The College Cost Reduction and Access Act of 2007 and Your Student Loan Debt

What Does the New Law Mean for Student Loans?

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The federal government began guaranteeing student loans provided by banks and non-profit lenders in 1965. This led to the creation of the program called the Federal Family Education Loan Program (FFELP).1 In fact, several years before that, in 1958, the very first student loan program was established by the National Defense Education Act — in part because the U.S. government decided that in order to keep up with the Russians in the then-fledgling space race, there needed to be more money available for qualified people to get the training they needed.2

Now, some fifty years later, "student loans" are a very familiar part of the American lexicon. The College Cost Reduction and Access Act of 2007 changed the way we view student loans and student loan debt.

What is the College Cost Reduction and Access Act of 2007?

Signed into law in September 2007, the law was regarded by some as the greatest investment to help students and parents pay for college since the GI bill.3 While college tuitions and related educational costs have grown some 40 percent in the last five years, the new law may cut loan interest rates in half on government subsidized student loans over the next four years. For folks with student loans to pay off, that averages out to a $4,500 savings over the life of the loan. And champions of the new law say that this effectively strengthens the middle class by making college costs generally more affordable.

Not only will student loan rates and payments be more manageable — guaranteeing that borrowers will pay no more than 15% of their discretionary income (the amount that's left over after you pay for housing, food and other basic necessities) in student loan repayments — but moving forward, all loans not paid off after 25 years will officially be taken off the books.

But the College Cost Reduction and Access Act is not without its critics. Even though the new law is being widely praised for increasing overall government funds for education without further burdening taxpayers, the student loan industry itself has taken some noticeable hits. Some reports indicate that certain student loan operations have refused to accept new loan applications since the new law was passed. And other rumblings around the industry claim that there have been significant layoffs of student loan workers beginning in fall 2007.

Some notable negatives for both prospective and current borrowers stemming from the new law include:

  1. A slight increase in lender loan origination fees. When you borrow from a lender, you're charged an additional fee based on the overall principal amount of the loan; average increases have recently doubled, from .5% to 1.0%.
  2. A delay for people who currently have other consolidated student loans. Current borrowers of PLUS loans will have to wait a while to be eligible for income-contingent repayment through direct lending. (This means that if you have a loan for an undergraduate student — a legal dependent, let's say — you won't be able to take advantage of the new income-related laws until July 2009.)

What do these changes mean to student loans in general — both new loans and old student loan debt?

It's probably still too early to identity all of the far-reaching effects the College Cost Reduction Act will have on student loan debts, but we do know that both current and future student loans are already being affected.

Here are some highlights of the new law that will likely affect both your current and future borrowing habits:

  1. Reduction in student loan rates. Average rates will drop from 6.8% to 3.4% over the next four years.
  2. Monthly payment cap on income. You won't have to pay more than 15% of your discretionary income — again, expenses beyond housing, food and basic essentials — on a month-to-month basis.
  3. Faster student loan forgiveness. Student loans not paid in full will be officially closed earlier — 10 years for public service employees, and 25 years for all other borrowers.
  4. Loan collection fees reduced. Loan collection agencies' fees have been reduced from 23% to 16%. This means that if you ever end up being delinquent on payments during the life of your student loan, the additional percentage interest you'll owe a collection agency (for student loans that are delinquent in payment, oftentimes schools and lenders will sell these loans directly to collection agencies, making them the default payee4) will be an average of 7% less than before the College Cost Reduction Act was passed.5

They say that education is the one thing that can never be taken away from you, that the things you truly learn can't be dismissed or compromised. Of course, only time will tell how the student loan culture will change moving forward. But if improving overall access to higher education is the goal, recent events would seem to favor both current and aspiring college students alike.

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