2012 is fast approaching, and with that comes changes to existing legislation. For students either currently attending, graduating or entering college sometime in 2012, there are important changes to student loan laws that begin in 2012.
TUTORIAL: Student Loans: Introduction

Repayment Changes
President Obama became a friend to recent college graduates who find themselves with unsustainable student loan payments. In an executive order, Obama has moved up the date of student loan reform from 2014 to 2012. These changes come in two parts.

First, the "Pay as You Earn" proposal will allow recent graduates to make payments as a percentage of their earnings. Under the current system, students are only required to pay a maximum of 15% of their discretionary income towards their student loan payments. Under the new law, students will only have to pay 10%. Also under this executive order, students will only have to make payments for 20 years instead of the current period of 25 years.

Second, borrowers will be able to consolidate their loans into one monthly payment. Borrowers with student loans from multiple lending companies know how difficult it is to keep track of who owns the loan and the payment amount without setting up multiple automatic payments. Under this plan, borrowers will make one payment for all of their government sponsored loans and also receive a 0.5% rate reduction. According to The White House, 5.8 million borrowers could be positively affected by this change. (Learn how to fill out the FAFSA form so that it is easier for you to fund your education. For more, see An Introduction To Student Loans And The FAFSA.)

Graduate Students Lose Subsidy
Not all of these changes are a benefit to students. Starting July 1, graduate and professional students will lose the ability to receive a Stafford loan and not accumulate interest while in school. These unsubsidized Stafford loans are being eliminated in order to shore up the Pell Grant program, which is currently more than $18 billion in debt. Proponents of this bill argue that many graduate students are already in the workforce and able to handle the interest payments that could amount to as much as $600 per year of payments while in school.

Loss of Origination Fee Rebate
Under 2011 law, students pay a 1% origination fee on all Stafford loans and a 4% fee on PLUS loans. Once the loan is dispersed, 0.5% of the fee for Stafford loans and 1.5% of PLUS loans is rebated. Under changes enacted by the Budget Control Act of 2011, the rebate will be eliminated starting July 1.

Electronic Interest Rate Reduction
For students who set up an automatic withdraw of their student loan payments, the Federal Government currently offers a 0.25% interest rate reduction. Presumably, the idea behind this is that the costs associated with delinquent borrowers is greatly reduced with automatic payments. The same legislation that eliminated the last two perks also eliminates this program.

Will It Work?
Between the elimination of the Stafford loan subsidy, the loan origination rebate and the 0.25% interest rate reduction elimination, the Federal Government expects to save an estimated $21.5 billion. Congress argues that budget cuts are essential to shore up the nation's balance sheet and all Americans will have to make sacrifices. The Obama administration claims that the cuts laid out in his recent executive order will cost the taxpayers nothing while opponents of the plan say that this opens the door for further abuse of the system.

The Bottom Line
Looking at the five changes above, students should be more happy about the reduction in payment than they are angry about the elimination of the relatively small perks as a result of the Budget Control Act of 2011. (For related reading, see Student Loan Debt: Is Consolidation The Answer?)

Related Articles
  1. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  2. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  3. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  4. Home & Auto

    Millennials Guide: 6 Routes to the Right Roommate

    Choosing the right roommate is key to not risking and ruining your credit history. Some simple precautions can save you from a financial nightmare.
  5. Savings

    A Look at the Cost and Tax Treatment of College

    Is there more we can do to improve the affordability of post-secondary education? We take a look at how students and colleges are taxed today.
  6. Credit & Loans

    10 Ways to Manage Student Loan Debt

    How to manage those pesky payments as you embark on adult life.
  7. Fundamental Analysis

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  8. Personal Finance

    8 Profitable Majors For The College-Bound In 2015

    Choose your college major wisely to justify the rising cost of higher education. Here are 8 majors that lead to good jobs and high salaries.
  9. Professionals

    Scholar vs. Entrepreneur: What's Your Calling?

    You don't need a bachelor's degree to launch your own company. But which path — school or entrepreneurship — offers a better start to your work life?
  10. Credit & Loans

    The Lurking Dangers of Student Loans

    Student loans are popular, but they present many dangers.
RELATED TERMS
  1. Good Student Discount

    An auto insurance policy discount available to young drivers ...
  2. Whartonite

    A graduate of the Wharton School of Business at the University ...
  3. Free Application For Federal Student ...

    The form that must be completed in order to qualify for any type ...
  4. Student Debt

    Money owed on a loan taken out to pay for educational expenses. ...
  5. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans – ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
RELATED FAQS
  1. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  2. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  3. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  4. What are the best MBA programs for corporate finance?

    Opinions vary based on which publications you consult, but the best MBA programs for a career in corporate finance are at ... Read Full Answer >>
  5. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  6. What are the differences between delinquency and default?

    Delinquency and default are loan terms that describe failure to make a required payment. A loan in delinquency occurs the ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!