Controlling Student Debt

In 2006, Congress slashed $12 billion in student lending funds in a desperate attempt to reduce the fiscal budget deficit. Recent studies have shown that student debt is getting out of control, and lawmakers on Capitol Hill have decided to take steps to help ease the burden for students with college loans.

In this publication, we're going to discuss some of the measures that elected officials are taking to help make college more affordable. Specifically we're going to discuss five programs that will help make getting a college diploma easier. First, we'll look at two of the most popular ways to pay for college today: Stafford Loans, and Pell Grants.

Paying for College Costs

Additional Resources

There are many different ways to pay for college. You can take out a private student loan, or you can apply for two of the most popular federal programs that exist today:

Stafford Loans, and
Pell Grants

It's important to understand how these programs can help because, later on, we're going to talk about some legislation that directly affects these two very important sources of college funding.

Stafford Loans

You apply for a Stafford Loan using the Free Application for Federal Student Aid form. These loans have variable interest rates, and are aimed at providing loans to both the undergraduate and graduate college student. In general, there are two types of these loans:

Subsidized Stafford Loans - which are awarded to students based on demonstrated financial need, and no interest accrues on the loan balance until repayment begins. They're called subsidized loans because the federal government is paying the interest due on the loan until the scheduled payments begin after graduation.
Unsubsidized Stafford Loans - which are not awarded based on financial need. The interest due on the outstanding student loan balance accumulates while the student attends school, and stops when the loan is repaid in-full.

According to statistics from the U.S. Department of Labor, approximately 5.4 million students borrow money to pay for college through Stafford Loans, and the average loan amount is roughly $3,100. Our article on Stafford Loans provides more information on loan maximums, which varies by student status and level of education.

Pell Grants

There are exceptions, but generally, Federal Pell Grants are awarded only to undergraduate students. These grants are paid by universities or colleges at least once each term. The money can be paid directly to the student, to the school via a student account, or any combination of the two. Unlike a loan, a grant does not have to be repaid.

The average grant under this program is $2,500, and there are approximately $12.9 billion in Pell Grants awarded to 5.2 million students annually.

Reducing Student Debt

As mentioned earlier, there have been recent cuts to federal spending on student loans. Congress is reversing that trend, and is trying to reduce the total debt burden held by students using at least five different approaches:

Linking Loan Repayment to Income Levels
Increasing Competition Between Lenders
Reducing Student Loan Interest Rates
Increasing Pell Grant Maximums
Reducing Reliance on Private Lenders

We're going to finish this article by taking a closer look at each of these approaches, and explain how students may benefit from these changes in the near future.

Student Loan Repayment

Senator Edward Kennedy, former Chairman of the United States Senate Health, Education, Labor and Pensions (HELP) Committee, released a study on the student loan system entitled "Report on Marketing Practices in the Federal Family Education Loan Program." As part of his student loan reform stance, Senator Kennedy proposed a repayment plan that would place a cap on monthly loan payments.

Under this program, if a former student were to take a low paying job after graduation, their monthly payments would be capped at 15% of their monthly income. The federal government would then pay the remaining interest expense on the loan. For students entering such fields of work as law enforcement, social work, or teaching, there would be a loan forgiveness provision that starts after 10 years.

Lending Competition

Senator Kennedy also pushed for legislation that would encourage colleges and universities to borrow directly from the federal government. By bypassing large lenders such as Sallie Mae, which receives subsidies from the federal government on the loans they write, studies indicate the Department of Education would save taxpayer money.

To provide an added incentive to schools, the Department of Education is even willing to send half of their savings back to participating schools, so they can provide additional financial aid to students in lower income brackets.

Lowering Interest Rates

The House of Representatives has passed legislation that lowers the interest rate paid on student loans by half. This program would apply to Stafford Loans, and once again, target students coming from lower income families.

For students with $10,000 in loans outstanding, this can mean the difference between paying nearly $6,000 in interest over the course of a 15 year loan at 6.8%, and $2,800 in interest at 3.4% (2011 / 2012 rates). That translates into $3,200 in savings over the life of the loan.

Pell Grant Maximums

Former President Bush proposed to increase the maximum awards under the Pell Grant program from $4,050 to $4,600 in 2008, and to $5,500 by 2012. The rationale behind this move is the feeling that Pell Grants have not kept pace with the rising cost of a college education. This program would cost taxpayers $15 billion over five years, but the prospects of it gaining legislative approval are high.

Private Lenders

Finally, most college students do not understand the financial relationship that exists between lenders and the schools they're attending. Many schools maintain a preferred list of private student loan lenders, in exchange for certain gifts made available to the schools themselves.

Once again, former Senator Kennedy supported legislation that would disclose such arrangements between schools and lenders. In addition, this bill would require schools to offer students a choice of at least three lending institutions.

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