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College loan terms better

In response to the urelenting growth in college expenses, the College Cost Reduction and Access Act of 2007 was signed into law.

Among its provisions, the act:
  • Increases funding for the Pell Grant through 2017 and increases the maximum available to students.
  • Cuts the interest rate on subsidized Stafford loans to 3.4 percent over a period of four years.
  • Introduces income-based repayment for federal student loans, effective in July 2009.
  • Establishes a new public service loan-forgiveness program.

Asher says the income-based repayment provision is designed to alleviate the struggle that many college graduates feel, particularly those with high debt relative to their income. These students "who may be struggling to make their loan payment can get an assurance of making their loan payment and a light at the end of the tunnel," says Asher.

Income-based repayment will be available to everyone with a federal student loan -- past, present and future borrowers. The program does, however, exclude PLUS loans.

Generally, federal loan payments will be limited to 10 percent of the borrower's discretionary income, or a little bit above 10 percent for people making higher incomes, with a cap at 15 percent.

According to IBRinfo.org, households making less than 150 percent of the poverty level for their family size will not have to make a loan repayment at all. For example, a family of two earning $20,000 per year would not be required to make payments. On the other end of the income spectrum, a family of two earning $100,000 annually would make a payment equal to 11.9 percent of their income.

After 25 years of payments, these loans will be automatically forgiven.

The public service loan forgiveness program will forgive the debt of federal student loan borrowers holding certain kinds of jobs after making payments for 10 years. Eligible jobs include those with nonprofit organizations and government jobs at the federal, state or local levels, among others. These rules will be finalized by November 2008.

There is one catch to this program: Your school must be in the direct loan program.

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"To benefit from the public service loan forgiveness program, you need to be in one of three types of payment plans, and they are only in the direct loan program. So you have to be in the right kind of job and making the right kind of loan repayments at the same time," says Asher.

However, the new law opens a loophole for students in the FFEL program. Asher says that a change made July 1, 2008, entitles graduates who had already consolidated their loans through an FFEL lender to reconsolidate. "You can reconsolidate into the direct loan program to access public service loan forgiveness," she says. In response to the urelenting growth in college expenses, the College Cost Reduction and Access Act of 2007 was signed into law.

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