Student Loan Rules You Should Know About

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?)