In our previous post on this topic, we introduced H.R. 4348 – Moving Ahead for Progress in the 21st Century (MAP-21). Today, we’ll discuss changes to the federal student loan program that occurred with passage of this legislation, and despite it.
Fully Backed By House and Senate
Capitol Hill showed strong support for MAP-21. Almost every congressional leader wanted to continue the flow of highway funds, which was the main purpose of this legislation. However, Congress also wanted to communicate to the American people their concern and sympathy with the student loan crisis. Which brings us to the first question that must be asked.
Did MAP-21 Prevent an Imminent Student Loan Crisis?
In pressing legislators to take preferred action, President Obama insisted that “[i]f Congress does not get this done in a week, the average student with federal student loans will rack up an additional $1,000 in debt over the coming year.” The President went on to describe the increase as a “$1,000 tax hike.”
According to Politico, that speech contained a bit of presidential hyperbole:
“That was a bit of hyperbole. According to the Department of Education, if [student loan interest] rates double, the borrower paying back the average Stafford loan would owe an additional $1,041 over the 12-year life of the loan. That would break down to $87 more annually, or about $7 more a month.”
Although any educational cost reduction is good for students and their parents, characterizing a savings of $7 a month (the cost of a deluxe cappuccino) as significant with a lasting impact on consumer borrowers is simply not supportable. Student loans are no easier to discharge in bankruptcy now than they were on July 1 when MAP-21 passed the Senate. Meaningful consumer debt reform, then, has not occurred with regard to student loans. Which brings us to the second question that must be asked.
What Has Changed With Student Loans?
Effective for all Direct Stafford Loans that are originated on July 1, 2012, and thereafter…
The interest rate on Stafford loans is fixed for both undergraduate and graduate degree programs. In the “miscellaneous” segment of MAP-21 is the Student Loan Interest Rate Extension. For subsidized undergraduate loans only, the rate of interest is frozen at 3.4% for one more year.
Undergraduate Degree Students. Let’s back up for a minute. There are both subsidized student loans (based on financial need) and unsubsidized student loans (not based on financial need). Both types are fixed-rate undergraduate Direct Stafford Loans. With the subsidized loan, the interest (3.4%) does not accrue while the student is enrolled. With an unsubsidized loan, fixed at 6.8% interest, when the borrower defers the interest it is capitalized and added to the loan balance.
Harder to Qualify for Student Loans. Changes to student eligibility will make it more difficult to financially qualify for student loans. A lowered income limit from $32,000 to $23,000 or less for the automatic zero, or no interest loan, effectively restricts the group of income-eligible students.
Borrowers Begin Paying Interest in Six Years. There is a new cap on federally subsidized loans. Previously, students could stay in school indefinitely, without any interest accruing on their subsidized loans until after graduation or leaving school. The loan period is now limited to 150% of the length of the program. Undergraduate students enrolled in four-year programs can only receive loans for up to six years, or 150% of the full-time completion schedule.
Graduate and Professional Degree Students. As of July 1, 2012, subsidized graduate Stafford loans are no longer available – period. Although the student does not make payments while enrolled, all graduate loans will begin charging interest as soon as the loan is disbursed until it is completely paid off. Unsubsidized graduate loans are fixed at 6.8% interest and will have the interest accrued and added to the principal. Consequently, the total cost for graduate loans to doctors, lawyers, and other professionals will be much higher.
Termination of the Six Month Grace Period. For all Stafford loans made on or after July 1, 2012, through June 30, 2014, the grace period has been completely eliminated. Loan payments begin immediately upon graduation or the end of enrollment.
Previously, graduate and undergraduate borrowers enjoyed a six-month grace period to transition into a work environment before having to begin loan repayment. Now, as soon as the student finishes school he or she must immediately start paying on the loans.
This is likely to increase the frequency of early defaults on student loans, particularly for graduates who cannot find work right away in a down economy. There will still be loan deferments, or forbearance, to temporarily stop or lower loan payments in certain circumstances. Although some loans may be cancelled or discharged, that would be an exceptional situation. So after the presidential hyperbole and congressional back-slapping, very little was accomplished in the way of helping student loan borrowers.