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Federal graduate loan subsidy eliminated in debt ceiling deal

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AUGUST 03, 2011

Though undergraduate students who benefit from a federal grant program came out on top when President Barack Obama signed a last-minute deal to raise the national debt ceiling Tuesday afternoon, graduate and professional students throughout the country will start owing more on their loans.

The debt ceiling deal preserves the maximum award for the federally funded Pell Grant program but will eliminate the interest subsidy for a government-subsidized loan program for graduate and professional students beginning in July 2012.

Obama signed the deal immediately following a 74-26 vote in the U.S. Senate, raising the nation’s borrowing limit to avoid a debt default and reducing deficits by at least $2.1 trillion over a decade.

As a part of that deal — the Budget Control Act of 2011 — the Pell Grant program was given an additional $17 billion to maintain its maximum award amount of $5,550 at the cost of eliminating the interest subsidy for the Stafford graduate loan program. Students who receive Stafford loans will need to begin paying interest on their loans while still in school or let it accumulate.

Additionally, beginning in July of 2012, the act eliminates loan repayment incentives for students who make their payments on time. According to a Congressional Budget Office analysis of the act, it is estimated that the changes would reduce direct spending by $9.6 billion over the 2012-16 period and $21.6 billion over the 2012-21 period.

Currently, Stafford loan borrowers who make 12 consecutive on-time payments are eligible for a rebate of 0.5 percent of the loan amount, which is applied to the 1 percent repayment fee.

Approximately 40 percent of all UC undergraduates are eligible for Pell Grants — which offer up to $5,550 in aid that does not have to be repaid — and received a total of $321 million this past year.

Graduate students can currently borrow as much as $20,500 a year in federal Stafford loans. That level will be raised to make up for the extra amount students will have to spend to make up for the subsidies, according to the CBO analysis.

“As appreciative as we are that Pell has been preserved this time around, we move forward with caution knowing that the fight is not over, that the future stability of Pell and other crucial higher education programs is still at stake,” said United States Student Association President Victor Sanchez in a statement. “It’s without a doubt that the victory we do come away with is a result of the hard work of students from around the nation, putting this issue at the forefront of the debate.”

According to estimates from the CBO analysis, the overall changes in direct spending for education programs would, on net, increase direct spending by $7.4 billion over the 2012-16 period but reduce direct spending by $4.6 billion over the 2012-21 period.

However, Obama said in a statement following the bill’s enactment that this is just the “first step to ensuring that as a nation we live within our means.”

“I’ve said it before; I will say it again:  We can’t balance the budget on the backs of the very people who have borne the biggest brunt of this recession,” he said in the statement. “We can’t make it tougher for young people to go to college … or ask scientists to give up on promising medical research because we couldn’t close a tax shelter for the most fortunate among us. Everyone is going to have to chip in.”

Allie Bidwell is the news editor.

AUGUST 03, 2011