Graduate Student Loan Changes Beginning 2012-13
In August 2011, Congress passed the Budget Control Act of 2011, which included two changes that will increase the cost of borrowing Federal Direct Loans for graduate students. The changes go into effect on July 1, 2012 and affect all Federal Direct Loans for graduate students for the 2012-13 academic year and beyond.
Elimination of the Interest Subsidy (Subsidized Federal Direct Loan)
- $20,500 will remain the maximum annual Federal Direct Loan for most graduate students. The interest rate remains 6.8% per year. Accrued interest will be added to the principal balance when you enter repayment, six months after you graduate or leave school. What is changed is that the federal government will no longer pay the interest on (subsidize) the first $8,500 of the loan while you are in school and during the six-month grace period. The increased cost to you will be based, of course, on how long you are in school and how much you borrow.
- This does not affect loans that you have already received. Subsidized Federal Direct Loans received before July 1, 2012 will retain the in-school subsidy. (Please Note: We cannot award 2012-13 loans early to beat this deadline.)
- This does not mean that you must or should make early interest payments to the federal loan servicer while you are in school. Because accrued interest is added only once—at the time you enter repayment—the interest is “simple,” not “compound,” and you will not be accruing interest on interest while you are in school.
- The best way to minimize the impact of this change is to borrow conservatively by:
- Keeping your costs as low as reasonable
- Borrowing the minimum you think you need at the beginning of the year and only asking for more later when you are sure you need it
- Aggressively pursuing aid from other sources (fellowships, departmental aid, employment, etc.)
Elimination of Repayment Incentives
- The new law also eliminates the up-front origination fee rebate on all Federal Direct Loans and Federal Direct Grad PLUS Loans. There is a 1% origination fee on all Federal Direct Loan disbursements ($10 per every $1,000), and a 4% origination fee ($40 per $1,000) on every Federal Direct Grad PLUS Loan disbursement.
- Before July 1, 2012, you received an immediate .5% rebate of the 1% origination fee for all Federal Direct Loan disbursements, meaning that only $5 was deducted per $1,000; and you received an immediate 1.5% rebate of the 4% origination fee for all Federal Direct Grad PLUS Loan disbursements, meaning that only $25 was deducted per $1,000. This rebate was an incentive for students who made timely payments after graduating.
- Beginning July 1, 2012, the origination fee rebate is eliminated and the full 1% origination fee will be deducted from all Federal Direct Loan disbursements ($10 per every $1,000), and the full 4% origination fee ($40 per $1,000) will be deducted from every Federal Direct Grad PLUS Loan disbursement.