“Twists and Turns”.. the loss of the Subsidized loan for Graduate students

Welcome to the “financial aid” blog. With all the captivating topics to write about why would I focus my first blog endeavor (ever!) on something as mundane as financial aid? Because far from being dull, the world of financial aid is filled with twists, turns and surprises. Don’t believe me? Then let’s talk about one of the biggest changes in the aid world for next academic year.

When you look at your financial aid award letter for 2012-2013, you will probably ask yourself the obvious question … “where did my Subsidized student loan go?”. Historically, Graduate level students have been offered a portion (presently $8,500 max) of their federal aid in the form a Subsidized loan with the benefit of no interest building on the loan while the student is both enrolled in school and during the six month post enrollment grace period.

However, in President Obama’s 2012-2013 budget proposal (March 2011) he recommended the elimination of the interest subsidy of the Subsidized Federal Direct Loans for Graduate and Professional students in an effort to utilize those savings to strengthen the undergraduate Pell Grant program. Congress initially countered with a proposal for the dissolution of the subsidy for all (Undergraduate and Graduate) students. Ultimately Section 502 of the Budget Control Act of 2011 (passed by Congress and signed by President Obama in August ) finalized the elimination of the Direct Subsidized loan for Graduate and Professional level students only.

The good news (in the short term) is that you will not lose loan funds. You were eligible for a maximum of $20,500 in Direct loans in 2011-2012 and you will be eligible for up to $20,500 in 2012-2013 as well. Only instead of $8,500 of the $20,500 eligible to be subsidized, the full amount is now unsubsidized. The bad news (in the long term) is that because interest will now be building on that formerly subsidized portion from the time of enrollment and during the grace period, you will ultimately be carrying a higher loan debt.

One other important aspect of Section 502 of the Budget Control Act of 2011 is that students will be losing the “origination fee rebate” which rewards on time payments on Direct (presently 1%) and Grad PLUS loans (presently 4%). The loss of the origination fee rebate will go into effect for any loan disbursed after July 1, 2012. The interest rate reduction for borrowers who agree to have payments automatically electronically debited from a bank account remain in effect (remember that when you enter into repayment!) and has not changed in the new law.

The reality is that the elimination of the subsidy loan for Graduate students has been seriously discussed and considered for several years as a budget savings measure and while it was a surprise for students (and financial aid administrators ) that it was ultimately passed , it was probably inevitable. Ultimately the Department of Education projects this measure will save an estimated $22 billion over the next ten years . Most significantly, $17 billion of those savings will address critical funding shortfalls for the Pell Grant program which remains the cornerstone federal aid vehicle to provide low income students access to post -secondary education.

So what are the most important things to remember/do about this change?

1) Understand that this change only affects those loans in place for academic year 2012-2013 (or for loans made for periods of enrollment beginning on/after July 1, 2012). The subsidized terms and conditions on any previous Direct Subsidized loans you received as an undergraduate or Graduate student to date remain as is and are secure.

2) If you declined any or the entire Direct Subsidized loan offered to you for this current 2011-2012 year , you may wish to rethink about borrowing it. Even if you do not need the funds immediately for this year, taking this loan now and banking the funds may serve you better than having to borrow the unsubsidized as your only option in a future academic year. If you do wish to reconsider your aid award and accept the previously award Subsidized loan, just contact our office.

3) Now more than ever you will want to take full advantage of COAP, particularly since your interest and aggregate loan balance will be higher without the benefits of the subsidy. Even in your 1L or 2L year , make an appointment to talk with the financial aid office about your loan balances, COAP eligibility and insure you are on track to apply for COAP to coincide with your loan repayment.

4) Finally, although it has been said many times, many ways, make a concerted effort to borrow only what you absolutely need to support yourself while at YLS. Sacrificing now in an effort to minimize your loan burden later will ultimately reap benefits for your future. Again, the Financial Aid Office can assist with helping you develop a viable spending plan to insure that you have enough funds to both live on and live well, while minimizing your loan borrowing.

So now that the FinAid blog is up and going , keep up with it as we report in upcoming posts other changes (beneficial changes!) in the works for the 2012-2013 academic year. Who knew financial aid could be so exciting!