January 17, 2014

3 Potential Student Loan Changes to Eye in 2014

Higher interest rates may be on the horizon for federal loans in the 2014-2015 school year.

Legislation signed by President Barack Obama in 2013 lowered student loan interest rates, but borrowers should expect rates to rise in 2014.

Student loans garnered a lot of attention in 2013. Interest rates on federal student loans became a political playing card – again – and debt loads and borrower default rates captured headlines.

The new year could be just as tumultuous for college borrowers. The pending reauthorization of the Higher Education Act could usher in myriad changes to federal student loan programs and interest rates for 2014-2015 loans likely won't remain the same.

[Learn how to map out college savings for 2014.]

Below are three potential student loan changes borrowers should keep an eye on in 2014.

1. PLUS loans: Unlike Stafford loans, approval of Parent Direct PLUS and graduate PLUS loans are subject to credit history. Borrowers with a foreclosure, bankruptcy filing, repossession or loan default within five years cannot receive a PLUS loan. Neither can those with an account that is more than 90 days delinquent.

In 2011, the Department of Education added additional criteria – no loans charged off or sent to collections. The adjustments meant thousands of PLUS loan borrowers were denied, despite being approved the prior year, Rachel Fishman, a policy analyst for the New America Foundation, notes in a January 2014 report.

"It left students scrambling in the middle of their academic careers, trying to find the funds to remain in school," Fishman said during a Jan. 8 panel on PLUS loans held at the Washington, D.C., foundation. "That never should have happened."

But the department may not have the authority to make changes to the regulations governing PLUS loans, says financial aid expert Mark Kantrowitz, publisher of Edvisors.com.

Congress is set to take the issue up next month and the result could go several ways, Kantrowitz says.

"From one point of view, they are looking at potentially making those two changes official," he says. "They could block those two changes. They could make other changes in eligibility."

Those other changes could include using debt-to-income ratios and FICO credit scores to determine eligibility for federal PLUS loans. These adjustments would help reduce default rates, Kantrowitz says, but could also shut out a larger portion of students and parents.

2. Interest rates: Congress battled over student loan interest rates in 2013, finally agreeing on market-based rates in late July. While the agreement lowered interest rates from borrowers at the onset, the respite was only temporary.

"Rates are going to go up," says Kantrowitz. "That's a given."

It is a given because interest rates on federal direct loans are now tied to the 10-year Treasury note. As the value of that note increases, so do the rates on Stafford loans, Parent Direct PLUS loans and graduate PLUS loans.

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