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New Law Changes Student-Loan Terms
A new federal law makes several changes in federal student-loan programs. If you already have student loans or plan to take out federal student loans for the 2006-2007 academic year, you should review the following items that may affect the terms of your loans. Many of the changes took effect July 1, 2006.
Consolidation Loans
Loan consolidation permits federal student-loan borrowers to bundle multiple student loans into a single loan, and depending on the borrower’s total education debt, extend the period for paying back the loan.
* In-school consolidation. You no longer will be able to consolidate your student loans while you still are attending school at least half time. The new law eliminates a provision that had permitted you to request that your loans enter repayment early. You now will have to wait until you are in the grace period after you leave school (or drop below half-time enrollment) or in repayment on your loans before you may consolidate them.
* Spousal consolidation. Spouses no longer will be able to include their loans in a single consolidation loan.
* Reconsolidation. With a few exceptions, if you already have consolidated your loans, you may not obtain a subsequent consolidation loan. The exceptions are that you subsequently take out a loan eligible to include in a consolidation loan, that you decide to include additional eligible loans within 180 days after receiving your consolidation loan, or that you decide to add eligible loans that you did not include in the original consolidation loan. The new law adds another exception that permits borrowers with Federal Consolidation loans to obtain a Direct Consolidation loan for the purpose of obtaining income-contingent repayment, but only if the lender has requested assistance from the loans' guarantor to help the borrower avoid default.
Deferment – Military Service
Deferments permit borrowers who meet certain criteria — for example, unemployment, economic hardship or attending school — to temporarily postpone their student-loan payments. The new law adds a new category of borrowers who qualify for deferment. Effective July 1, 2006, if you’re serving in the military on active duty during a war or other military operation, or national emergency, or performing qualifying National Guard duty during a war or other military operation or national emergency, you may qualify to defer payments on loans that were disbursed on or after July 1, 2001.
Disbursement
Waivers from delayed and multiple disbursements. Typically, your loan dollars are paid out to your school in more than one installment. In addition, if you are a first-time borrower and a first-year student, federal regulations require that your first loan disbursement be delayed for 30 days after your classes begin. If your school has a low student-loan-default rate, however, the new law provides waivers from these disbursement requirements. This change was effective as of Feb. 8, 2006.
To study-abroad or foreign-school students. If you are studying abroad through a program of a U.S. postsecondary institution or studying at a foreign school, the lender or guarantor of your loan first must verify your enrollment (and the foreign school that you’re attending must specifically request disbursement directly to you) before your loan can be disbursed directly to you. In addition, foreign schools must comply with the multiple- and delayed-disbursements noted in the preceding paragraph, although they also are eligible for the waivers noted above.
Fees
Prior to July 1, 2006, Stafford- and PLUS-loan borrowers could be assessed upfront loan fees of up to 4 percent of the loan amount. The new law makes the following changes in those fees.
* Federal default fee. The law requires the collection of a 1-percent fee to defray the costs of loan defaults. Lenders and guarantors, however, may pay this fee on your behalf.
* Origination fees . Origination fees for Federal Stafford loans are being phased out. The maximum origination fee is reduced to 2 percent from 3 percent for Federal Stafford loans whose first disbursement is on or after July 1, 2006. The origination fee will be reduced in annual increments of 0.5-percentage points until it is eliminated by July 1, 2010. PLUS-loan origination fees are unchanged.
Interest Rates
Stafford loans. The new law made no change in a federal law that was enacted in 2002 and calls for a change from variable interest rates to a fixed rate of 6.8 percent for Stafford loans whose first disbursement is on or after July 1, 2006. Loans disbursed prior to that date will continue to carry variable interest rates that adjust annually on July 1, based on the rate of the 91-day Treasury bill.
PLUS loans. The new law increased the fixed interest rate on Federal PLUS loans whose first disbursement is on or after July 1, 2006, to 8.5 percent from 7.9 percent. PLUS loans disbursed prior to that date will continue to carry variable interest rates that adjust annually on July 1.
Loan Limits
Beginning next year, July 1, 2007, certain undergraduate and graduate students will be able to borrower more under the Federal Stafford-loan program.
* Undergraduate students. The maximum annual loan limit for a first-year undergraduate student will increase to $3,500 from $2,625; the annual loan limit for second-year undergraduates will increase to $4,500 from $3,500.
* Graduate and professional students. The unsubsidized loan limit will increase to $12,000 from $10,000.
PLUS Loans for Graduate and Professional Students
Previously available only to parents of dependent undergraduate students, PLUS loans also are available, beginning July 1, 2006, to graduate and professional students to help defray their costs of attendance. PLUS loans are federally sponsored loans that may permit you to borrow on more favorable terms than private, nonfederally sponsored loan programs offer.
The chief benefit of a PLUS loan is that you can borrow up to your total cost of attendance, less any other financial aid you receive. So, unlike Federal Stafford loans, there is no set loan limit. You must pass a credit check to take out a PLUS loan. PLUS loans are unsubsidized, so you are responsible for all of the interest that accumulates on the loan. Unlike Stafford loans, PLUS loans offer no grace period: PLUS loans enter repayment within 60 days after the loan is fully disbursed. PLUS-loan interest rates also are higher than rates for Stafford loans, but PLUS loans offer the same flexible repayment options and the ability to defer loan payments or request forbearance, if you qualify.
Rehabilitation of Defaulted Loans
If you’re in default on a federal student loan, you may qualify to rehabilitate your loan. Rehabilitation can be beneficial by removing the reporting of your default to national credit bureaus and restoring your account to repayment status. The new law makes it easier for you to qualify for a rehabilitation loan by permitting you to make nine voluntary, on-time payments within a 10-month period, rather than the previous requirement of 12 consecutive, voluntary, on-time monthly payments.
Teacher Loan Forgiveness
The new law extended provisions for expanded loan forgiveness available to certain teachers. Read more information about teacher loan forgiveness.
Wage Garnishment
If you are in default on federal student loans, your loans’ guarantor may order your employer to withhold a percentage of your pay to apply to your unpaid loan balance. The new law increased the percentage that may be withheld to 15 percent from the previous level of 10 percent.
