A Break on College Costs

New legislation will make college more affordable by directing federal money to students instead of to student lenders. The College Cost Reduction and Access Act, which President Bush is expected to sign this fall, increases funding for financial aid, offers tuition assistance for students who plan to teach, and helps struggling graduates repay their student loans. Lawmakers freed up money for the changes by cutting federal subsidies to student loan companies by $20 billion.

Need-based aid. For families who qualify for financial aid, the news is doubly good. The Pell Grant, awarded to students with high need, climbs to a maximum of $5,400 over the next five years, from the current $4,310. Students who qualify for the max will receive the first increase, of $490, in 2008-2009, bringing the total that year to $4,800.

Meanwhile, the interest rate on subsidized Stafford loans, also offered to families with need, drops to 3.4% over the next four years. That's half the rate on unsubsidized Staffords, available to any family. Students who borrow a total of $13,800 at 3.4% will save $4,400 over the life of the loans.

Robert Shireman of the Project on Student Debt. Rather than pay a fixed amount over ten years (the standard repayment schedule), struggling grads can opt for a program that bases payments on up to 15% of their annual discretionary income, defined as gross income above 150% of the federal poverty level. (The 2007 poverty level for an individual is Loan repayment. As of July 2009, borrowers "will have the assurance that their loan payments won't cripple them," says $10,210, plus $3,480 for every additional family member.)

The formula replaces less generous income-based programs and applies to Stafford loans offered through the federal government as well as private lenders.

For borrowers faced with choosing between loan repayment and, say, three square meals, the short-term savings can be significant. For instance, a single borrower earning $28,000 would pay $159 a month on a $20,000 debt compared with $230 on the fixed-payment schedule. The payment drops to $93 if the borrower has a dependent.

Uncle Sam helps by picking up the interest on subsidized loans for three years if the reduced payments aren't enough to cover it. Borrowers increase payments as their income rises, but they never have to pay more than the fixed amount on the ten-year schedule. The feds forgive the balance on both subsidized and unsubsidized loans after 25 years.

Public-service incentives. Would-be teachers who hesitate to take out big loans for a low-paying career will soon have relief. As of July 2008, students in teacher preparation programs who commit to teaching for four years can qualify for a $4,000 annual grant to defray college costs. If they decide later not to teach, the grants revert to loans.

Student borrowers also have an incentive to go civic. If they work for ten years in public service, including law enforcement, public health and early education, the government forgives the balance on their student loans. Only students who borrow directly from the federal government get this deal. The clock starts ticking toward the ten-year mark for payments made after Oct. 1 of this year.

Protected income. For the academic year 2009-2010, the federal financial aid formula will let working students keep more of their earnings. The new formula protects $3,750 of the income earned by dependent students, rather than the $3,000 it currently carves out. The allowance rises to $6,000 by 2012-2013. For independent students, the allowance goes to $7,000 in 2009-2010 and increases to $9,330.