Federal student loan subsidies cut by $12 billion

In an effort to lower the national deficit, President Bush is looking to student borrowers to help foot the bill.

The U.S. House of Representatives approved the Deficit Reduction Act on Feb. 2 in a 216-214 vote without the assistance of a single Democrat. Bush signed the bill into law Feb. 8, 2006 and said his budget for 2007 will eliminate federal programs that have performed poorly.

The budget cuts aim to decrease this year’s federal deficit by $39 billion, which represents a sizeable chunk of the nearly $400 billion deficit the White House is projecting in 2006, due in large part to the war in Iraq and Hurricane Katrina.

The Deficit Reduction Act calls for the federal government to decrease funding to Medicare, Medicaid, farming subsidies, student loan subsidies and more than 100 other government programs, one-third of which support education and the arts.

Federal student aid subsidies, which support underprivileged college students, will be reduced by $12 billion.

The bill also suggests that increased, fixed interest rates for federal loans will filter $2 billion back to the government rather than back into higher education.

UAA Students will begin to see these changes July 1, when interest rates for federal Stafford loans are scheduled to increase to a fixed rate of 6.8 percent. Stafford loans are low-interest loans that can be either subsidized or unsubsidized. A subsidized loan allows students to defer any accumulation of interest until their completion of school.

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Current interest rates for Stafford loans are based on a variable rate that is reset every year, with a rate cap of 8.25 percent. Stafford loan interest rates for 2005 averaged 4.7 percent, so many students will see an initial increase to their loan rates in 2006.

However, Stephanie Butler, the Director of Operations at the Alaska Commission on Postsecondary Education, said she wasn’t too surprised by the 6.8 percent figure.

“Interest rates are rising. I believe it’s expected that if it were to remain variable, it could even be higher than 6.8 (percent) next year,” Butler said.

Ted Malone, UAA’s director of student aid, said around 6,000 UAA students have received Stafford loans for the 2005-06 academic year, resulting in the disbursement of approximately $20 million in federal loan money for the Anchorage campus alone.

Malone said that when he began working with financial aid in 1986, Stafford interest rates were at the 8.25 percent mark. He said that because of the variable system, the interest rate has declined to today’s low rates. He says he thinks the new fixed rate will be beneficial to students in the long run.

Michael Teffeteller, a sophomore UAA student who plans to major in business and management accounting, uses Stafford loans and Pell grants to supplement his spending during the school year. He says he is fortunate enough to not have to rely on loans, but doesn’t see the changes as having a big impact on students in the long run.

“That 2-percent increase isn’t going to stop anyone from going to college, said Teffeteller. “A misconception is that college is expensive, but it’s not any more expensive than a drug habit, a car or a girlfriend.”

Rep. Berta Gardner, D-Anchorage, said that the federal budget changes really wouldn’t mean much for Alaskan students in terms of federal money. What it really affects is the for-profit loan originators like banks and private lenders who rely on federal subsidies.

“Most Alaskan students go through the Alaska Commission on Postsecondary Education and they have always kept their rates lower,” said Gardner. She said the ACPE is able to remain unaffected by the changes because it relies on state rather than federal subsidizing.

The Deficit Reduction Act also makes changes to federal PLUS loan as well. In the 2005 academic year, the variable average interest rate was 7.9 percent. Under the new bill, the PLUS loan rate will be fixed to 8.5 percent. PLUS loans are taken out by parents to pay for their dependent undergraduate student’s school expenses. Changes to PLUS loans will now make them available to graduate students as well as the Stafford loans to supplement the rising costs of higher education.

Lenders too, are faced with changes that may have them reevaluating their outlook on student lending.

One change that will make things easier is that the bill eliminates spousal debt consolidation, which is when a husband and wife consolidate separate loans into one.

“The bummer there, is if later on they get divorced or if one of the spouse dies the other is still responsible for the full amount of the debt,” Butler said.

However, with subsidies being cut to lenders themselves, loaning money to students may become a less attractive business. When lenders earn lower returns from loans they are less inclined to pass savings back on to students.

Despite vast cuts to educational programs, there are some undoubtedly positive effects the Deficit Reduction Act will have on students.

The change will phase out the origination fee that students pay when they take out a loan. Origination fees are charged to a borrower by a lender for the privilege of obtaining the loan.

“Right now lenders may charge up to 3 percent origination fee, and the act reduces it to 0 percent over a four year period,” Butler said.

Additionally, under the new bill, freshman and sophomore students will be able to borrow $3,500 and $4,500 a year _” an increase of $1,000 from the previous years allowance. Graduate students will now be able to borrow $2,000 more than in the past, for a total of $12,000. $7,000 of this amount will accumulate no interest until they finish school. The previous loan caps have been in place since 1986 and until now have not reflected the inflating costs of tuition.

The bill also includes $3.7 billion in new federal Pell Grants for high achievers and students who study math, science or certain foreign languages.

Many national student organizations have nicknamed this bill the “Raid on Student Aid.”

According to a Feb. 8 Associated Press article, “Democrats said the measure was an assault on college students and the elderly and disabled who rely on Medicaid to pay for their health care. They said the bill, which was written in private, was evidence of the undue influence of corporate interests such as insurance companies and drug manufacturers.”

Republicans said the measure proves their status as the party of a more efficient government and said that so-called mandatory spending programs like Medicare threaten to swamp the budget as the baby boomer generation starts retiring.

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