4 Big Changes to Federal Student Loans Just Took Effect

Folded dollar bill being inserted into bank wearing graduation hat
Karen Roach/Shutterstock
By Betsy Mayotte

Early July is generally a slow period for most businesses, but it can be a scramble in the world of higher education. Most regulatory changes, including changes to student loan interest rates, are effective on July 1, despite the fact that the federal fiscal year doesn't begin until October 1. This is partially due to a requirement that the Department of Education give advance notice of any proposed regulatory changes, including those dealing with student loans. Federal law mandates that the Department of Education set aside times for the public and affected to comment on the proposed changes. Here are four changes that took affect on July 1.

1. Interest Rates

Last year, Congress changed the law that dictates interest rates on federal student loans. The new rule bases the rate off of the 10-year Treasury note rate as of the last auction in May, with a small margin added. This year that rate was 2.61 percent, eight-tenths of a percent up from last year.

Any new loan first disbursed on or after July 1 will have that interest rate, fixed, for the life of the loan. Interest rates will not change on existing fixed rate loans, including consolidation loans.

The rates for these new loans are as follows:

Loan type Interest rate for loans made July 1, 2013 – June 30, 2014 Interest rate for loans made July 1, 2014 – June 30, 2015 Maximum rate for future loans
Direct subsidized and unsubsidized Stafford loans for undergraduate students 3.86 percent 4.66 percent 8.25 percent
Direct unsubsidized Stafford loans for graduate students 5.41 percent 6.21 percent 9.5 percent
Direct graduate PLUS loans 6.41 percent 7.21 percent 10.5 percent
Direct parent PLUS loans 6.41 percent 7.21 percent 10.5 percent

2. Closed School Discharge

This one almost ended being perfect timing, considering the recent announcements that Corinthian Colleges may have to shutter its 107 campuses in the next few weeks.

Thankfully, the crisis was averted or at least slowed down, but sometimes schools do close with no notice –- and students are almost always the victims when that happens.

Some protections are in place for those with federal student loans. Previously, if a student is enrolled within 90 days of the date a school closes and is unable to complete his or her credentials at another school, he or she is eligible to have the associated federal student loans discharged. New rules effective July 1 expand that time frame to 120 days from the date the school closes.

Keep in mind the entire school or location must close to be eligible for this discharge, and if you are offered an opportunity to complete that credential, you're likely better off getting that degree.

3. New Income-Based Options for New Borrowers

The executive order that President Barack Obama signed a few weeks ago won't just expand Pay As You Earn to borrowers with older loans. New borrowers will be able to take advantage of these payment terms now.

Borrowers who take out their first loan on or after July 1 will be eligible for the version of the income-based repayment plan that caps their payments at no more than 10 percent, rather than the 15 percent of the "classic" income based plan, of their disposable income and will forgive any remaining balance after 20 years rather than 25.

4. Relief for Defaulted Federal Loan Borrowers

Borrowers with defaulted federal student loans have two options other than paying the loans in full to get their loans out of default: rehabilitation and consolidation. In order to rehabilitate the loan, borrowers must make nine consecutive, on-time payments of a reasonable and affordable amount agreed to by them and the loan holder.

New rule changes will standardize how that rehabilitation process works for all borrowers, regardless of who holds their defaulted federal loans. Borrowers who start the rehabilitation process on or after July 1 will have their payment initially calculated under the 15 percent rule,which essentially means 15 percent of a borrower's disposable income. If that amount is too high, borrowers will have the right to submit a financial hardship form that takes more of your total financial situation into account.

There are also new rules for administrative wage garnishment to ensure all borrowers are treated equally and fairly.

Betsy Mayotte is director of regulatory compliance for American Student Assistance.

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I worked full time, part time and went to college full time. Took out a small student loan and paid it back. The problem with free education, is when things are free, people don't do their best. When my parents paid, I didn't do so well. When it was my money, I worked very hard. Not all people are meant to go to college. My parents didn't just stop paying, I just signed up and paid myself. It is not the governments job to pay for our post k-12 education.

July 10 2014 at 8:40 AM Report abuse rate up rate down Reply

Speaking of fed loans, no one is able to catch onto some facts here. Many more kids could be going to coalage for free and we could pay off 1/4 of the national dept at the same time. Lets start with the smaller first. Subject, coins. Why the hell do we still need copper and silver on them when the 43 penny worked just fine? Now speaking of copper which is 55 cents a lb at the local junk yard need not be used to carry electric to our homes. We can get it there in a plastick water pipe and generate hydrogen at the same time. Does any well driller wish to chalange this and why? It will probably put ya out of biz.
WES Pinellas Park FL

July 08 2014 at 7:54 PM Report abuse rate up rate down Reply

Here is the problem with the student that defaulted. You must make 9 consecutive payments before you can qualify because while you are making thos epayments, those payments go directly to the arreages of the loan all the while creatin gmore interest, so no matter how much you pay those 9 month's, none of those payments goes towards the principal of the loan and this will happen for the duration of the loan, always bein gbehind and adding interest .

July 08 2014 at 6:30 PM Report abuse rate up rate down Reply

President Barack Obama signed a few weeks ago won't just expand Pay As You Earn to borrowers with older loans. If you can handle your payments that you have now,I would not go for this program, it will just take you longer to pay it off and I believe that the sooner the better to get rid of it

July 08 2014 at 1:41 PM Report abuse rate up rate down Reply

And these rates are supposed to make me happy?
Student loans should have NO interest rate...why is the gov't enforcing money making off of our kids going to college........You can get a house for 3%, a car for 2.99% but an education at 6-7%...terrible

July 08 2014 at 11:56 AM Report abuse -1 rate up rate down Reply
1 reply to George's comment

Bush's SallyMae.... Look it up..

July 08 2014 at 2:33 PM Report abuse rate up rate down Reply

None of this will help students with more than one trillion in student loans. Nor will it help their co0signers, many whom are parents whose Social Security can be garnished.

No, in the US paying to go to school is still the norm. Meanwhile in Chile and elsewhere, the struggle is for universal access to public education. Until we get this in America taxpayers will get hit with the default bills and students will suffer in debt servitude for the rest of their lives.

Diploma mills, like predatory for-profit colleges, will still snort up the Title IV monies while they offer a sub prime education.

Time to organize a debt jubilee and learn from Denmark, Chile and others as to how to fight for unviersal free public education.

July 08 2014 at 11:43 AM Report abuse rate up rate down Reply
1 reply to weilunion's comment

Having hosted Brazilian foreign (high school) exchange students in the USA, I discovered that if your grades in Brazil are good enough, you get free tuition in Public universities. If your grades are not good enough, your parents (or the student themselves) can pay and go to a private university.

Would you be surprised that the worse grades, the higher the tuition in the private universities?

BTW, Brazilian high school consists of TWELVE subjects every semester, and ANY failed subject forces the student to repeat ALL twelve, regardless of the grades in them; 11 "A" grades and just ONE "F" grade and all twelve must be repeated.
In the USA, we have "no student left behind" instead.

July 09 2014 at 5:26 AM Report abuse rate up rate down Reply

If you want to go to college, go to a community college for the first two years and save some money. It only matters where you get your BA from.

If you can't afford college too freakin bad, we need mechanics, plumbers and garbage men/women.

July 07 2014 at 11:55 PM Report abuse +1 rate up rate down Reply
1 reply to petpetdon's comment

I don't know for sure, but you **might** be right about BA degrees.

I went to a top-10 engineering university for a BS, and was hired by a company that ONLY hired engineers with "B" or better GPAs from those top ten universities. (BTW, those schools graded on the curve, eliminating "grade inflation".)

I also paid part of my own tuition for a private high school, (with part time jobs), and had strong enough standardized test scores to earn a tuition-and-fees scholarship (well, at least most of the fees... most required lab courses had additional fees for materials used, and those were not covered, or cheap). I had to work summer jobs and get student loans to pay for my room, board, and books, and paid those loans off in two years after graduation, (by living frugally!).
(No, I didn't have any "Spring Break" trips/vacations.)

Also, college would not have been possible without the support, and love, from my parents. Only my father had a college degree, but both were hard workers, and raised a large family. As the oldest child, I was ineligible for "need based" scholarships. I also earned 10 hours of college credit in math by taking Advanced Placement standardized tests. (Hint for HS students... ask your counselors about that! 10 hours of college credit is about half a semester, and we all know that is a big potential savings.)

July 09 2014 at 6:01 AM Report abuse +1 rate up rate down Reply

There are 85,000 foreign student in U.S.A. colleges each year, and the top five U.S.A. colleges have 55,000 seats, so what do you think is happening. The top five are charging Maximum to foreign students, students from rich parent, rich International companies, and rich governments that all help pay the bill. A U.S.A. student has little to no chance of competing with this type of money.

Wake up America, WAKE UP... please.

July 07 2014 at 11:14 PM Report abuse -1 rate up rate down Reply

A) I believe we should be funding technical schools, Jr. Colleges, and four-year colleges 100% for those that want to go and are willing to pay the taxpayer back by working in government or some other institution for four years at a reduced pay.

Example, we will pay for Medical school, but the student has to work in the VA or Charity hospitals for a period at reduced pay.

B) Education funding is under attack in Arizona, New Jersey, Florida, Texas, Michigan, Ohio, Wisconsin, Indiana, Delaware, Maryland, Pennsylvania, Tennessee, and Iowa, all by Republicans that are trying to Re-WRITE History, destroy Teachers and Teacher Unions, convert our schools to rich, white only Charter Schools, etc. The FUNDING for fixing existing schools and upgrading education is being cut while new school buildings are being built that cost billions. There is also a Republican effort to defund Public Television, Public Radio, and any other media that 'educates' our people, they, the Republicans, only want uneducated people that they can control, and guess what; that is EXACTLY what they are GETTING.... Vote Republican and watch the USA become another 1930's Germany...

C) Our jails are full of those who grew up without an education and could not or can not find substained employment, each person in jail cost the taxpayer about $23,000 per year to take care of another person who is not paying taxes or pulling his or her weigh in our society.

Would it not be better to take that $22,000 and GIVE it to each high school student that actually stays in school and gets his or her diplomia. Then if the student continues to succeed in college, he or she gets $22,000 per year for each year in. The result will be a downturn in criminals, an upturn in tax returns as each college educated person will earn an average of over $60,000 per year.

D) Actually, the Corporations are the PRIME Beneficiaries of Public and Private School Education. The reason for getting an education is to get a job, and getting a job benefits the company, the officers and CEOS of the company, and the stockholder investors of the company.

Therefore, we should eliminate the Property tax that is used to pay for public education, and spread the billing across the corporate and company sector. That would give companies a need to make damn sure that students are getting a good education that is geared toward the needs of the companies, not the ideas of the scholars who are still teaching 1800 era subjects.

July 07 2014 at 8:58 PM Report abuse rate up rate down Reply
1 reply to mac2jr's comment

With your thought process the NFL should pay for all of the football scholarships in all colleges and universities. Since the NFL uses colleges as a minor league anyway.

That money could be freed up for real students that actually want to learn something.

July 07 2014 at 11:59 PM Report abuse +1 rate up rate down Reply

We should be providing FREE school from K to MBA, the cost is far less expensive than throwing a person in jail for dozens of years. Educated people are productive and generally do not commit major crimes, whereas an uneducated person that cannot support him or herself generally will commit a crime.

July 07 2014 at 8:55 PM Report abuse -2 rate up rate down Reply
1 reply to mac2jr's comment

DO you know how many educated people can't find work in the USA?

July 08 2014 at 12:00 AM Report abuse rate up rate down Reply