Q&A: What the debt ceiling deal means for your student loans
Guest blogger Heather Jarvis provides education and training “for student loan borrowers and the people who love them.” Here she sums up what college students, recent graduates, and folks considering grad school need to know about the debt ceiling deal.
Do those peaceful hours studying feel like a long time ago? It's never too late (or too early!) to understand your student loans. Photo via Tulane Public Relations (Flickr/Creative Commons)
Last week the House and Senate passed the Budget Control Act of 2011 [PDF] just ahead of the deadline, and President Obama has signed the act into law. Key student aid programs are largely intact, and I am relieved to report that the new law avoids some of the proposed cuts that would have hurt students the most.
There are three main provisions in the debt ceiling deal related to higher education:
- Funding is provided for the Pell Grant program.
- The in-school loan interest subsidy for graduate and professional students is eliminated beginning July 1, 2012.
- “Repayment incentives,” or cost reductions earned by certain borrowers, are eliminated for loans disbursed on or after July 1, 2012.
Now for some Q&A…
Q. Students shoulder $4.6 billion of the deficit reduction (so far)?! How is that possible?
The elimination of the graduate and professional interest subsidy and the loan repayment incentives are estimated by the Congressional Budget Office to produce a savings of $21.6 billion. $17 billion of that savings will go to shore up the Pell Grant program, and $4.6 billion will be used to reduce the deficit. Read on for more details about all of these changes.
Q. I have student loans. What steps should I take?
- Always borrow federal student loans first and only consider more expensive private student loans if you must.
- If you are still in school and you can afford it, consider paying student loan interest as it accrues. You’ll lower your costs over time.
- Choose the repayment plan that makes the most sense for you. Income-Based Repayment (IBR) is a good option for people with low income compared to their student loan debt.
- Pay off your most expensive loans first.
- Find out if Public Service Loan Forgiveness can help.
Q. Is my Pell Grant safe?
Pell Grants are safe for now; the White House indicates that the funding will be sufficient to keep them at their current level of $5,500. If they had been cut, students may well have had to increase their reliance on student loans. Thankfully, the Budget Control Act shores up the Pell Grant program by providing $17 billion in funding over the next two fiscal years. However, with spending cuts anticipated in the future, Pell Grants remain at risk.
Q. What should graduate and professional students expect?
Graduate and professional students will pay more for student loans. The Budget Control Act eliminates the in-school interest subsidy for graduate and professional students, so these folks will pay more interest over time. However, it does not eliminate the interest subsidy for undergraduate borrowers.
Subsidized Stafford Loans have historically been available to both undergraduate and graduate borrowers with demonstrated financial need. In the case of Subsidized Loans, the government pays the interest that accrues on the loan while the student is in college. Without the subsidy, students must themselves pay the accruing interest as they go, or have the unpaid interest added to the principle amount of their loan and pay it later.
(Ed. note: You can learn more about financial aid on our financing your graduate education page.)
Q. What about repayment incentives?
To encourage borrowers to repay on time, the Department of Education was previously authorized to provide certain incentives, including an origination fee rebate and interest rate reduction. Borrowers would earn these benefits by making on-time payments over 12 months. Beginning on July 1, 2012, the Department of Education is no longer authorized to provide these repayment incentives, but may continue to allow an interest rate reduction for borrowers who enroll in payment by automatic electronic debit.
Q. Is it possible that there will be even more cuts to student aid?
Yes. The Budget Control Act requires Congress to come up with a lot more deficit reduction by Thanksgiving. Additional spending cuts may come in part from higher education. Stay tuned…
Do you have additional questions we can try to answer? Leave a comment below and we’ll do our best!
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About the author
Former capital defense attorney and long-time public service advocate Heather Jarvis dedicates herself to helping students make informed decisions about their student loans. Since 2005, Heather has helped more than an estimated 25,000 students understand and overcome college debt through in-person and online trainings and resources. As Senior Program Manager for Advocacy and Outreach at Equal Justice Works, Heather played a role in the passage of the College Cost Reduction and Access Act, which made IBR and Public Service Loan Forgiveness a reality.
Want to learn more about Public Service Loan Forgiveness? Register for one Heather’s popular free webinars and get the scoop. Heather provides free tools and information for student loan borrowers and the people who love them at www.askheatherjarvis.com.
Tags: debt ceiling, Heather Jarvis, income-based repayment, Pell Grants, Public Service Loan Forgiveness, student loans, students
Thank you for posting this article. My parents called me in a panic last night, basically telling me that I’m doomed due to student loans – it’s a relief to find a non-hysterical viewpoint!
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I dont know if this helps me i did federal loans only and i graduated in 2009 and im jobless. My interest is increasing everyday.
What would be your advice to a recent (May) college graduate who is still applying/looking for a job? Keep applying or go back to school?
Income-Based Repayment is a good option for people with student loans who aren’t earning a lot as compared to their debt. Find out more at http://askheatherjarvis.com/tools and http://IBRinfo.org.
Kelly, I think you are right to consider the pros and cons of both options. When thinking about the possibility of grad school, it makes sense to keep cost in mind. If you decide on grad school and you need to borrow to pay for your education, I encourage you to take advantage of the federal student loan programs first and avoid private student loans. Private loans lack the flexible repayment options of federal loans and can be risky and expensive.
[...] Idealist helpfully summarizes, the debt ceiling deal made some serious cuts to student loans. Although Pell Grants were saved, [...]
Thank you SO much for posting this. It is very helpful with the numerous changes that have happened in the last few years.
Kelly:
I’d highly recommend checking out national service programs such as AmeriCorps, http://www.americorps.gov. The Idealist Career Center has a section on why service corps are a great entry point to social impact work:
http://www.idealist.org/info/Careers/EntryPoints/Service
That said, do check out Idealist’s Grad School Resources – we have articles to help people decide to go or not to go to grad school, like bad reasons to go to grad school:
http://www.idealist.org/info/GradEducation/BadReasons
And good reasons to go:
http://www.idealist.org/info/GradEducation/GoodReasons
We also have a career guide for first time job seekers that may be of use:
http://www.idealist.org/info/Careers/Guides/FirstTime
Best of luck.
Hello, I would like to know what happens if you stop paying your loans. My parents cannot get a job and I am the only one who works and supports (financially) at home and my salary does not cover for everything. We have tried everything, our house is in foreclosure, my parents filed bankruptcy, etc…
This information was very helpful, and probably eased a lot of concerns current and former students are having. Thank you! I have recently signed up for one of Heather Jarvis’ webinars. SDS
I was really hoping to go back to school and obtain a second Masters Degree or move on to my Doctorate to support my work in NGO/humanitarian aide. I am afraid it will be impossible to continue my education as planned, considering my existing undergraduate and graduate federal loans. Taking on more loans, plus the high cost of living in New York City make me hesitant to continue my education. It seems as though only those who are pursuing a financially lucrative career are the ones who can afford higher education. Are there any possibilities that would allow me to continue my pursuit of additional higher education without leaving me in debt for the rest of my life making $800 a month loan re-payments?
The advice is great, but college grads are still having problems with finding a job. You can’t pay back loans if you don’t have steady income. It’s just that simple. It doesn’t make sense for someone is employed on a salary to not pay back their loans. They have the means to do so. However, if you are unemployed, desperately searching and applying for jobs, with no steady income, how could you logically pay back any loans? It makes sense to me but it doesn’t seem to make sense to those looking to collect the funds. Also, not all careers are financially lucrative post-college as Kim stated. Maybe loan companies need to work more closely with college graduates and the private sector so that they can move forward in their careers, creating a win-win situation for both the graduate and the lender. But I know this is Pollyanna thinking, so we shall see.
Income-Based Repayment is a great option for people who have relatively high student loans as compared to their income. It can really help federal student loan borrowers who are struggling financially. Public Service Loan Forgiveness can help people like Kim, who are looking to public service careers. One problem is that these programs are tricky to understand. There is lots more information on IBR and PSLF on my site at: http://askheatherjarvis.com/tools
Tina,
The government has very serious collection powers for federal student loans, and they make sure they get their money, even if they have to garnish your wages or seize your tax refund. It is next to impossible to get student loans discharged in bankruptcy. You have much better options before your loans are in default, when fees and penalties add up fast and your options become restricted. Please refer to http://www.studentloanborrowerassistance.org for excellent information for borrowers in financial distress.
Best,
Heather
I need some clarification…
Does this change mean that the subsidized grad loans I took out before July 2012 will start accruing interest starting July 2012 or will this change only apply to loans taken out after this date?
I just want to be prepared.
Thanks!
Marcela, For subsidized Stafford loans, borrowers are not charged interest while in school at least half-time and during grace periods and deferment periods. That will remain the case for all subsidized Stafford loans borrowed before July 1, 2012. It’s only loans borrowed on or after July 1, 2012 that are affected by the Budget Control Act. Starting then, graduate and professional students will not be able to borrower new subsidized loans.