Student loans get more expensive

Although Congress has kept the interest on new subsidized Stafford loans at 3.4%, other changes have made federal student loans more costly.

By Karen Datko Jul 3, 2012 6:26PM

Image: Graduation cap (© Stephen Wisbauer/Getty Images)The federal government giveth and taketh away from students who need to borrow money for college.


Yes, the rate on subsidized Stafford student loans issued after July 1 will remain at 3.4%, rather than double to 6.8%, thanks to votes in Congress recently.


However -- and that is a big HOWEVER -- other changes took effect on July 1 that will make some federal student loans more costly than they've been. Those changes were passed by Congress during last year's ugly wrangling over the federal budget and debt ceiling deals.


No grace period. For subsidized Stafford loans taken out after July 1, the federal government will no longer pay the interest for the first six months after graduation. (The feds will, thankfully, continue to pay the interest on new loans while the undergraduates are still in school.)


What does that mean for the typical college student? Once you graduate, you'll still get six months of breathing room before your first student loan payment comes due. However, the interest that accumulates in that six months will be added to your loan principal.


By one estimate, that will be add $57 to the average $3,357 loan when the interest rate is 3.4%, or $114 when the rate doubles on new loans in a year.


Good news: The grace period is set to return on July 1, 2014. (Post continues below video.)

No subsidized loans for graduate students. It's even worse for students seeking advanced degrees. As of July 1, graduate students are no longer eligible for new subsidized federal loans. That means they'll be responsible for paying the interest that accrues on new federal loans from the very first day they borrow the money. (They also didn't get a break on interest rates in last week's deal, so Stafford loans come with a 6.8% rate. The federal Grad PLUS loans have a slightly higher rate of 7.9%.)


By one estimate, the end of the federal subsidy will add $7,000 to the cost of the average grad school loan. Let's hope that extra schooling proves worth it.

And that's not all. Other changes:

  • A family now has to have an income of no more than $23,000 to qualify for an automatic zero family contribution on the Free Application for Federal Student Aid (FAFSA), down from $32,000.
  • Needy students will be eligible for Pell grants for only 12 full-time semesters. There was no limit before. This sounds reasonable. One smart way to reduce college costs is to earn a degree in four years or less.

What's a student to do? Pauline Abernathy, vice president of the nonprofit Institute for College Access and Success, told U.S. News & World Report that students should discuss repayment options -- including the Income-Based Repayment and Public Service Loan Forgiveness programs -- with their financial aid office before they leave school to find out how to become eligible.


Better yet? Take steps to minimize the amount of money you need to borrow.


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