Bill would provide student loan funds

Times Staff Writer

Financing college is likely to get easier, thanks to a bill sailing through Congress.

The Ensuring Continued Access to Student Loans Act of 2008, passed by the Senate on Wednesday, would let parents and students borrow more from the government. It could also boost grants for some needy high achievers.

The House has passed its own version of the bill. Here's a rundown on the proposal and how it could affect you.


What's the bill about?

The continuing credit crunch has caused about 65 lenders to back out of the student loan market in the last three months. Currently, students borrow about $85 billion a year to finance higher education. With college costs rising and the economy slowing, legislators say student loans are more important than ever.

House and Senate leaders agreed to provide more government backing for so-called unsubsidized Stafford loans -- the most common type of federally guaranteed loan. This is likely to save students millions of dollars by letting them forgo costly private loans.

The bill is projected to make money for the government -- $450 million over five years. Lawmakers agreed to use those funds to boost grants for needy students.


When would it take effect?

There are differences between the House and Senate bills, but they are so minor that legislators could agree on a final bill as early as today. President Bush has said he will sign it, which could allow it to go into effect within weeks.


How would it affect student borrowing?

First, some background: There are three common types of student loans: subsidized Staffords, unsubsidized Staffords and private loans.

Both types of Stafford loans have fixed interest rates and terms set by the government. Any Stafford loan taken out after July 1 will have a fixed rate of 6% for the life of the loan. The difference between subsidized and unsubsidized Stafford loans is that the federal government pays the interest on the subsidized loan while the student is in school; the interest accrues on an unsubsidized Stafford loan while the student is in school and must be repaid when the student graduates.

The government would boost the maximum amount that students can borrow under the unsubsidized Stafford program with this legislation. This bill does not affect subsidized Stafford loans.

Maximum loan limits vary, but for typical freshmen the amount they can borrow under the unsubsidized Stafford program will rise to $5,500 from $3,500. Sophomores will be able to borrow $6,500, up from $4,500. Juniors and seniors will be able to borrow $7,500, compared with $5,500 currently.

These hikes are likely to reduce student reliance on private loans, which now account for roughly one-quarter of all funds borrowed for college. These loans' interest rates and terms are set by the lender; some have rates as high as 20%.


Does the bill help parents?

Parents now can borrow under the Parents Loans for Students program, known as PLUS. The catch with a PLUS loan is that borrowers must start repaying within 60 days of disbursement. This legislation would let parents defer repayment while their child is in school. Interest on the loan would accrue while the repayment is deferred, which can prove costly, but it provides an option for parents who can't afford to repay the loans while their children are in college.


Can parents be denied PLUS loans?

Yes. Parents with an adverse credit history currently are ineligible for PLUS loans, except in "extenuating circumstances." This bill broadens the definition of those circumstances to include being up to 180 days late with their mortgages or having medical debts. That should make it easier for some parents to borrow.


What about grants for needy students?

The government has pledged to pour the $450 million it expects to earn into Academic Competitiveness and SMART grants. These are scholarships for needy, high-achieving students. SMART grants are geared to those studying math and science.


How does this bill make money for the government?

Although the interest rates on Stafford and PLUS loans are lower than those on most private loans, they're higher than the government's cost of funds. The government also collects origination fees when the loans are made, said Mark Kantrowitz of, a financial aid website.


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