Congress approved legislation that would increase the amount of federally guaranteed loans that college students can borrow and provide more flexibility for parent borrowers.
The measure, which President Bush is expected to sign, would let college students borrow an additional $2,000 in unsubsidized federal student loans every year. It’s the sharpest increase in federal loan limits in more than 15 years.
Supporters say the bill would reduce students’ reliance on private student loans, which typically carry higher interest rates and less flexible repayment terms than federal loans do. In addition, the credit crisis has made it harder for borrowers who lack stellar credit to even qualify for a private loan.
“Our legislation guarantees that low-cost college loans will continue to be available with government help, no matter what happens in the private loan market,” Sen. Edward Kennedy, D-Mass., chairman of the Senate education committee, said in a statement.
The legislation would also let parents who take out a federal Parent Loan for Undergraduate Students defer payments on the loan until up to six months after their child graduates from college.
Parents can use PLUS loans to make up the gap between a child’s financial aid package and the cost of college. The loans carry a fixed interest rate of 8.5 percent, making them cheaper than many private loans. But in the past, parents had to start repaying PLUS loans 60 days after the loan was disbursed, unless the lender agreed to defer repayments.
That made PLUS loans less attractive to many families than private loans, which typically let borrowers defer repayments until after graduation, says Luke Swarthout, associate with the U.S. Public Interest Research Group’s Higher Education Project.
The new legislation also lets parents qualify for PLUS loans, even if they’re behind on their mortgage payments or medical bills. In the past, such delinquencies could disqualify them. Given the rise in mortgage delinquencies across the country, “we were expecting an increase in the number of people who were denied federal parent loans,” says Robert Shireman, executive director of the Project on Student Debt. “This (bill) may make that less of a problem.”
The legislation also seeks to shore up the federal student loan market by authorizing the Education Department to buy federal student loans that lenders are unable to sell as securitized debt.
Several major lenders have left the student-loan market, saying the credit crunch and lower federal subsidies have made the loans unprofitable for them. So far, no student has been unable to get a federal student loan. Lawmakers are concerned, though, that problems could arise later this summer, when most students typically apply for loans.
“Today’s vote will help ensure that students’ dreams of going to college aren’t sidelined by the turmoil in the credit markets,” Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, said in a statement. “I urge the president to quickly sign this bill into law.”
