The ink isn't even dry on the College Cost Reduction and Access Act of 2007 that President Bush signed last week and already the cost of higher education has gotten more expensive for college bound families.
While the bill did increase Pell grants for low income families, it also cut subsidies to the student loan industry by almost $21 billion. Immediately after the law took effect, banks and other lenders who issue federal student loans began to cut back their 'borrower discounts'. This will dramatically affect middle income families who largely rely on borrowing for their children's education.
Lenders have long used these discounts to compete for borrowers of federal student loans, which include the student's Stafford loans, the parent's PLUS loans, and federal consolidation loans. These borrower 'incentives' typically included interest-rate reductions for automatic debit payments from the family's bank account, or for making a certain number of consecutive, on-time payments. This new legislation cuts into the lender's profit margins.
Feeling their profit margins squeezed, several lenders, including Wells Fargo & Co. and Nelnet Inc. eliminated many of their borrower benefits on new federal loans. Nelnet also reinstated origination and default fees on its Stafford loans, which were previously waived, of as much as 2.5%. Some lenders, such as Bank of America, Chase, and KeyBank are currently evaluating their programs.
Lenders are making the biggest cuts in their federal Consolidation loans, where profit margins are slim. A federal Consolidation loan allows borrowers to combine all their federal loans into one loan to lock in a fixed interest rate and simplify and reduce monthly payments. Lenders such as Sallie Mae and Citibank now only allow borrowers to get a 0.25 percentage point rate reduction on consolidation loans for enrolling in automatic payments. Previously, these lenders also offered a 1% rate reduction after the first 36 months of on-time payments.
Furthermore, College Loan Corp will no longer offer any repayment benefits on its federal consolidation loans and Wachovia dropped its discounts on federal consolidation loans, which had allowed borrowers to cut their interest rates by as much as 1.25 percentage points.
The real cost of college is much more than just tuition, fees, and room & board. It includes the cost of borrowing for education too. And regardless of how you look at it, the cost of college just got more expensive for most American families.
If your plan to pay for college includes education loans, it is more important than ever to be cautious and careful.