New Rules on Federal Student Loans

Whether you're taking out a federal student loan or entering repayment, get up to speed on these five changes to the federal loan program.

1. Loans get pricier.

The rate on subsidized Stafford loans — the federally sponsored loans available to students with need — jumps from 3.4% to 6.8% on July 1, barring a last-minute (and unlikely) save from Congress. Despite the headlines, there's no reason to panic. The rate applies only to new loans, not those that are outstanding, and it doesn't necessarily mean your payments will soar, says Mark Kantrowitz, of Edvisors.com.

At 6.8%, a $5,500 Stafford loan repaid over ten years (the standard schedule) would cost about $9 more per month, or about $1,000 more over the life of the loan. Not surprisingly, the hit becomes bigger the more you borrow. On the maximum amount available in subsidized Staffords for undergraduates — $23,000 — you'd pay about $40 more per month, or $4,600 over the ten-year repayment schedule.

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2. Interest starts sooner.

The feds have always picked up interest on subsidized Staffords while students are in school, but until recently, interest was also deferred during the six-month grace period before new grads have to start repaying student loans. Now, the interest on subsidized Stafford loans starts the moment grads hit the real world — but the change applies only to loans issued between July 1, 2012, and July 1, 2014, after which the grace period is scheduled to go back into effect.

This year's crop of grads will likely have a combination of loans that gain interest during the grace period and those that don't. A $3,500 loan at a 6.8% interest rate (assuming rates double) will accumulate $120 in interest during the six-month period.

3. Grad students lose a break.

As of July 1, 2012, graduate students no longer have access to subsidized Staffords, which means they lose the in-school deferral on interest for those loans. They can still get unsubsidized Staffords, which carry a 6.8% fixed rate and are available to all students who apply. Unsubsidized Staffords start accruing interest from the time they are disbursed, but repayment can be deferred until six months after graduation.

4. PLUS borrowers face a higher hurdle.

Graduate students — as well as parents — can also get PLUS loans, which carry a 7.9% fixed rate. You can borrow the full cost of attendance, minus financial aid. Unlike Stafford loans, PLUS loans require underwriting — and those standards have tightened up. To qualify, recipients cannot have an "adverse" credit history, which includes bankruptcy and has lately expanded to include unpaid collection accounts and charge-offs.

You can appeal a denial by providing extra documentation, such as proof of a repaid loan or divorce records showing you're not responsible for the debt, or by finding an endorser. The endorser takes a risk and must be willing to pay the loan in full if you do not. Undergraduates whose parents are denied a PLUS loan are eligible for up to an additional $4,000 to $5,000 in unsubsidized Stafford loans per year. Those who are denied PLUS loans are unlikely to qualify for private loans.

5. Repayment plans get more generous.

One of several repayment options, Pay As You Earn, became available to borrowers at the end of December 2012 and improves on the income-based repayment program. As with the earlier plan, Pay As You Earn pegs the amount you pay to your discretionary income (the amount by which your income exceeds the poverty line), but it lowers the percentage of income you pay from 15% to 10% and the number of years over which you pay from 25 to 20 years. At the end of that period, any remaining amount is forgiven. To qualify, you must have taken out your first federal student loan after September 30, 2007, and received a disbursement from at least one loan after September 30, 2011. Only Direct Loans are covered.

To see if your monthly repayments are lower under PAYE than under a standard ten-year plan, use the "Pay As You Earn" calculator.

Susannah Snider worked as a research-reporter and staff writer at Kiplinger Personal Finance Magazine. She went on to serve as managing editor for money at U.S. News, overseeing articles and content covering real estate, personal finance and careers. She is a certified financial planner professional and earned her CFP marks in 2019.