until 2012.

The new interest rate for a federal-subsidized loan for undergraduate students is 5.6 percent, down from last year’s rate of 6 percent. According to the National Association of Student Financial Aid Administration, the new rate will be applied for loans borrowed from July of this year to July 1, 2010.

According to Portland State’s Office of Financial Aid, interest rates for graduate students remained at 6.8 percent. Unlike the need-based federally subsidized loan—where the government pays the interest on the loan while the student attends school—unsubsidized and graduate student loans do accrue interest while the student attends school.

Under another provision of the CCRAA, for the academic year of 2009–10, the maximum Pell Grant amount a student can receive is $5,350, an increase of $619 from last year.

In addition to the new interest rate for undergraduate students, other provisions will also take effect this year. One of these changes is a provision stating students will never have to pay more than 15 percent of their yearly income for student loan repayment. Furthermore, whatever debt remains after 25 years of repayment will be forgiven.

According to the CCRAA, students may also have their loan forgiven in a shorter period of time of 10 years, provided that they go to work in public sector professions, such as military service, education, local, state or city government. During that time, they must make regular payments on the loan.

Ellen Rask-Jenkins, a Portland State student currently working on her master’s in Interdisciplinary Studies, said that will be her plan after she graduates in 2011.

“With the work that I’ve been doing in school, the next step for me is to bring it to the city level,” Rask-Jenkins said. “I wanted to work as a community organizer and urban planner way before I learned that doing so would erase all my debts.”

Rask-Jenkins said she owes somewhere between $45-47,000 in student loans, plus interest.

“I don’t know about other people, but for me, working for the city is not something that I feel like I’m forced to do because of my debt. I actually would enjoy the experience,” Rask-Jenkins said. “But I guess for people who have no interest in working for public jobs, they would feel a bit tied down.”

The CCRAA set the interest rate on federally subsidized loans to be cut by half from the 2007 level of 6.8 percent to 3.4 percent by 2011. In 2012, the interest rate will revert back to 2007’s rate of 6.8 percent.
 

Important numbers for 2009-10

5.6 percent: the new interest rate for undergraduate federally subsidized loans borrowed between July 2009 and July 2010
6 percent: the interest rate for last year’s undergraduate federally subsidized loans
15 percent: loan repayment cannot exceed 15 percent of annual income
$619: the increase in the maximum Federal Pell Grant Award

Timeline of the College Cost Reduction and Access Act

September 2007
President Bush signed the College Cost Reduction and Access Act (H.R. 2669) into law.

October 2007
CCRAA went into effect.
Loan interest rate was 6.8 percent, with loan forgiveness for public service employees who had made 120 monthly payments (10 years) or were employed in public service during that time.

2008–09 academic year
Pell Grant award increases by $490 per student.
Interest rate reduced to 6 percent for undergraduate federally subsidized loans.

2009–10 academic year
Zero Expected Family Contribution income level is set at $30,000, from last year’s $20,000.
Second interest rate reduction down to 5.6 percent for undergraduate federally subsidized loans.
Student will not have to spend more than 15 percent of their annual income on loan repayment.
Unpaid amounts are forgiven after 25 years of payment.

2010–11 academic year
Third interest rate reduction down to 4.5 percent for undergraduate federally subsidized loans.

2011–12 academic year
Final interest rate reduction down to 3.8 percent for undergraduate federally subsidized loans.

2012
Interest rate reverts back to 6.8 percent.