President Bush signed the College Cost Reduction and Access Act into law on Thursday, Sept. 27, 2007. The Act amends the Higher Education Act of 1965 and includes changes to the federal financial assistance programs related to postsecondary education, alters student eligibility for grants and loans, reduces the government’s payments to lenders and guaranty agencies, and increase the fees paid by lenders. The anticipated savings will be utilized to reduce the costs for borrowers and create a new grant program, which supplements the Pell Grant program. Most of the Act’s provisions will take effect on Oct. 1, 2007, and others become effective on July 1, 2009.

Stafford Loans:

Starting on July 1, 2009, the Act reduces by 50 percent (from 6.8 percent to 3.4 percent) the interest rate on to new subsidized Stafford loans (loans to students with financial need) over four years. In 2012, without Congressional intervention, the interest rate will revert back to 6.8 percent.

Pell Grants:

The Act increases the maximum Pell Grant (grants to families making less than $50,000 per year) by $1,090 (up to $5,400) by 2012. The law also extends Pell Grant funding authority through 2017.

Teacher Tuition Assistance:

The Act creates the Teacher Education Assistance for College and Higher Education Grant program (TEACH) and provides $4,000 a year (not to exceed $16,000 for undergraduates or $8,000 for graduate students). TEACH funds must be used for tuition, fees and room and board (institutionally owned housing). Part-time TEACH candidates will be eligible for grants in proportion to the amount of time devoted to school. TEACH eligibility requires: (i) a GPA of 3.25 on a 4.0 scale or a 75th percentile score on at least one college school admissions test; and (ii) completion of coursework and requirements necessary to begin a career in teaching. 

In return for the grant, TEACH recipients are required: to serve as a full-time teacher for at least four academic years; at a high-need school; and within eight years after completing the course of study. Individuals who fail to complete the obligation will have their TEACH grant treated as a Federal Direct Unsubsidized Stafford Loan.

Income-Based Repayment Plan:
 
Effective July 1, 2009, it establishes a 15 percent discretionary income (adjusted gross income minus 150 percent of the poverty level for the borrower’s family size) limitation plan for annual educational debt repayment. The limitation plan applies to the repayment of almost every type of government-guaranteed loan (Stafford student loans, Grad PLUS loans, etc.).

Under the income based repayment plan (IBR Plan), for up to three years the government will pay the unpaid loan amount when a borrower is making reduced payment. After three years, the unpaid loan amount will be added to the loan balance. After 25 years the IBR Plan balance, if any, will be forgiven.

The IBR Plan is similar to the income cap repayment plan (ICR Plan), but contains three important distinctions. The distinctions include: (i) an income-based formula for computing the amount due each month results in payments that are lower than under ICR; (ii) the government payment of any unpaid interest on subsidized loans for up to three years after the borrower elects IBR; and (iii) capitalization of unpaid interest when a borrower’s income rises so high that they are repaying their loan at the standard repayment rate.
 
Loan Forgiveness (Public Service):

Beginning July 1, 2008, individuals who pursue public-sector careers (military, law enforcement, firefighting, nursing, public defenders, librarians, early childhood teachers, etc.) can have the balance on their student loans forgiven after 10 years of service and loan repayment. The law does not require that the 10 years of public service be continuous. However, before the borrower can qualify for accelerated debt forgiveness, they must: (i) have made 120 payments under some combination of IBR, ICR or standard repayment; (ii) served full time in a public service job; and (iii) hold a public service job when the debt forgiveness occurs.

Only direct student loans or loans consolidated under the government's direct-loan program are eligible for the debt forgiveness. The end result will be the total repayment of only one-fourth to one-third of the loan debt.

Tax Matters:

The debt forgiveness (10 or 25 years) is, at present, taxable, even though forgiveness under most law school loan repayment assistance programs is tax-exempt.

The amount of monthly repayment for married IBR borrowers is based on the combined adjusted gross income of the borrower and the borrower’s spouse, even if they file separate tax returns. This creates a strong disincentive to marry Upon marriage to a spouse with substantial income, an IBR borrower’s monthly repayment obligation will increase sharply (even if the spouses keep their incomes separate and do not share them), and the amount of eventual forgiveness will correspondingly plummet.

Student Loan Deferment (U.S. Servicemembers):

The law provides U.S. servicemembers (Active duty, National Guard, and Reservists) a 180-day loan deferment after demobilization. The provision will apply regardless of the size or when the loan was originated. Eligibility for the deferment is limited to times of war and a national emergency.

Service members called to active duty while enrolled in school (college, university, etc.) will be eligible for a 13 month loan deferment after completion of their tour of duty. The deferment expires upon reenrollment in school.

The Negative:

The Act will negatively impact students who are owners of 529 Savings Plans. These plans will no longer be exempt from assessments. The Act contains no provision for families who do not qualify for need based financial aid. In addition, the interest rates applicable to non-government subsidized Stafford Loans will not be decreased.

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