Education Loan Changes Effective July 1, 2009

It's extremely important to stay up-to-date on your loan terms. The following student loan changes became effective on July 1, 2009.

Lower Interest Rates and Origination Fees for Stafford Loans

For new subsidized Stafford Loans only, the fixed interest rate is 5.6 percent, down from 6.0 percent. Subsidized Stafford Loans are based on financial need and the interest is paid by the government while you are in school or your loan is in deferment.

For all new undergraduate and graduate Stafford Loans (both subsidized and unsubsidized), the origination fees have been reduced from 2.0 percent to 1.5 percent.

Low Variable-Interest Rates

Variable interest rates for all Stafford Loans originated before July 1, 2006 (unconsolidated loans only) are reset each year. On July 1, 2009, the variable interest rate reset to 2.48 percent (down from 4.21 percent). Students who consolidate during their six-month grace period are now eligible for a low interest rate of 1.88 percent.

New Income-Based Repayment Plan

Similar to the existing Income-Contingent Repayment plan (Direct Loan borrowers) and the Income-Sensitive Repayment plan (Federal Family Education Loan [FFEL] borrowers), the new Income-Based Repayment (IBR) plan is available to both Direct Loan and FFEL borrowers. The IBR plan provides a narrower definition of discretionary income and caps monthly payments at a lower percentage of discretionary income (less than 15 percent for most borrowers). The determination of what you should be able to pay is based on income and family size. Under this plan, debt and interest that remain unpaid after 25 years are forgiven.

There's one small snag with IBR; under current tax law, any loan amount that is forgiven will be taxed. A bill in the U.S. Congress, H.R. 2492 (Levin & Tiberi), seeks to bring this forgiveness program in line with other programs that exclude the amount forgiven from being taxed. Proponents of H.R. 2492 fear that taxation of the amount forgiven will either discourage borrowers from using this beneficial repayment plan or prove to be an unexpected payment hardship in the future if borrowers using IBR are not aware of this tax law provision.

Federal Pell Grant Increase for 2009-10

In addition to changes in the loan programs, Federal Pell Grants maximum awards will increase for the 2009-10 award year. The $4,731 maximum award for 2008-09 increases by approximately 13 percent to $5,350 in 2009-10.

About the Author:
Judi Sandall is a graduate of the State University of New York, with a BA in English Literature. She is a technical writer and editor who worked in student financial aid for over 20 years.