Relief for student borrowers

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.

As with subsidized Stafford loans, Pell grants are awarded based on your family’s financial need. Because of the College Cost Reduction and Access Act, the maximum Pell grant for the coming school year is $4,731, up from $4,310 last year.

The legislation actually specified that the maximum rise to $4,800 this year, but Congress and President Bush didn’t appropriate enough money.

The law requires three more annual increases, but how big they are will depend on how much money is appropriated.

The legislation also created TEACH grants of up to $4,000 a year for students who plan to teach math, science, special education, bilingual education and other “high-need” subjects at schools with high concentrations of low-income students.

The problem with TEACH grants is that they come with a lot of strings attached. If you don’t meet all the conditions, some of which may be out of your control, the grants turn into unsubsidized Stafford loans, accruing interest at a 6.8% rate while you’re in school and after you graduate.

In fact, the Education Department has estimated that only 20% of the students who get these “grants” will meet all the eligibility requirements, said Lauren Asher, associate director of the Project on Student Debt, a Berkeley-based advocacy group.

“They are calling this a grant, but it’s not going to be a grant for many people; it’s going to be a loan,” she said.

For instance, you must serve as a teacher for at least four years within your first eight years of completing your studies. You must teach a qualifying subject at a qualifying school.

The Education Department hasn’t even determined the list of qualifying schools -- and when it does, it can change the list annually. For now the department suggests checking the list of schools that qualify for other loan forgiveness programs at www.tcli.ed.gov/CBSWebApp/tcli/TCLIPubSchoolSearch.jsp.

“If you could be sure that you will actually turn out to be good teacher, and there will be a job in the right type of school teaching the right subject for the required number of years, then you should take the TEACH loan, confident that it will be forgiven,” Asher said.

But if you choose a TEACH grant over a subsidized student loan but end up not meeting all the criteria for the grant, you’ll pay at least $3,000 more in interest, she said.

TEACH, by the way, stands for Teacher Education Assistance for College and Higher Education. (That’s right: “Education” appears in the name twice.)

Locking in a low rate

If you’re one of the 7 million people with federally guaranteed student loans issued before July 2007, now is a good time to consider consolidating them under the government’s Direct Loan program.

That’s because these loans -- there are about $60 billion outstanding -- accrue interest at a variable rate that is reset each July 1.

And this month, thanks to rate cuts by the Federal Reserve over the last year, that variable rate plunged to 4.2% from 7.2%.

If you consolidate your loans now, you will lock in 4.2% as a fixed rate on your consolidated debt. And 4.2% is a very attractive rate from a historical perspective.

If you do nothing, your rate will continue to adjust annually, based on market interest rates.

To learn more about the government’s loan consolidation program, go to www.loanconsolidation.ed.gov.

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Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit latimes.com/kristof.