The week of July 1 is generally a slow one for most businesses, but it can be a scramble in the world of higher education.
Most regulatory changes, including changes to student loan interest rates, are effective on July 1, despite the fact that the federal fiscal year doesn't begin until October 1. This is partially due to a requirement that the Department of Education give advance notice of any proposed regulatory changes, including those dealing with student loans. Federal law mandates that the Department of Education set aside times for the public and affected to comment on the proposed changes. Here are four changes that took affect on July 1.
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1. Interest rates: Last year, Congress changed the law that dictates interest rates on federal student loans. The new rule bases the rate off of the 10-year Treasury note rate as of the last auction in May with a small margin added. This year that rate was 2.61 percent, eight-tenths of a percent up from last year.
Any new loan first disbursed on or after July 1 will have that interest rate, fixed, for the life of the loan. Interest rates will not change on existing fixed rate loans, including consolidation loans.
The rates for these new loans are as follows:
|Loan Type||Interest Rate for Loans Made July 1, 2013 -- June 30, 2014||Interest Rate for Loans Made July 1, 2014 -- June 30, 2015||Maximum Rate for Future Loans|
|Direct subsidized and unsubsidized Stafford loans for undergraduate students||3.86 percent||4.66 percent||8.25 percent|
|Direct unsubsidized Stafford loans for graduate students||5.41 percent||6.21 percent||9.5 percent|
|Direct graduate PLUS loans||6.41 percent||7.21 percent||10.5 percent|
|Direct parent PLUS loans||6.41 percent||7.21 percent||10.5 percent|
2. Closed school discharge: This one almost ended being perfect timing, considering the recent announcements that Corinthian Colleges may have to shutter its 107 campuses in the next few weeks.
Thankfully, the crisis was averted or at least slowed down, but sometimes schools do close with no notice -- and students are almost always the victims when that happens.
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Some protections are in place for those with federal student loans. Previously, if a student is enrolled within 90 days of the date a school closes and is unable to complete their credentials at another school, he or she is eligible to have the associated federal student loans discharged. New rules effective July 1 expand that time frame to 120 days from the date the school closes.
Keep in mind the entire school or location must close to be eligible for this discharge, and if you are offered an opportunity to complete that credential, you're likely better off getting that degree.
3. New income-based options for new borrowers: The executive order President Barack Obama signed a few weeks ago won't just expand Pay As You Earn to borrowers with older loans. New borrowers will be able to take advantage of these payment terms now.
Borrowers who take out their first loan on or after July 1 will be eligible for the version of the income-based repayment plan that caps their payments at no more than 10 percent, rather than the 15 percent of the "classic" income based plan, of their disposable income and will forgive any remaining balance after 20 years rather than 25.
4. Relief for defaulted federal loan borrowers: Borrowers with defaulted federal student loans have two options other than paying the loans in full to get their loans out of default: rehabilitation and consolidation. In order to rehabilitate the loan, borrowers must make nine consecutive, on-time payments of a reasonable and affordable amount agreed to by them and the loan holder.
New rule changes will standardize how that rehabilitation process works for all borrowers, regardless of who holds their defaulted federal loans. Borrowers who start the rehabilitation process on or after July 1 will have their payment initially calculated under the 15 percent rule,which essentially means 15 percent of a borrower's disposable income. If that amount is too high, borrowers will have the right to submit a financial hardship form that takes more of your total financial situation into account.
There are also new rules surrounding the administrative wage garnishment process, all of which were put in place to ensure all borrowers are treated equally and fairly.
Betsy Mayotte, director of regulatory compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, is a frequent contributor to ASA's SALT Blog; responds to public inquiries via the advice resource "Just Ask;" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.