Interest Subsidy Eliminated, beginning July 1, 2012Date: August 5, 2011
Congress passed and President Obama signed the Budget Control Act of 2011 [PDF] that will result in cuts to federal programs. There will be changes to the federal student loan programs beginning July 1, 2012. The new law will not affect the amount of funding available, just the cost (loans will cost more).
In the President's 2012-13 budget proposal in March 2011, he recommended the elimination of the interest subsidy of the Subsidized Federal Direct Loans for Graduate and Professional students. The savings would be used to bolster the Pell Grant program. Congress proposed the dissolution of the subsidy for ALL students. Section 502 of the new law eliminates the interest subsidy for graduate students beginning July 1, 2012 (next year). Our understanding is that eligible students will continue to be able to borrow $20,500 annually, but interest will accrue on the entire amount beginning at disbursement. The loss of the interest subsidy to a full time day student who borrows for the first time in 2012-13 and was eligible for $8,500 in the past would be about $2,800 term time and $900 in grace period (total $3,700). The additional interest costs for 4 year evening students would be about $4,800 term time and $1,200 in grace period ($6,000). The Department of Education is projected to save $18 billion over the next 10 years.
In addition, under Section 503 of the new law, students will lose the "origination fee rebate" on Direct and GradPLUS loans disbursed after July 1, 2012. Currently there is a 1% origination fee on direct loans (0.5% assessed at disbursement and 0.5% if the borrower fails to make the first 12 months on time). Borrowers would be charged the full 1% regardless of on time payments. For the GradPLUS, the total is 4% (2.5% on disbursement and 1.5% if the borrower fails to pay the first 12 months on time). Borrowers would be charged the full 4% regardless of on time payments.
The Department of Education is projected to save $3.6 billion over the next 10 years.
There is a possibility that borrowers may lose the 0.25% interest rate reduction for electronic loan payments, but it not clear at this point.
$17 billion of the total savings will go to funding Pell Grants.
The Department of Education will be issuing Regulations that address these changes in more detail. We will be sure to send a follow up e-mail as soon as we know more details. There is possibility of more cuts to education funding. These will be released around Thanksgiving.
In sum, the changes are NOT for 2011-2012, they are for 2012-13. As to whom they will apply and how - more detail once the Department of Education issues Regulations regarding the new laws. We will keep you posted as we hear.
Stephen G. Brown
Fordham Law School