Student loans are becoming scarce

Asian student stressed over her schoolwork
  • The Budget Control Act of 2011 includes cuts to federal student aid.
  • The Pell Grant program received an additional $17 billion in the legislation.
  • Cuts to federal loan programs could be included in upcoming budget talks.

If you're counting on the federal government to pay for part of your child's college education, beware. The available money may be decreasing quickly. Congress finally came to an agreement to raise the nation's debt ceiling recently, but not without major budget cuts. The Budget Control Act of 2011 includes immediate cuts to federal student aid, and experts say additional cuts to federal student loans may be coming.

"Student aid is still at risk," says Mark Kantrowitz, publisher of the FinAid and Fastweb websites and author of "Secrets to Winning a Scholarship." "It's a big target, so there's a high likelihood of additional cuts."

Good news and bad news

The Pell Grant program, which has been operating with an $18.3 billion shortfall, received a boost from the Budget Control Act, which allocated an additional $17 billion to finance the program. While the money won't expand the Pell Grant program, it will help to maintain the program at its current grant levels.

The bad news is the money to boost the Pell Grant program was raised by making cuts to the federal student loan program, eliminating the interest subsidy on loans to graduate students for loans after July 1, 2012, and eliminating the Education Department's Direct Loan Program repayment incentives.

Before the act, graduate students who received subsidized student loans could have portions of the accruing interest waived by the federal government, says Ryan Franklin, a certified public accountant for Moss Adams Wealth Advisors in Seattle. The Act's elimination of this subsidy and other smaller loan origination fee rebates was estimated to raise $21.5 billion for the federal government.

"The net result of these changes was a cut in education spending of around $4.5 billion," Franklin says.

Eliminating subsidized student loans for graduate and professional students means interest on their loans will begin to accrue while they are in school. "The rationale is that these students have been in the work force and potentially have the ability to increase their earnings," says Patrick Kandianis, co-founder of SimpleTuition, a website providing information and resources about paying for college.

"A graduate student with the average amount of student loans ($17,500, of which $8,500 is subsidized) could now owe as much as $600 of interest per year while in school. This amount is part of the principal upon repayment at a federal rate of 6.8 percent," Kandianis says.

In addition to the elimination of federally subsidized loans for graduate and professional students, the Budget Control Act also eliminated prompt payment discounts for federal Direct Loan and PLUS Loan borrowers as of July 1, 2012. Direct loans, issued by the federal government to the student through the U.S. Education Department, previously provided borrowers with an interest rate reduction for using automatic debit repayment. PLUS Loans, unsubsidized loans to parents to help pay for their child's education, previously offered a rebate of the origination fee if borrowers made their first 12 payments on time.


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