Law Seen as Step To Cut Students' Debt Burdens

By Ian Shapira
Washington Post Staff Writer
Monday, February 4, 2008

As students confront rising tuition, a new federal law aims to help those who are borrowing more than ever to pay for college. Student aid advocates and higher education experts say the College Cost Reduction and Access Act, signed by President Bush in September, marks a significant but imperfect step toward alleviating college debt.

For the neediest families, the law allows lower-than-ever monthly payments on some federal loans and provides increased Pell grants. And for those who plan on being career prosecutors or who work for nonprofit agencies or in other public service for at least 10 years, the law forgives remaining federal debt.

Aid advocates hope the Democratic-led Congress will continue increasing federal benefits and taking other steps to help students. Some are backing legislation, expected to reach the House floor as early as this week, that would compel lenders to disclose more about interest rates on private loans. They also urge lawmakers to bar private lenders from using the names of universities for "co-branding" as they market loans to students who might not be aware of how to obtain the best possible rates.

The advocates stress that students should know that the law helps them with federal loans, not with private loans.

Here are some of the major provisions:

- For the neediest students, the interest rate on subsidized Stafford loans will be gradually reduced from 6.8 percent this year to 3.4 percent in 2011. For higher-income students who receive unsubsidized Stafford loans, the interest rate will remain 6.8 percent.

- Starting in July 2009, students can take advantage of a new formula to reduce monthly payments on federal loans. The formula reduces the portion of discretionary income used to calculate maximum payments and limits monthly bills to 15 percent of that income, instead of the previous cap of 20 percent. After 25 years of payments, remaining debt is forgiven.

- Anyone who receives loans directly from the federal government and stays in a public service job for 10 years can have remaining debt forgiven after that period. Those working in government or nonprofit agencies can start the clock from October 2007.

- Maximum Pell grants, which target low-income students, will gradually increase to $5,400 annually in 2012, up from about $4,200.

Robert Shireman, president of the California-based Institute for College Access and Success, said he hopes Congress raises the maximum Pell grant to $7,500 by 2012 and passes legislation that would allow students to treat private loans like other consumer debt and discharge them through bankruptcy.

Late last year, Rebecca Thompson, legislative director of the U.S. Student Association, met a University of North Carolina student who told her that he didn't qualify for much of the new aid provided under the law.

"He was like, 'Who does this really help?' " Thompson said. "There are still lots of students who come from working-class families who are priced out of the relief."

Thompson added: "It's not the complete solution to solving the student debt crisis. This was simply the first step. There are few protections in place that exist for private loans that are similar to the protections for federal loans."

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