Frequently Asked Questions About the Budget Control Act of 2011 and How it Affects Federal Student Loans Issued on or After July 1, 2012
Q: I’ve always borrowed a subsidized loan, why can’t I do that anymore?
A: We are no longer allowed to award you a subsidized loan after July 1st due to changes signed into law by President Obama in August 2011. This law, known as The Budget Control Act of 2011, eliminates the award of subsidized loans to graduate and professional students.
Q: Why would the government eliminate the subsidized loan for graduate and professional students?
A: The government was facing shortfalls in their funding of the Pell grant program. In order to preserve the Pell grant program, the government had to make several changes. The elimination of the subsidized loan program for graduate and professional students was one of those changes.
Q: I’m not even really sure what a subsidized loan is … can you explain?
A: All loans accrue interest from the time the funds are disbursed. The benefit of being able to borrow a subsidized loan is that you are not responsible for the interest that accrues on that loan for the time period set by the loan agreement. In the case of the subsidized loans you can borrow for your educational expenses, the government pays the interest that accrues on your loans while you are in school at least half-time and during grace periods and deferment periods. Thus, when you enter repayment of those loans, the amount you must repay is only the sum of the loans disbursements, not the sum of the loan disbursements AND the sum of the interest that has accrued.
Subsidized loans are reserved for those students who demonstrate “financial need.” The amount of the award is restricted based on certain criteria set by the Department of Education. In general, most graduate and professional students were eligible to borrow $8,500 per loan period in subsidized loans.
Q: How will the elimination of the subsidized loans affect the amount I owe when I enter repayment of my loans?
A: The increased amount you will owe at repayment is difficult to quantify. Factors such as the amount you elect to borrow, how far you have progressed in your schooling and payments you make toward your loans while in school are just some of the items that will have a direct effect on the amount you will owe at repayment. If you would like some assistance in estimating an amount you may owe, please contact your Financial Planning Office.
Q: I heard that I now have to make regular interest payments while I’m in school. Is that true?
A: We highly recommend that you make regular interest payments while you are in school, if you can afford to do so. There is however no requirement for this.
Q: Is there anything that I can do to offset these increased borrowing costs?
A: Yes! Being proactive and managing your loan portfolio can save you lots of money and lots of headaches in the future.
When you first start at Palmer, and each year thereafter, we ask you how much you would like to borrow in educational loans. We recommend you visit the Financial Planning Office and review the elections you have made. If you find yourself with extra money at the end of a term, you are borrowing more than what you need to live. Consider changing your elections to borrow less in future terms.
Consider making interest only payments while you are in school. Contact your loan servicer to work out the details. Even if you can’t pay the full amount they recommend, pay what you can! Once you begin repayment, compounding interest only works against you.
Seek out sources of financial aid that do not need to be repaid. Palmer participates in the federal work-study program. Consider finding a job that will supplement your classroom learning as well as decrease the amount in loans that you will need to borrow. Also, check out the scholarship opportunities that are available to you through the College. Review the scholarship criteria and apply for those you are eligible to receive.
If you are awarded a Perkins loan on your award letter, accept it! The Perkins loan is a subsidized loan with a low 5% interest rate and a 9-month grace period. We noticed many students declined the Perkins loan this year because they didn’t think the effort to complete the entrance counseling and the promissory note were worth the benefit.
Q: With the elimination of the subsidized loan, does this mean I won’t be able to borrow enough money to cover my expenses?
A: No. The elimination of the subsidized loan is considered to be the loss of a repayment benefit. This means that you won’t feel the affect of this change until you enter repayment of your loans. Previously you were eligible to borrow up to $33,000 in Stafford loans per loan period, of which no more than $8,500 could be subsidized. You are still eligible to borrow $33,000 per loan period, but it will all be unsubsidized.
Q: What about the subsidized loans I’ve already borrowed, both in my undergraduate and graduate programs?
A: Any subsidized loans that were disbursed prior to July 1, 2012, will retain their subsidization. This change is effective only for new loan periods beginning on or after July 1, 2012.
Q: I see that loan origination fees have changed. How will that affect my refund check?
A: If you borrow the maximum amount of loans to cover your cost of attendance, then you should not see a change in the amount of your refund. The estimated amount of loan fees you will incur is added to your cost of attendance budget. So the gross amount of loans you will borrow will be higher, but the amount of your refund should stay the same.
If, however, you borrow anything less than the maximum amount, then the amount of your refund will be reduced. You can calculate the amount of your origination fee by multiplying the amount you borrow in unsubsidized loans by 1% and by multiplying the amount you borrow in GradPLUS loans by 4%. Your refund check will be reduced by the sum of these amounts.
Q: Why can undergraduate students still borrow a subsidized loan, but graduate and professional students cannot?
A: The government has decided that the emphasis for funding should be placed on ensuring college accessibility. In order to accomplish this goal, government funds are being focused on need based aid for undergraduates. Since the subsidized loan is a need based loan, the undergraduates will retain the eligibility to borrow a subsidized loan.
Q: Where do I go for more information?
A: For more information or for answers to questions you may have about these upcoming changes, please stop by your campus Financial Planning Office.