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.”