6 Ways the Debt Deal Could Hurt College Students

Daily Herald (Arlington Heights, IL), August 8, 2011 | Go to article overview

6 Ways the Debt Deal Could Hurt College Students


Byline: Associated Press

NEW YORK -- College is already expensive. Now the government's eleventh-hour agreement to raise the debt ceiling is set to push costs higher.

That's particularly true for those pursuing advanced degrees, with the government eliminating subsidies to graduate and professional students as one way to cut back. The upside is that the savings will be used to help preserve the Pell grant program, which provides critical funding for low-income students.

But that's not where the budget tightening ends. A bipartisan panel of lawmakers is set to identify at least another $1.2 trillion in deficit reductions by Thanksgiving, meaning college aid programs could face further cuts. There's also the lingering possibility that the country could lose its top-notch credit rating, which would push up interest rates on private student loans. A broader decline in the stock market could also eat away at college savings that are invested in the stock market.

Here's a look at how the deal in Washington could impact six aspects of paying for college:

Subsidized loans

Starting next July, graduate and professional students will no longer be eligible for subsidized federal loans. These loans keep the cost of borrowing in check because the government doesn't charge interest while students are in school. That can have a big impact on how much is owed upon graduation.

Graduate students can take out up to $107,500 in federal loans, of which $42,500 can be subsidized. They'll still be able to borrow the same amount once the change goes into effect, but no subsidized loans will be available. The additional cost of an unsubsidized loan could push up total debt at graduation by an average of about 16 percent, according to Finaid.org, which tracks the financial aid industry.

There aren't any indications so far that the government will do away with subsidized loans for undergraduates, especially since such a move would face widespread political opposition. About 7.5 million undergrads a year rely on subsidized federal loans, compared with 1.5 million graduate and professional students.

Pell grants

The $17 billion in savings from eliminating subsidies for graduate and professional students will be used to fund Pell grants. But the extra money only helps bridge a funding shortfall so the program won't have to make any cuts in the immediate future.

The preservation of Pell grants is seen as critical because they provide undergraduate funding to the neediest students; the vast majority of the 10 million recipients have family incomes of $40,000 or less. For now, students will still be able to get a maximum grant of $5,550 a year. But the odds aren't looking good for the annual cap increases scheduled from 2013 to 2017, notes Terry Hartle, vice president of government affairs for the American Council on Education.

Even with the funding injection, the program faces an estimated operating shortfall of $1 billion for the 2012 school year. And that gap could widen if the economy deteriorates and more students apply for grants.

That in turn could force the government to consider tightening eligibility requirements or lowering the maximum grant amount, Hartle said.

Loan discounts

The government's debt deal also eliminates a discount given to borrowers who make their payments on time. …

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