New Legislation for Student Loan Plans - How Will This Affect You?

A recent piece of legislation was passed by Congress and signed by President Bush that will cut nearly $21 billion dollars in government subsidies to lenders that provide for student loans over the next five years. This sounds like bad news for the student, but in reality it is anything but bad news. The money that has been cut from subsidizing lenders is going to be put back into different aspects of money for students, including lowering interest rates, and raising the amount of money in the grant programs.

Most of the money that has been cut will go into increasing the size of Pell Grants. Pell Grants are awarded to lower income students, and it is money that the student does not have to repay. Right now, the maximum grant amount is $4,310. That amount will be raised to $4,800 next year and the amount will continue to increase until the maximum grant amount reaches $5,400 in the year 2012.

Subsidized Stafford loans for undergraduates are now at a fixed rate of 6.8 percent. That amount will be reduced by half over the next four years until July 2011 when the interest rate will be 3.4%. If Congress does not extend the interest reduction, the rate will revert to 6.8 percent in the year 2012.

There will be additional grants made available for those who choose to go into teaching in areas that need more teachers such as math, science, special education and foreign languages. These grants can be worth as much as $4,000 per year, but there are some strings attached. The student must commit to teaching for at least four years in areas where there are teacher shortages. Eight years will be allowed to fulfill this obligation, and if it is not done not only will the principle have to be repaid, but also the accumulated interest.

The repayment plans will also be revamped. Beginning in July of 2009, payments will be no more than 15% of a person's discretionary income. If the loan is paid on for 25 years, the rest of the loan money will be forgiven.