Subsidized Loan Limitations

Continuation of federal aid programs or elements of the programs in recent years has not involved additional funding. Congress, in efforts to avoid adding to the overall federal budget, has increasingly looked within the federal aid budget itself to find cost savings that will fund increased expenditures in grant programs or continuation of loan benefits to eligible students. The Federal Direct Subsidized Loan program has seen the most changes as Congress deals with increased expenditures in federal aid with limited increases to the total federal aid budget.

The subsidy to these loans has been progressively limited. In essence, the funding that the Department of Education pays the Department of Treasury for these loans when the student is not in repayment is being reduced. These savings then pay for increased expenditures in aid programs due to a greater numbers of eligible students, maintenance or small increases in maximum amounts, or continuation of specific program benefits.

Interest Rate Change and Differential

Beginning July 1, 2006, Federal Direct Subsidized and Unsubsidized Loans changed from a variable interest rate that readjusted each year and could be as high as 8.25% to a fixed interest rate of 6.8%. Interest rates, in general, were rising when Congress took this action, and the change helped to keep rates lower and more predictable for the largest student loan program.

Soon interest rates began to fall so Congress developed a tiered interest rate for undergraduate students borrowing Federal Direct Subsidized Loans from 2006 through 2013. The desire was to create more competitive rates for students primarily seeking their basic post-secondary education. As such, graduate students did not benefit from the tiered interest rate and instead remained at a fixed 6.8%.

Continuation of lower interest rates for undergraduate students led to further changes in eligibility noted below.

Elimination of Grad Student Eligibility

The Budget Control Act of 2011 eliminated in-school loan subsidy for graduate and professional students borrowing new loans for loan periods after July 1, 2012. Subsidy terms on previously borrowed loans remain in place.

Graduate and professional students are therefore no longer eligible for a Federal Direct Subsidized Loan as of the 2012-2013 academic year. The assumption, like with loan interest rates, is that prime loan terms are reserved for eligible students seeking their basic college degree.

Now all graduate student borrowing (both in Federal Direct Unsubsidized Loans and Federal Graduate PLUS Loans) involves interest that is accumulating while the student is in school and any grace period. Students can elect to pay interest rather than have it accumulate and added to their principal loan amounts (thereby avoiding paying interest-on-interest).

Grace-Period Subsidy Holiday

When reviewing appropriations as part of the FY2012 Budget Bill, Congress faced the proposition of the Federal Pell Grant program with an expected shortfall and a desire to maintain the maximum grant amount for 2012-13.  The funding to meet these concerns was found by temporarily eliminating subsidy on loans when borrowers are in their grace period prior to entering repayment.

Interest subsidy for undergraduate students borrowing Federal Direct Subsidized Loans was eliminated during the grace period for new loans between July 1, 2012 and July 1, 2014. Repayment does not begin during the grace period, but students (rather than the government) will now be responsible for interest accumulation during the 6-month grace period following enrollment of at least half-time.

The federal government will continue to cover the grace-period interest for all subsidized loans issued before July 1, 2012, and the grace-period subsidy is scheduled to go back into effect for loans issued on or after July 1, 2014. However, such savings may be tapped by Congress once again in future appropriations bills.

Subsidy Eliminated at 150% of Academic Program

The fixed interest rate on Federal Subsidized Direct Loans was set to move from the 3.4% tiered low to 6.8% on July 1, 2012. To avoid this doubling of the interest rate, Congress once again turned to subsidized loan benefits to help meet the costs of the one-year 3.4% interest rate extension until July 1, 2013. While the interest rate continuation was temporary, a change to loan eligibility was made permanent.

Federal Direct Subsidized Loans were permanently limited to 150% of the length of a student’s academic program. New student borrowers will be limited to receiving subsidized loans for 3 years in a 2-year program or 6 years in a 4-year program beginning July 1, 2013. Students reaching this limitation could receive unsubsidized loans if otherwise eligible including meeting satisfactory academic progress requirements.

Additionally, the borrower who reaches the 150% limitation will have their interest subsidy end for all outstanding subsidized loans. Repayment does not begin, but like unsubsidized loans, the student (rather than the government) would become responsible for interest accumulation at this point.

Any and all periods of subsidized loan borrowing will count against the 150% time limit.

To avoid loss of subsidy, students who are new loan borrowers after July 1, 2013, have increased incentive to remain within the timeframe limitations of satisfactory academic progress. An approval of an academic progress appeal will not change any eligibility determined on subsidized loans based on this 150% rule.

These limitations are in addition to aggregate limits on loans.

students walking up CCM drive

While the current Federal Direct Loan Program is discussed here, borrowers in the Federal Family Educational Loan Program (FFELP) that existed before July 1, 2010, were also subject to changes in interest rates.

Disclosure statements are issued each time a new student loan is secured. These statements detail borrowed amounts and address terms of the loan. Borrowers should maintain a file of these statements to best understand their student loan borrowing.

Information on student borrowing is also available via the U.S. Department of Education Direct Loan website.