[Tabs] USA Today - College Aid Bill

[Joe Orozco]

$20 billion college aid bill heads to White House

By Sandra Block

Democratic leaders formally signed a $20 billion college aid bill Tuesday 
that will boost federal grants for low-income students and lower interest 
rates
for student loans.

Supporters say the bill, which President Bush is expected to sign within 10 
days, is the largest investment in college education since the 1944 GI bill
provided tuition aid to millions of World War II vets.

"This is obviously a very big day for students and their families," said 
Rep. George Miller, D-Calif., chairman of the House Education and Labor 
Committee.


The bill will increase Pell grants, the largest source of federal aid to 
low-income students, from $4,310 to $5,400 by 2012 (see box). It will also 
cancel
unpaid loan balances for borrowers who work at least 10 years in public 
service and who make payments for those 10 years. In addition, it will let 
all
federal student loan borrowers make payments based on their income. To pay 
for the new programs, the bill will cut federal subsidies to private lenders
that offer federally guaranteed loans.

Congress approved the bill over the objections of lenders, which warned that 
the federal subsidy cuts would raise the costs of student loans.

Some Republican lawmakers have also criticized the loan-forgiveness 
provision, arguing that it created a new government entitlement program. 
Sen. Judd Gregg
of New Hampshire, the top Republican on the Senate Budget Committee, says 
the bill "puts a stake through the heart of the budget process."

Nor does the bill address the rising cost of college, which has led to 
record amounts of student debt. In the past five years, average tuition at a 
public
university has soared 35%, after adjustment for inflation.

Miller said members of his committee plan to look at steps colleges should 
take to restrain costs. It's a bipartisan interest in Congress, so I think 
that
conversation is about to begin," he said.

How the bill will affect students and families who borrow money for college:

Lower interest rates

The law will gradually reduce rates on some undergraduate Stafford loans. 
But the cuts won't kick in until next year. If you have an outstanding 
Stafford
loan, you won't benefit from a rate cut, says Robert Shireman, director of 
the Project on Student Debt. The current rate for Stafford loans taken out 
after
July 1, 2006 is 6.8%.

The rate cuts will be limited to subsidized Stafford loans, available only 
to borrowers with financial need. With such subsidized loans, the government
pays the interest while you're in school. About two-thirds of subsidized 
Stafford loans go to families with adjusted gross income of under $50,000.

The law will reduce rates for the subsidized Stafford loans to 3.4% by 2011 
(see box). But barring congressional action, those rates will jump back to 
6.8%
on July 1, 2012.

The lower rates will apply to new loans taken out after the effective date. 
If, for example, you take out a subsidized Stafford loan on July 1, 2008, 
your
rate will stay 6% for the life of the loan. Your rate won't fall to 5.6% on 
July 1, 2009; that rate will apply only to loans issued after that date.

Income-based repayment

Borrowers with Stafford loans will never have to spend more than 15% of 
their discretionary income, which is tied to the federal poverty level, on 
their
loan repayments.

The amount of discretionary income for individual borrowers will vary, 
depending on family size. But most borrowers who sign up for the program 
will end
up spending less than 10% of their total income on their student loans, 
according to the Project on Student Debt.

Under current law, borrowers can enroll in a program that caps payments at 
20% of discretionary income. Few borrowers, though, have taken advantage of 
that
program, says Philip Schrag, a law professor at Georgetown University Law 
Center. The new program "reduces payments to a much more manageable fraction
of disposable income," he says.

If the capped payment doesn't cover interest on the loan, and the loan is a 
subsidized Stafford, the government will pay the interest for the first 
three
years. After that, unpaid interest will be added to the loan balance.

For unsubsidized Stafford loans, unpaid interest will be added to the 
balance from the beginning. But after 25 years, any balance left on the loan 
will
be canceled.

This provision takes effect on July 1, 2009. But it won't be limited to 
loans issued after that date. Borrowers with outstanding loans will also be 
eligible
for the income-based repayment program.

Lawmakers who backed this provision recognized that some people never earn 
enough money to repay their investment in a college education, says Luke 
Swarthout,
associate with the U.S. Public Interest Research Group's Higher Education 
Project. We ought to have a system that is not so overly punitive that we 
discourage
people from making that investment or taking that risk."

Loan forgiveness for public service workers

Borrowers who spend at least 10 years working in certain public service 
professions, such as police officers, teachers, firefighters and members of 
the
military, will be eligible to have the balance of their student loans 
forgiven.

If you're a public service employee, or are considering a career in public 
service, here's what you need to know about the loan forgiveness program:

*Only loan payments made after Oct. 1 count toward the 10-year period. If 
you're already working in a public service job, you won't receive credit for 
payments
you've already made on your loans.

*You must make income-based payments to the federal direct loan program.

The federal direct loan program is one of two Stafford loan programs. The 
other is the Federal Family Education Loan Program, in which loans are 
provided
by private lenders and guaranteed by the government.

Only about a quarter of colleges and universities take part in the direct 
lending program.

But public service workers can qualify for the loan forgiveness program by 
consolidating their loans in the direct loan program, says Mark Kantrowitz, 
publisher
of FinAid.org, a financial aid site.

Schrag, the law professor, says the provision will be particularly helpful 
to law school graduates who want to pursue a career in public service.

Those graduates have some of the highest debt-to-income ratios of all 
borrowers, making it hard for them to work in government or public service, 
Schrag
says.