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Big changes come to student loans
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New Help for Some College Borrowers

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What Student Loans Have to Do With the Health-Care Bill

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New Help for Some College Borrowers

Buried in the health-care and education bill that Congress passed Thursday is modest help for parents borrowing to pay college costs. But the legislation doesn't address current and former students who are wrestling with education debt. Under financial-aid provisions in the bill, all students and parents beginning next fall will borrow directly from the federal government, ending a program in which the government subsidized private lenders to provide federal loans. Parents pay an annual interest rate of 7.9% under the direct program, compared with 8.5% under the old program.

Student borrowing rates for federal loans aren't affected: They will be 4.5% this coming school year for students with financial need and 6.8% for everybody else. A second provision in the bill sweetens a program that caps student-debt payments based on income and family size—but only for students who begin school in 2014 or later. The current income-based repayment program, begun in July, limits payments to 15% of a borrower's discretionary income and forgives any debt that isn't paid off in 25 years. The future changes limit payments to 10% of discretionary income and forgive debt after 20 years.

The bill also provides more funding for Pell Grants, which are available mostly to students from families making $50,000 a year or less. The changes come as tuition, fees and room and board continue to grow faster than inflation, reaching eye-popping levels at top schools amid state budget crises and declines in endowments. The University of California system, for example, has raised tuition and fees to more than $11,000 next year, from about $8,700 last fall. Brown, Dartmouth, Duke, Harvard and Stanford universities, among many others, say that their tuition, room, board and fees will top $50,000 for the first time in 2010-11.


So despite the new benefits for borrowers, paying for college remains a monumental task. Here are some ways to make it less painful:

• Don't assume a school's sticker price is real. Many public and private schools have raised their financial aid along with tuition, and some have committed to packages that limit or eliminate student loans. Roughly 50% of students at top schools receive financial aid, and even families with incomes of $200,000 or more may qualify.

At Brown, for instance, more than 40% of the students receive some aid, with the average annual package around $31,000. Provost David Kertzer says the school's income from tuition, after subtracting financial aid, was essentially flat in 2009 compared with 2006.

Experts say that some students may actually pay less at a private school than a public one. But competition for aid is tough: More than 18.8 million Free Application for Federal Student Aid forms have been filed so far this school year, up 20% over a year ago.

• Parent borrowers need a better credit record than students. Parents can take out federal PLUS loans at a 7.9% interest rate. But while FICO scores aren't a factor, parent borrowers can't have any missed payments in the previous 90 days or had a bankruptcy or foreclosure in the past five years. If parents don't qualify, students can borrow more in federal Stafford loans.

• Students should limit their total education debt to about what they expect to earn their first year out of school, says Mark Kantrowitz, publisher of If you need to borrow much more than $40,000, you probably ought to consider whether that school is the right fit.

• If the government loan programs aren't enough, financial-aid experts say parents should compare the rates for a home-equity loan before taking out a private education loan, which can carry a double-digit interest rate. While a home-equity loan can put a borrower's house at risk, rates on such loans are often lower—and the interest may be tax-deductible.