Changes to Federal Student Loan Program

Dear graduate and professional students,


You may already be aware that the debt ceiling negotiations in August 2011 included some changes to the Federal student loan program. We write to you with some details about the Budget Control Act of 2011, which affected two major benefits for graduate student loans.


1. Elimination of Interest Subsidy


Beginning July 1, 2012, graduate and professional students will no longer be eligible to borrow funding through the Federal Direct Subsidized Loan program. Currently, graduate students can borrow an annual maximum amount of $8,500 per academic year in Direct Subsidized Loan funds (if eligible, based on financial need calculations). The Federal Government subsidizes the interest on these loans while students are enrolled in school (for at least half-time credit) and during the 6 month grace period after enrollment. Simply put: students are not responsible for paying the interest on Direct Subsidized Loans until repayment begins. The Budget Control Act of 2011 eliminates this interest subsidy so that, after July 1, 2012 graduate and professional students will only be eligible to borrow Direct Unsubsidized Loan funding up to the annual maximum ($20500 for most students, but higher for those enrolled in Health Professions programs such as DDS, Public Health or Pharmacy).


While the total dollar amount of Federal Direct Loans remains the same, the cost of borrowing those loans will increase. Students are not required to pay accrued interest while enrolled in school, but interest does accrue during enrollment periods as well as the six month grace period. Any unpaid, accrued interest on these loans is capitalized at the time of repayment (i.e. it becomes part of the principal loan amount).

2. Elimination of Direct Loan Repayment Incentives


The Federal Government charges an origination fee on all Federal Loans. The Department of Education deducts their origination fee from each loan upon disbursement. The origination fees are:


  • 1% fee on Federal Direct Unsubsidized Loans
  • 4% fee on Graduate PLUS Loans.


Currently an “up-front interest rebate” of 0.5% is credited on all Direct Subsidized/Unsubsidized Loans and 1.5% is credited on all Graduate PLUS Loans. This results in the actual origination fees deducted from the loan proceeds being 0.5% on the Direct Subsidized/Unsubsidized Loans and 2.5% on the Graduate PLUS Loans. Under the current process, the rebate will only be added back to the loan amount if the borrower makes a late payment during the first 12 months of repayment.


The Budget Control Act eliminates the “up-front interest rebate”. Effective July 1, 2012, Federal Loan borrowers will be charged the full origination fee (1% on Direct Unsubsidized Loans and 4% on Graduate PLUS Loans).


Neither of the above changes will impact student loan funding for the 2011-2012 academic year. The new law will go into effect beginning July 1, 2012. Further information on this topic can be found here:$17_Billion_for_Pell_and_Ends_Grad_Student_Loan_Interest_Subsidy.aspx.