April 28, 2006

Students enjoy the nice weather outside of the science building on the campus of SOU Wednesday. Orville Hector | Ashland Daily Tidings

Changes coming July 1

Bush administration laws will raise interest, reduce consolidation

By Alan Panebaker
Ashland Daily Tidings

In 2002, when Jessica Kinsey graduated from Southern Oregon University with a bachelor’s degree, she and her husband were able to consolidate $35,000 in federal student loans to save money on a better interest rate.

The two went on to buy a house a few months later, and now she is in a graduate program working toward a master’s in management degree.

“Consolidation was fairly simple for us because we just rolled them (loans) over once we graduated,” Kinsey said.

For graduating college seniors in 2006, things may be a little different. Every July, interest rates on federal loans like Stafford and PLUS (parental loans for families with children in college) go up, and consolidation has always been the trick for college students to keep their low interest rates.

This year, however, things are changing a bit more than normal. People in Kinsey’s position will no longer be able to consolidate with their spouses, and that is just one of the sweeping differences brought on by the Federal Deficit Reduction Act of 2005.

President George W. Bush signed bill S.1932 into law Feb. 8. The act brings with it a multitude of budget cuts including those in Medicare and Medicaid.

According to statements by the president shortly after signing the bill, it will reduce federal student loan costs by $22 billion.

“With that money, we will save taxpayers $12 billion — because we intend to increase student aid by 10 additional billion dollars,” Bush said in February. “What I’m telling you is, the students are getting the money, and we’re making the program a lot more efficient for the taxpayers.”

The act will save federal money by increasing interest rates on federal loans to a fixed 6.8 percent (Stafford loans are currently at about 4.7) and by decreasing consolidation options for students.

“The difference is in the fine print,” said Scott Chadick, a loan processor in the financial aid office at SOU.

He said many students with Federal Family Education Loans could usually accelerate their payment process while they are still in school in order to consolidate for a cheaper interest rate. The Federal Budget Reduction Act will take away this privilege come July 1.

Since SOU receives federal money directly from the government, it has more lenient policies on when students can repay their loans after graduation. Institutions who get loans through lending companies like SallieMae, make things a bit more difficult. Students who consolidate while in school lose their grace period to pay back loans after graduation.

The fine print in S.1932 that has made national news recently concerns loan reconsolidation. In some instances, students can consolidate a loan once for cheaper interest rates, then shop around further down the road and obtain even better rates. The budget deficit act makes this illegal, which has caused uproar among columnists accusing SallieMae and the U.S. government of trying to monopolize the student loan industry.

“Federal spending on student loans represents about one-half of 1 percent of the federal budget,” wrote Terry Savage, a columnist for the Chicago Sun-Times. “but proposed cuts to the student loans program equal 30 percent — roughly $12.7 billion — of the proposed budget cuts.”

Savage doubts the act’s ability to reduce the federal deficit by a significant amount, stating that private lenders who accept a lower interest rate and do not cost government dollars do most refinancing.

The controversy even incited a lawsuit in New York federal court brought by a lending company and a woman who was $75,000 in debt and could have found a better interest rate than she was receiving.

While the litigation in the Northeast may be a futile effort to consider the act unconstitutional, Chadick recommended students in Oregon take advantage of the lower variable interest rates before July 1 to save some money.

As for Kinsey, she deferred her loans for graduate school and appears to be in the clear until she receives her second degree.