4 Big Changes to Federal Student Loans Just Took Effect

Folded dollar bill being inserted into bank wearing graduation hat
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By Betsy Mayotte

Early July is generally a slow period for most businesses, but it can be a scramble in the world of higher education. Most regulatory changes, including changes to student loan interest rates, are effective on July 1, despite the fact that the federal fiscal year doesn't begin until October 1. This is partially due to a requirement that the Department of Education give advance notice of any proposed regulatory changes, including those dealing with student loans. Federal law mandates that the Department of Education set aside times for the public and affected to comment on the proposed changes. Here are four changes that took affect on July 1.

1. Interest Rates

Last year, Congress changed the law that dictates interest rates on federal student loans. The new rule bases the rate off of the 10-year Treasury note rate as of the last auction in May, with a small margin added. This year that rate was 2.61 percent, eight-tenths of a percent up from last year.

Any new loan first disbursed on or after July 1 will have that interest rate, fixed, for the life of the loan. Interest rates will not change on existing fixed rate loans, including consolidation loans.

The rates for these new loans are as follows:

Loan type

Interest rate for loans made July 1, 2013 – June 30, 2014

Interest rate for loans made July 1, 2014 – June 30, 2015

Maximum rate for future loans

Direct subsidized and unsubsidized Stafford loans for undergraduate students

3.86 percent

4.66 percent

8.25 percent

Direct unsubsidized Stafford loans for graduate students

5.41 percent

6.21 percent

9.5 percent

Direct graduate PLUS loans

6.41 percent

7.21 percent

10.5 percent

Direct parent PLUS loans

6.41 percent

7.21 percent

10.5 percent

2. Closed School Discharge

This one almost ended being perfect timing, considering the recent announcements that Corinthian Colleges may have to shutter its 107 campuses in the next few weeks.

Thankfully, the crisis was averted or at least slowed down, but sometimes schools do close with no notice –- and students are almost always the victims when that happens.

Some protections are in place for those with federal student loans. Previously, if a student is enrolled within 90 days of the date a school closes and is unable to complete his or her credentials at another school, he or she is eligible to have the associated federal student loans discharged. New rules effective July 1 expand that time frame to 120 days from the date the school closes.

Keep in mind the entire school or location must close to be eligible for this discharge, and if you are offered an opportunity to complete that credential, you're likely better off getting that degree.

3. New Income-Based Options for New Borrowers

The executive order that President Barack Obama signed a few weeks ago won't just expand Pay As You Earn to borrowers with older loans. New borrowers will be able to take advantage of these payment terms now.

Borrowers who take out their first loan on or after July 1 will be eligible for the version of the income-based repayment plan that caps their payments at no more than 10 percent, rather than the 15 percent of the "classic" income based plan, of their disposable income and will forgive any remaining balance after 20 years rather than 25.

4. Relief for Defaulted Federal Loan Borrowers

Borrowers with defaulted federal student loans have two options other than paying the loans in full to get their loans out of default: rehabilitation and consolidation. In order to rehabilitate the loan, borrowers must make nine consecutive, on-time payments of a reasonable and affordable amount agreed to by them and the loan holder.

%VIRTUAL-article-sponsoredlinks%New rule changes will standardize how that rehabilitation process works for all borrowers, regardless of who holds their defaulted federal loans. Borrowers who start the rehabilitation process on or after July 1 will have their payment initially calculated under the 15 percent rule,which essentially means 15 percent of a borrower's disposable income. If that amount is too high, borrowers will have the right to submit a financial hardship form that takes more of your total financial situation into account.

There are also new rules for administrative wage garnishment to ensure all borrowers are treated equally and fairly.

Betsy Mayotte is director of regulatory compliance for American Student Assistance.