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A closer look at student loans

The new rules, passed by Congress and signed by President Bush in February, affect different loan programs in various ways. Here's a preview of what you can expect, as well as what to do about it:

Stafford loans
The biggest news for students with Stafford loans: Rates will jump July 1. On that day, students will also lose the option of consolidating loans while they are still in school.

Students should consolidate now to lock in lower rates, says Sandy Baum, senior policy analyst at the College Board and professor of economics at Skidmore College. "If you're going to consolidate, consolidate before rates go up," she says. But others advise students to hold off until closer to the July 1 deadline.

The law also allows students to borrow more Stafford money during the first two years starting July 1, 2007. While freshmen could previously borrow $2,625, soon they will be able to borrow $3,500. And the limit for sophomores is moving from $3,500 to $4,500. But the total undergrads can borrow will remain the same at $23,000.

Boosting limits for the first two years is a good thing, says Baum. "It would be good if we increased it more. Because loan limits on the Stafford loan program are probably not high enough, students are turning to private loan programs with higher limits and less favorable terms."

Some education organizations and lenders are upset that the rates are not only going up, but going from a floating to a fixed rate. "We thought variable was more equitable for students," says Tom Joyce, spokesman for SLM Corp., popularly known as Sallie Mae.

Larry Zaglaniczny, director of congressional relations for the National Association of Student Financial Aid Administrators, agrees. "At times of a good economy, students should benefit from market forces," he says.

PLUS loans
Parents will also be paying more if they want to help their kids pay for school. For the majority of parents who take out PLUS loans, (the federally regulated money borrowed through lenders), the rates will increase from 6.1 percent to 8.5 percent.

Some colleges and universities use the direct loan system (more about that below), which bypasses lenders and grants PLUS loans directly from the government. Those parents will see rates go from 6.1 percent to 7.9 percent. But because the disparity in the interest rates between the two programs was made in error, it is also possible that the direct loan rate could be adjusted to 8.5 percent in the future, says Zaglaniczny.

The law also makes PLUS loans an option for grad students.

FFELP vs. direct loan program
To know exactly how the loan picture will change, students and parents also have to understand exactly where they are getting their money. Both the Stafford and PLUS program have two variations. Under the direct loan program, the money comes directly from the federal government. Under the Federal Family Education Loan Program, or FFELP, the money comes from a third-party lender, but at rates set by the federal government. Colleges and universities choose which type of loan program they will offer, and FFELP loans are much more common.

Next: "Lenders and loan terms are not all equal."
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Stafford - in school 4.29%
PLUS loan 6.84%
Private loan 8.30%
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