Three Rule Changes to Repaying College Loans

The rules for college loans are undergoing a host of changes, thanks to recent action by Congress that will reshape how students and their families pay for higher education for years to come.

Here are the biggest changes and what they mean for you.

Fixed rates on Stafford and PLUS loans

Since late 1992, the two largest federal student loan programs have come with a variable interest rate. Starting July 1, the rate for new Stafford loans will be fixed at 6.8 percent and the rate for new PLUS loans will be 8.5 percent, which could benefit borrowers if interest rates continue to rise. Variable rates on loans issued before July 1 that have not been consolidated will continue to be reset once a year.

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Higher loan limits

Under the old rules, college freshmen could borrow up to $2,625 in Stafford funds. The new limit will be $3,500 starting July 1, 2007. Caps for sophomores will go from $2,500 to $4,500 and graduate and professional students will be able to borrow $12,000 a year instead of $10,000.

Since Americans are relying more and more on loans to pay for college, the higher caps should be a big boost, says Deborah Fox, of Fox College Funding, a financial advising company in San Diego.

Declining origination fees

Fees for taking out a student loan will steadily decline and, in some cases, disappear by 2010. Under current rules, if you were to borrow directly from the government under the Stafford program right now it might cost as much as 4 percent of the amount to be borrowed, or 3 percent if you were borrowing from a private lender subsidized under the Federal Family Education Loan Program (used by about 80 percent of colleges and universities).

Under the new rules, fees for FFELP loans will drop annually, going to zero in 2010. Fees for direct government loans will drop to 1 percent by 2010.

The end of in-school and spousal consolidation

Plenty of students consolidated their outstanding loans this year to lock in lower rates in advance of the higher fixed rates set to take effect July 1. Starting next month you won't be able to consolidate if you are still in school.

Married grads paying off their debt are also losing the consolidation option. Under the old rules couples could combine their loans and lock in a fixed rate.

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