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Newly Passed Law Makes Changes to Federal Student Loan Program

A couple weeks ago, a brand new law overhauled the federal lending program. Under the new law, the Education Department  provides all federal loans through college financial aid offices starting July 1.

Until now, people had the ability to acquire government-backed loans from private lenders with the Federal Family Education Loan program, or FFEL.

Students who curently have FFEL loans will not be instructed to make any changes. However there are actually situations when it's wise to change to newly created direct loan program.

For the time being, the federal government can expect to save roughly $68 billion over the next decade by ending the subsidies it paid to private lenders. The savings is going to be utilized in part to enhance education grants for the most deserving students starting in 2013.

There won't be any advantages for individuals who previously took out loans. Nevertheless, there are several repayment options new graduates ought to be aware of.

Graduates shouldn't be afraid of being handed a bill with their diploma as most federal loans include a six-month grace period after graduation. Nevertheless interest does continue accruing during this time, therefore the sooner repayment begins the better.

The exception has always been subsidized federal loans, when the government waives interest charges prior to the loan coming due.

The conventional repayment plan spans 10 years, there is however absolutely no penalty for eliminating debt earlier. Needless to say, that is most likely not a worry for anyone holding massive debt loads.

Individuals seeking career fields which do not pay out a great deal may wish to consider a program called income-based repayment, or IBR. This option was launched recently to help make debt more feasible. Basically, this caps obligations at 15 percent above any earnings over and above $16,000, with any debt remaining after 25 years is forgiven.

Eligibility is dependent upon an equation which weighs education loan debt against income. Those in thedirect and FFEL programs can apply.

The new law makes IBR all the more favorable by capping payments at 10 percent of income. However the changes don't take effect until 2014 and will only apply to new borrowers.

An additional provision of IBR that's already in place forgives debt after just 10 years of repayment for individuals who are employed in public service. This benefit is only accessible to people that have direct loans. Therefore individuals with a FFEL loan would have to consolidate it within the direct loan program to qualify.

There are a couple other options for those who are struggling financially. Borrowers can apply for unemployment or economic hardship deferment for up to three years. Income needs to be around $16,000 or less to qualify for economic hardship.

And in many cases, interest continues mounting up on the loans.

A consolidation loan can be used to combine several federal loans, which means that borrowers simply pay just one monthly bill.

Private lenders shall no longer be offering them, but FFEL borrowers can certainly still get consolidation loans from the direct loan program.

A fresh interest rate is going to be dependant on the weighted average of the loans, in this way, interest charges be comparable under a consolidation. But that average is going to be rounded up to the nearest 1/8 percent, so there could be a small cost for the convenience of obtaining a single bill.

You can usually only consolidate loans once you graduate. Included in its overhaul, however, the government is letting students in school consolidate loans between July 1 and June 30 of next year if they want to contend with just one lender.

This could be tempting if you currently have FFEL loans and will now get direct loans. But it's probably best to wait until you graduate, because a consolidation technically puts you into repayment.

For a similar reason, be careful about your timing when getting a consolidation loan. If you wish to take advantage of the six month grace period after graduation, wait a few months.

A particular disadvantage of consolidation loans is the fact that they often extend the repayment period, meaning the overall cost of the loan is going to be higher.

This will occur if you have been making payments on separate loans within10-year payment plan. A loan consolidation distributes payments over a new 10 year period. This would lower your monthly bill, but increase the amount you pay in interest for the life of the loan.

It is possible to negate this effect by paying more than is due month after month.

Financial bonuses are one more reason FFEL borrowers may not wish to consolidate right into a direct loan. Private lenders sometimes offer interest reductions for a consecutive number of on-time payments. In some cases, they might forgive origination fees when you initially take out a loan. Nonetheless, don't forget that the agreement may state that the fees must be paid should you move in to the direct loan program.


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