Finding the money for college during this widening credit crunch just got easier, thanks to emergency legislation signed by the president last week.
The new law raises the amounts that undergraduates can borrow under the federal student loan program. It also loosens the rules so parents who are behind on mortgage payments can still qualify for federal parent loans. And it gives them more time to repay parent loans.
"It's long overdue," says Sharon Hassan, director of financial aid at Goucher College. "It took a crisis in the market for this to happen."
Congress worked quickly to reduce any credit crunch threat to education loans this year. The subprime mortgage crisis triggered the credit crunch that has now spread to other areas, including student loans. Dozens of private lenders that make loans under the federal program have said this year that they no longer will do so. And lenders have been raising their criteria for private loans, making it harder for students to get a loan if they don't have stellar credit or a co-signer.
If you're student or a parent, many of the changes under this new law will apply to loans made beginning in July. Here are the key provisions:
*The annual loan limit for unsubsidized Stafford loans goes up by $2,000 for all undergraduates. The new limits for dependent students will be $5,500 for freshmen, $6,500 for sophomores, and $7,500 for juniors and seniors. Independent students or those whose parents don't qualify for a government PLUS loan will be able to borrow up to $6,000 in each of the first and second years, and $7,000 in the third and fourth years.
*These are unsubsidized loans, so that means you - not the government - pay the interest on the loan while you're in school.
*The total amount you can borrow under the Stafford loan program during your college years also is going up. Undergraduate dependent students will be able to borrow a maximum of $31,000, up from $23,000. The new limit for independent students will be $57,500, up from $46,000.
*The credit criteria for parent PLUS loans have been temporarily loosened. Parents currently can be denied loans if they are 90 days or more delinquent on any debt payments. Beginning in July, lenders will be able to still consider parents for a loan if they are no more than 180 days late on a mortgage payment or medical bills as of January 2007. This more lenient treatment of medical and mortgage bills continues through the end of 2009. You still can't be 90 or more days late on other debt payments, though.
*Parents will get more time to repay a PLUS loan if they want. Currently, they must start repaying 60 days after the final disbursement of the loan, which means they start repaying the loan in the spring. But the new law will allow parents to defer payments up to six months after their child graduates. Interest accrues while the student is in school and is added to the balance.
Help for lenders
Besides easing borrowing pressures for families, the law also attempts to get more money into the hands of lenders so they can continue making education loans. To do this, the federal government will be allowed to temporarily purchase loans from private lenders. The details of this are yet to be worked out. And it's unclear at this point how many lenders will participate.
Many financial aid experts like the changes, saying the extra $2,000 a year for student borrowers can make a big difference.
"It will benefit a lot of students," says Zhanna Goltser, director of financial aid for the College of Notre Dame of Maryland.
"A lot of students won't have to take out private loans," Goltser says. Private loans tend to have higher rates and less flexible repayment plans than federal loans.
The option of deferring payments on PLUS loans also will encourage more parents to take them out, some aid directors say. PLUS loans are used to make up any shortfall in tuition, fees, books and living expenses.
"Families have bills to pay and for some parents making payments on PLUS loans is not an option," Goltser says. Instead, they resort to private loans where payments can be deferred, she says.
Goltser's only regret is the timing of the law. The Baltimore college has sent out student aid letters to incoming freshmen and was getting ready to mail out those for returning students.
The school plans to send out e-mail and letters to students to notify them of the higher borrowing limits in case students want to increase their federal borrowing.
Concern about debt
Some aid directors are concerned that students will rack up more debt, even if it's borrower-friendly federal loans.
Sarah Bauder, director of financial aid at the University of Maryland, College Park, says she would have preferred that Congress increase the amount of grants, which is money that doesn't have to be repaid.
Mark Lindenmeyer, director of financial aid at Loyola College in Maryland, says he encourages parents first to try to pay for college on a monthly installment plan that doesn't charge interest. After that, the next best option is federal student loans, then PLUS loans and in the last resort, private loans.
If parents decide to defer PLUS loan payments, Lindenmeyer has another tip: Pay the interest on the loan while the student is in school. That way, the loan won't balloon into a much bigger debt over the years.