Changes in Financial Aid and Student Loans

One of the main questions students enrolled in any degree program have about financial aid, especially student loans, is whether there will be any changes to the programs and if those will impact them—either during school or later when they are repaying any student loan amounts they may have borrowed. This is a great question any student should constantly be asking.

The last time the Higher Education Act (which governs all the student aid programs) was reauthorized was in 2008—that’s almost 10 years ago. Considering how long it has been, and that there is a new administration in Washington, D.C., there is a strong chance you could see more changes over the next few years.

To help you understand these, let’s take a look at changes that are already in place and may impact you, as well as some changes that have been proposed and are currently under discussion.

Recent Changes

Student Loan Interest Rates

Interest rates on federal student loans, such as direct subsidized, direct unsubsidized, and direct PLUS (for parents of undergraduates and also for graduate students), change each year for new loans disbursed on or after July 1 of any given year. This simply means that when you graduate, you may not only have multiple loans, you will have different interest rates on each one. The rates are fixed and will never change on each individual loan throughout repayment.

FAFSA Deadline and Information

There were two recent changes to the Free Application for Federal Student Aid (FAFSA) that may impact when you apply and receive your award notice. 

1. In the past, the earliest you could apply for federal aid was January 1 of the year you needed the aid. For example, you could apply as early as January 1 for financial aid you needed in August of that same year. However, now applications can be submitted up to three months earlier, meaning October of the year prior to when you need the aid.  
   
   

2. The second change is related to the first. When you complete the FAFSA, you generally use prior year income data from your most recent tax return—or your parents do, if you are an undergraduate or a graduate student whose school requires parental information for campus-based aid. However, moving the application date back three months means you can now use “prior-prior” year income when completing the FAFSA before January. Your school will likely verify the income information at some point later in the spring after you or your parents file your taxes for the prior year. 

Proposed Changes

Elimination of Interest Subsidy

Currently, undergraduate students who demonstrate financial need can borrow from the federal government with direct loans. Direct loans are interest-free to borrowers during school and during the six-month grace period before repayment begins, which follows a drop below half-enrolled time status.

While subsidized loans for graduate students were eliminated in 2012, there is a proposal to eliminate them for all students, including students in undergraduate and certificate programs. This would mean borrowers would owe more at time of repayment since the government is no longer picking up the interest during school and the grace period. That is interest that builds up (accrues) and is capitalized (added back to the original amount borrowed) at repayment.

Simplifying Repayment

There are basically two categories of repayment plans for federal loans—time driven and income driven. Time-driven plans are pretty straightforward, and the payments are the same over a designated period of time and the debt is retired at the end of the term by simply making the minimum payment (you can always overpay if you want, without penalty). However, there are multiple income driven plans such as Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), each with their own unique characteristics, all of which can make choosing the right income plan quite confusing for borrowers who need income plans. 

There is a proposal to move to only two plans: standard 10 year and one income driven plan, with payments calculated at 12.5% of a borrower’s discretionary income, with any remaining debt forgiven after 15 years (for undergraduates) or 30 years for graduate students, including dental students.  

New One Loan Program

There is a proposal to eliminate the current federal direct loan program, which includes direct unsubsidized and direct PLUS loans, and replace it with a new Federal One Loan program with one unsubsidized loan per category of borrower (for example, undergraduate, graduate, parent).

Elimination of Public Service Loan Forgiveness (PSLF)

There is also a proposal to eliminate the Public Service Loan Forgiveness program, by eliminating the federal direct loan program as noted above (only direct loans are eligible for PSLF). PSLF is the program whereby the federal government will forgive a borrower’s remaining balance after 10 years (120 timely monthly payments) as long as they worked in the public sector during that time. Visit www.StudentAid.ed.gov/publicservice for details. Current indications are the current direct loan borrowers will remain eligible for PSLF, assuming they meet the eligibility requirements.

So what does all this mean for you? Clearly, the more educated you are about your student loans, the better, and that’s where your school’s financial aid office can help.

Remember:

1. Never borrow more than you really need.
2. Plan to pay back what you borrow, and don’t plan on the government picking up the tab.
3. Always know what you borrow, who is servicing the loans and when they’re due.
4. Finally, when looking at changes, find out if the changes impact new loans or new borrowers. The general rule of thumb is that major changes to programs impact first-time borrowers only, with current borrowers being “grandfathered” into current provisions.

Watch ADEA GoDental for additional updates on proposed changes to student financial aid.