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

    Should You Look at 529 Plans Outside Your State?

    529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
  2. FA

    Paying for College: Utilize These Top Hacks

    Saving money for college is difficult for many families, but it doesn't have to be. Here are some overlooked hacks to save money on college costs.
  3. Investing

    4 Billionaires Who Dropped Out of Harvard

    People who became successful despite dropping out of Harvard University.
  4. Credit & Loans

    Student Financial Aid Changes: FAFSA 2015-2016

    Here is a look at some of the major changes to FAFSA in 2015 - 2016 and how they will affect student financial aid.
  5. Credit & Loans

    What to Do When You Can't Repay Your Student Loans

    Student loans should be kept in good standing no matter what. Here are some tips on managing your loans.
  6. Credit & Loans

    Student Loan Deferment: Live to Pay Another Day

    Extending your principal repayment date can increase your chances of fighting off default.
  7. Credit & Loans

    Fund Your Schooling with PLUS Loans

    Find out what they and are whether you're eligible to apply for these no-maximum loans.
  8. Savings

    Fund College for a Grandchild: 529 vs. HEET

    For some grandparents, a HEET is a desirable option for funding their grandchildren's college education. Here's what you need to know about this trust.
  9. Professionals

    Why Millennials Might Not Be Ideal Clients

    Here's why luring millennial clients might be a waste of time (for now).
  10. Credit & Loans

    An Introduction to Student Loans and the FAFSA

    Learn how to fill out the FAFSA form so that it is easier for you to fund your education.
  1. Who is eligible for student loan forgiveness?

    Your eligibility for student loan forgiveness depends on the type of student loan in question. If you have a federal loan, ... Read Full Answer >>
  2. What’s the difference between the two federal student loan programs (FFEL and Direct)?

    The short answer is that one loan program still exists (Federal Direct Loans) and one was ended by the Health Care and Education ... Read Full Answer >>
  3. Can Sallie Mae loans be forgiven?

    Sallie Mae loans, similar to other private loans, cannot be forgiven. As of 2015, there is no option for private student ... Read Full Answer >>
  4. Can Sallie Mae loans be consolidated?

    Sallie Mae loans can be consolidated with other federal loans, but not with private loans. For federal loan consolidation, ... Read Full Answer >>
  5. How does Sallie Mae disburse funds?

    Sallie Mae is the number one provider of financial aid and student loans in the United States, servicing over 25 million ... Read Full Answer >>
  6. Do Sallie Mae loans go directly to your school?

    Sallie Mae is the biggest provider of financial aid and student loans in the United States. The company operates as a private ... Read Full Answer >>
Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center