Student aid changes take effect

Going to college became more affordable this month for millions of lower-income students, thanks to changes to two major financial aid programs.

The revisions, spurred by a federal law called the College Cost Reduction and Access Act, include higher maximum amounts for federal grants as well as lower interest rates on some newly written government-guaranteed loans.

"This is a big, big improvement in the status of the lowest-income students," Rep. George Miller (D-Martinez) said at a news conference late last month.

At the same news conference, Sen. Sherrod Brown (D-Ohio) called the legislation "an investment in American students" that "couldn't have come at a better time."

The federal act also created a new grant program for future teachers, but strings attached to the grants make them quite risky for students.

Meanwhile, a regular interest-rate reset this month may make it worthwhile for recent graduates with outstanding variable-rate student loans to refinance them with new, fixed-rate debt.

Here's what's happening:



Stafford loan rates

A big change affects Stafford loans, a cornerstone of the federal student aid system. The interest rate on newly written, "subsidized" Stafford loans was reduced July 1 to 6% from 6.8%. It is scheduled to drop the following three years until it reaches 3.4%.

For each loan, the interest rate is fixed. Whatever the rate is when you borrow the money is the rate you will pay for the life of the loan.

If you're starting college this year and borrowing about $13,800 over fours years with subsidized Staffords -- the average amount of Stafford loans taken out -- the rate reductions will mean a savings of $2,570 in repayment costs, advocacy group U.S. PIRG calculated.

The interest rate on "unsubsidized" Staffords will remain at 6.8%.

Whether you qualify for a subsidized Stafford depends on an estimate of your and your family's ability to pay for college. Unsubsidized Staffords are available to any college student.

In addition to lower rates, a longtime benefit of a subsidized Stafford is that the government pays the interest while you're in school.

On an unsubsidized Stafford, you are responsible for interest from the day you borrow the money.

About 5.5 million students take out subsidized Stafford loans each year, while 4.8 million get the unsubsidized variety.

(In reality, even "unsubsidized" Stafford loans are subsidized because the interest rate is better than the market rate you would get on a similar loan -- private lenders agree to give you that lower rate because the debt is guaranteed by the government.)

You can get a Stafford loan from the U.S. Education Department's Direct Loan program, from student lenders such as Sallie Mae and All Student Loan or from banks such as Bank of America and Wells Fargo. The rates and basic terms are the same regardless of where you borrow the money.



Bigger awards

Loans can help pay for college, but grants are better because you don't to pay them back. And the amount you potentially can get from the government's main student grant program, known as Pell grants, just went up.