The Deficit Reduction Act of 2005 was voted on and passed by Congress on February 1. It cut federal student loan programmes by a lot. The $11.9 billion in cuts to student loans, which include changes to the law on student loan consolidation, will hurt students who want to go to college and people who want to combine their loans with higher interest rates. The industry expects a rush of students who want to consolidate in order to take advantage of the low rates that are available now but will go up on July 1.
On Feb. 1, the House of Representatives just barely passed S. 1932, the Deficit Reduction Act of 2005. S. 1932 passed with a vote count of 216-214. On Feb. 8, President Bush signed it into law, making the $11.9 billion in student loan cuts over the next five years official.
Students and graduates are in danger right now. Since the cost of college goes up every year and the interest rates on consolidating student loans are about to go up, college students are rushing to consolidate before the rates go up on July 1.
Student loans suffer the most.
The biggest cuts to other federal programmes, like Medicaid, Medicare, and food stamps, are to federal student loans.
Most of the changes to student loans in the law will go into effect on July 1, and the rest will happen over time. Some of the changes include raising Stafford Loan rates from as low as 4.7 percent to 6.8 percent. Plus, fixed interest rates will rise from 7.9% to 8.50%. The fixed rate on consolidation loans stays the same because of the law.
Before July 1, the interest rates on student loans will go up.
NextStudent, an education funding company based in Phoenix, says that now is the time for students and recent graduates to consolidate their student loans because the rates will go through the roof on July 1. Students and recent graduates are now being told to consolidate because the rates for doing so can be as low as 2.75 percent when benefits are taken into account. Other reasons to consolidate are a longer time to pay, one monthly payment, and no penalties for paying off the debt early.
Here are some other rules about consolidating student loans that go into effect on July 1, 2006. Students and recent graduates should know about the new rules so they can act:
Changes to a Consolidation Loan
- The rule about only one holder hasn't changed
- Takes away the options to consolidate in school or with a spouse.
- In the DL Program, a second consolidation loan can only be made if the FFELP borrower wants an income-based repayment plan and is trying to avoid default. However, this is only possible if the loan has been submitted to a guaranty agency for what used to be called "preclaims assistance" but is now called "default aversion."
- The Conference Report also has a clause that says an FFELP borrower can only get a direct consolidation loan if a lender rejects their application for a consolidation loan or if the application is rejected because the borrower wanted repayment terms based on their income.
A borrower who hasn't paid back a loan can get a DL consolidation loan to fix the problem.
DL consolidation loans have the same terms as FFELP consolidation loans if nothing else is said.
If the Deficit Reduction Act is signed into law, it will cut student loans by a lot and change the rules about how to consolidate student loans. Even though the law has changed in a way that hurts those who want to go to college, students and graduates still have until July 1 to consolidate their loans before the interest rate goes up.
