How the 2011 Debt Deal Affects College Students

In 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act—which introduced sweeping changes to federal student aid. It increased Pell Grant funding, broadening the program’s reach—as well as expanding availability of subsidized and low-interest federal loans.

Under the new debt deal, however, some of those federal aid expansions will be rolled back—making college more expensive for a large number of students. Some changes have already been made—increasing costs particularly for those in graduate and professional schools.

However, a bipartisan panel of 12 lawmakers has been assigned to seek out an additional $1.2 trillion in cost reductions by November—and more college aid programs could be on the chopping block.

Here’s an overview of how the new debt deal can affect students in the future—and how it has already.

There’s no question that for most college students, school just got more expensive. Graduate and professional students will pay significantly more money in interest over their time in school.

No more subsidized loans for graduate and professional students

Coming in July 2012, graduate and professional students will no longer be able to qualify for any subsidized federal loans. These federal loans keep interest in check by allowing it to start accumulating only after the student graduates from school. Without access to subsidized federal loans, school just got more expensive for students in law and medical school, PhD students, and those studying for a Masters degree.

Fewer students get Pell Grants

The government is projected to save over $17 billion by taking subsidized loans away from graduate and professional students. That savings will be put toward the Pell Grant program, but only to assure the program won’t have to make any cuts in the near future.

The Obama Administration’s original student aid overhaul increased the maximum Pell Grant amount to $5,550 per year, with increases set for 2013 and 2017. While the current limit isn’t going anywhere, it’s not likely that those limit increases will be preserved in their current form. It’s also possible that if the economy worsens and more students qualify for Pell Grants—which are given out based on financial need—the government will have to make its eligibility standards more strict.

Fewer loan discounts

Before the debt deal, students got a .5% discount on loans made after July 1, 2010 if they make their first 12 payments on time. In July 2012, that discount will be eliminated. However, the debt deal does not eliminate an additional discount of .25% on interest for those who set up automatic debit payments for their loans.

Higher interest rates for federal loans

Federal loans are currently a better deal than private loans—primarily because the interest is significantly lower. This may not be the case for long. Currently, Stafford loan interest rates are set at 3.4%; that will jump to a whopping 6.8% next year. Risk of this is especially high since the government’s credit rating was recently downgraded from AAA to AA+. This downgrade could raise the government’s borrowing costs by eroding trust among lenders—and the government may need to pass that trust along to consumers.

Reduced tax breaks

Currently, students can claim up to $2,500 in tax credit for college costs under the American Opportunity Credit Act, with an additional credit of up to $1,800 for the first two years of college under the HOPE Act. So far, tax breaks for student loans have not been eliminated. But that doesn’t mean they won’t be. The panel of lawmakers tasked with identifying additional cuts will have the option of reducing tax breaks for college costs as part of their larger cost-saving initiative.

Late student loan disbursal

This year, many students have received word that their financial aid packages for the Fall 2011 semester have not changed—but they won’t be disbursed until fall. This can make things difficult for many returning students, who must use financial aid to pay for books, housing necessities, and school supplies.

Reduced student savings

After the US government’s credit rating was downgraded, the stock market plunged over 500 points. This is sure to affect the college savings accounts of millions of families nationwide, many of whom had invested in 529 college savings accounts. If the spending cuts weaken the economy, it’s possible those savings accounts could take a long time to recover—if they recover at all.

There’s no question that for most college students, school just got more expensive. Graduate and professional students will pay significantly more money in interest over their time in school. And everyone will pay more in interest for federal loans. In addition, Pell Grant funding may no longer be accessible to many students if the government must increase its eligibility requirements. In addition, current market conditions have damaged college savings accounts across the country. Hopefully, the economy will pick up in coming years—and the outlook will improve for college costs.