Changes to College Loan Laws Benefit Borrowers

College students, their parents, and graduates paying back student loans can all benefit from recent changes to federal loan laws, described below.

Changes to Federal Loan Applications
All new federal college loans will be made through the Department of Education’s Direct Loan Program. This means that the subsidized and unsubsidized Stafford Loans and Perkins Loans made to students, and Parental Loans for Undergraduate Students (PLUS) made to parents are no longer available through banks or private lenders like Sallie Mae.

Banks and private lenders can of course still offer their own college loans, but there is now a distinct separation between private and government loans. This has made the process for getting federal loans clearer, since there is now only one way to apply: fill out the Free Application for Federal Student Aid (FAFSA), and inform your college that you would like to take out federal loans.

Federal loans may also become easier to get. Mark Kantrowitz, publisher of, told the Wall Street Journal that his research shows that private lenders have historically approved far fewer federal loans than the Direct Loan Program.

Changes to Federal Loan Interest Rates
Some federal loans have become cheaper as a result of lower interest rates. The fixed rate on a subsidized undergraduate Stafford Loan has decreased from 5.6 percent to 4.5 percent. PLUS Loans that were at 8.5 percent interest have been dropped to the 7.9 percent rate that some PLUS Loans were already being charged.

Changes to Pell Grants
The maximum Pell Grant amount has gone up from $5,350 annually to $5,550. Both full-time and part-time students are eligible for Pell Grants, which are awarded based on financial need. Fill out the FAFSA to apply.

Changes to Federal Student Loan Repayment Options
There have been several changes to the guidelines for paying back student loans:
• 2010 graduates with Stafford Loans that originated before July 1, 2006 can consolidate the loans within six months of leaving school to lock in a low 1.87 percent rate. These loans will otherwise have a variable interest rate refigured yearly.
• Eligibility for the Income Based Loan Repayment Program (IBR) for federal student loans is now calculated using the greater of either: the current amount of the loan or the balance when repayment began. In the past, eligibility was determined only by a comparison of the loan amount at initiation of repayment with your income. If you qualify for IBR, your loan payments are capped at a certain percentage of your income, and all remaining debt is forgiven after 25 years.
• Couples who jointly file taxes and are both paying back loans through IBR now have their payments calculated differently. Calculations now take into account that their joint income has to cover the sum of their loans. Before, the joint income was used to determine the payments for each individual’s loan, resulting in a high total amount due.

So there’s lots of good news, but current students might have to deal with some red tape. If you have a federal student loan that was made through a private lender before these changes went into effect last July, and you need to take out a new loan, you will have to sign a Master Promissory Note. This can be done online. Contact your financial aid office for more information about how the rule changes affect you, and how to make the most of the new borrower-friendly laws.