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Students destined to go deeper in debt

The Deficit Reduction Act, passed by Congress and signed by President Bush in February, is a mixed bag for college students. But many educational analysts agree that the news for needy students is mostly bad.

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The bottom line: They can borrow more money through federally regulated programs. But they're going to pay more for it.

Rates on Stafford loans are going from a variable rate that hovered around 5.3 percent, or 4.7 percent while students were in school, to a fixed 6.8 percent.

Most parents seeking to help their kids through school by borrowing from the federally regulated PLUS program will see rates jump from 6.1 percent to 8.5 percent.

And the traditional Pell grant program, which gives money to students with the greatest financial need, will retain the same grant limits for the fifth year in a row despite massive increases in college costs.

Students can borrow more
The law has both good and bad news for students, says Donald Heller, associate professor of education at the Center for the Study of Higher Education at Pennsylvania State University. "It's good for students in that they will be able to borrow a little more money at subsidized rates.

"On the flip side for students, it clearly appears that loans will be more expensive in the long run, so that's going to make it worse for students," he says.

According to a new study released by The Project on Student Debt, the "interest rate scheduled for July 2006 will result in payments that are 20 percent higher than the 2004-2005 rates, more than doubling the total interest paid over the life of the loan."

"It's a terrible thing," says Joshua Chaisson, a junior majoring in economics at the University of Southern Maine, who works with the Student Public Interest Research Groups, a political action network, on financial-aid-related issues. "It's a really sad day for students."

Not all bad news
Larry Zaglaniczny, director of congressional relations for the National Association of Student Financial Aid Administrators, also sees pros and cons. While it hinders students in many respects, "in other respects it does some good things for students."

Graduate students will now be eligible to apply for PLUS loans, which were available only to parents of students. Undergrads will be allowed to borrow more in Stafford loans for their first and second years of college. But the total amount they can borrow for college under the program stays the same.

In addition, the one-time origination fees now attached to Stafford loans will be phased out by 2010. But a 1-percent, one-time default aversion fee will become mandatory on Stafford loans, and in some cases students will be asked to pick up the tab.

For more on these student programs, see "A closer look at student loans."

U.S. government will benefit
An aspect of the law that is attracting interest -- and some ire: The federal government stands to make billions from the student loan program for use toward reducing the deficit.

 
 
Next: "What you have is students paying for the disparity."
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 RESOURCES
A closer look at student loans
Pell grants -- less money for the needy
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College Financing
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NATIONAL OVERNIGHT AVERAGES
Stafford - in school 4.66%
PLUS loan 7.21%
Private loan 8.30%
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