Among the many items in the Federal Deficit Reduction Act of 2005 are huge changes to the federal financial aid program. The most affected: Stafford loans and PLUS loans.

Congress, in an effort to reduce growing budget deficits, wrote the Deficit Reduction Act. A key part of the act asks students one thing: pay more of your college aid cost. Beginning July 2006, the government is asking students to pay a higher interest rate on about every type of loan. Here’s how it breaks down:
Stafford Loans

Stafford’s are the most popular type of student loans. According to collegeboard.com, $27 billion in subsidized Stafford loans went to students in 2005. The loan rules are changing in 2006 and students are going to be paying more in interest. Beginning July 1st, rates are changing from an adjustable rate- currently at 5.3 percent- to a fixed rate of 6.8 percent. A variable rate moves up and down with economic cycles, but the new fixed rate will remain at 6.8 percent. This means an increase from today’s level could be cheaper in years to come.

Also on the list of change: freshman and sophomores get borrowing increases. Starting July 1st 2007, the maximum a freshman is eligible to borrow will be increased to $3,500 from $2,625. For sophomores the max will be increased to $4,500 from $3,500. But don’t cheer to loud. The total amount of Stafford dollars a student can borrow remains the same- at $23,000.
PLUS Loans

PLUS loans are available to parents who wish to help pay for their child’s education. They are the other major debt option, and they will also become more expensive. The interest rate on a PLUS loan will move from a floating variable rate to a fixed 8.5 percent.

The PLUS is now open to more than parents. The proposed U.S. Department of Education (ed.gov) budget for 2007 is asking that graduate students be allowed to apply for these loans that were once only open to parents of undergrads.

For more information on student aid, visit www.bankrate.com, www.projectonstudentdebt.org, or www.collegeboard.com.

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