The Deficit Reduction Act, going into effect July 1, will cut
direct spending to federally subsidized programs, including a $12.7
billion cut to student aid, and raise interest on student loans
used to finance college tuition.
The act, signed by President Bush earlier this year, aims to
reduce the nation’s deficit. The act will also cut spending
to other areas, including medicare, transportation, agriculture,
and medicaid.
One potential benefit is that students will be able to borrow
more money at one time; another is that graduate and professional
students will be able to apply for a Parent PLUS loan that in the
past has been exclusive to parents of dependent undergraduate
students.
In anticipation of the interest rate increase, UCLA’s
financial aid office sent e-mails to students recommending that
they consolidate their loans and lock their interest rates in to a
lower rate, said Ronald Johnson, UCLA director of financial
aid.
Consolidating a loan involves locking in loans of different
interest rates to a single interest rate for the life of the loan
until it is paid off.
Students will still be able to consolidate their loans after
July 1st but the interest rate will be much higher, Johnson
said.
Interest for Stafford loans, a federally subsidized loan used by
many UCLA students through the financial aid office, will increase
from an interest rate of 5.3 percent to 7.14 percent. PLUS loans,
another federally subsidized loan for parents of students with good
credit history, will rise to an interest rate of 7.94 percent.
After graduating, students who have taken out loans to finance
their eduction have a grace period of about six months.
Students then begin to pay back the money they borrowed from
loan lenders plus a percentage of the total amount borrowed, which
is determined by the interest rate.
Higher interest rates mean a graduate will be required to pay
back more money per month until their loans are paid off.
Nick Valdizia, associate director of financial aid at UCLA, said
though increases in interest rates for loans could deter lower
income families from sending their children to college because of
the greater potential for debt, high interest rates should not
determine a person’s decision to attend an institute of
higher education.
Validizia said that students in the last five to seven years
have enjoyed lower interest rates, around 4.5 to 6 percent, and as
a result many students were able to borrow money to afford their
higher education.
But 10 years ago the interest rates were also around 8 percent
and because of the impact of the act students will be facing
similarly high interest rates once again, he said.
Sachi Sosna, fourth-year near eastern civilizations student,
will be consolidating her loans in the next couple of weeks because
of the act, but she believes the current administration is looking
in the wrong place to take care of its deficit.
“Instead of getting money from the top 10 percent of
America, (the administration) is taking money from the
lower-working class and is only making America’s debt
problems worse,” Sosna said.
“If they started taking money from the top 10 percent, it
would offer more chances for the lower class to get out of debt and
would allow more students to afford college,” she added.
Johnson said he is concerned about the greater implications of
the government’s decision to cut aid to education as
well.
“We are moving away from the principal benefits of
education has provided to our country. These reductions are
ill-advised and could have great consequences,” Johnson said.
“Education should be exempt from these types of
cuts.”