The cost of student loans is going to skyrocket unless Congress acts fast.
In 2007, Congress passed the College Cost Reduction and Access Act, which lowered the interest rate on federal student loans from 6.8 percent to 3.4 percent. But the law was temporary and set to expire July 1.
There are currently several pieces of legislation to soften the blow. The Interest Rate Reduction Act (H.R. 4628) and the Stop the Student Loan Interest Rate Hike Act of 2012 (S. 2343), would push the doubling to July 1, 2013 at a cost of $6 billion each.
A plan touted by U.S. Senators Tom Coburn, M.D. (R-OK) and Richard Burr (R-NC) - the Comprehensive Student Loan Protection Act - would change the structure for all new federal student loans first disbursed after July 1 to become a fixed-variable rate. It requires the applicable rate of interest for student loans to be equal to the bond equivalent rate of 10-year Treasury bills auctioned at final auction prior to June 1, plus 3 percent.
In 2010, student-loan debt surpassed credit-card debt for the first time. American students took out twice the value of student loans in 2011, about $112 billion, as they did a decade before, after adjusting for inflation. Overall, Americans now owe about $1 trillion in student loans.
President Barack Obama’s proposed his Pay as you Earn Plan last year that would allow borrowers to reduce their monthly student loan payments to 10 percent of their discretionary income. About 1.6 million students would have the ability to cap their loan payments at 10 percent starting next year and the plan would forgive the balance of their debt after 20 years of payments. Additionally, starting this January an estimated 6 million students and recent college graduates would be able to consolidate their loans and reduce their interest rates. Current law allows borrowers to limit their loan payments to 15 percent of their discretionary income and forgives all remaining debt after 25 years.
On May 23, Mitt Romney unveiled his own education plan. A Chance for Every Child
promises to simplify the federal financial aid system and "refocus" Pell grant dollars on the most needy students. Romney would enter into public-private partnerships to ensure students and their families are able to make informed decisions about college. A Chance for Every Child also takes aim at improvements designed to cap monthly student loan payments at 10 percent of borrowers' incomes.
Along with the interest rate increase, there are new requirements for the federal student aid programs. Most of these changes are effective with the 2012-13 school year. Subsidized loans (for which the student is not responsible for the interest while the enrolled in college at least half-time), will not be eligible for an interest subsidy during the six-month grace period. Graduate and professional students will no longer be eligible to receive subsidized loans at all. Also, the U.S. Department of Education will no longer offer borrowers repayment incentives.
The amount to qualify for an Expected Family Contribution of $0 was reduced to only allow a family income that does not exceed $23,000, a reduction from the previous maximum income of $32,000.
Penalties for defaulting on a loan are getting stiffer too:
- National credit bureaus can be notified of your default, which will harm your credit rating, making it hard to buy a car or a house.
- You will be ineligible for additional federal student aid if you decide to return to school. Loan payments can be deducted from your paycheck.
- State and federal income tax refunds can be withheld and applied toward the amount you owe.
- You will have to pay late fees and collection costs on top of what you already owe
- You can be sued.