Federal Student Loans Get Cheaper, Easier

2010 brings lower interest rates, easier application and repayment rules

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Because states have been cutting back on scholarships while hiking tuition, more students are having to borrow to fund college. Luckily, at least some federal student loans are getting cheaper, easier to get, and easier to repay.

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 Easier application: While students will still have to fill out a Free Application for Federal Student Aid, starting July 1, students who want a federal Stafford loan need only ask their college. They no longer need—or have the opportunity—to shop for a bank to make a federally backed loan.

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 Cheaper: Congress has lowered the interest rates for student Stafford loans awarded to those who qualify as needy. In the 2010 academic year, which starts July 1, students who qualify for the "subsidized" federal Stafford student loan will be charged no interest while the student is in school, and just 4.5 percent after they leave. (They will also pay an up-front fee of 0.5 percent of the value of the loan.) In the 2009 academic year, the government charged 5.6 percent in after-graduation interest on subsidized Stafford loans. The government makes subsidized loans to students whose FAFSA shows they cannot afford the full cost of their college, and who don't receive enough scholarships and other aid to make up the difference between the cost and what they can afford.

 [Read 6 Advantages to Federal Student Loans.]

All other students who attend college at least half time can continue to borrow up to $12,500 a year (younger students have lower loan maximums) through the unsubsidized Stafford program, which charges 6.8 percent in interest. Students don't have to make payments on unsubsidized Staffords while they are in school, but the interest does continue to accrue.

 [Read How Much Should I Borrow for College? ]

 Easier to repay: Many recent graduates who tried to take advantage of the Income-Based Repayment plan the federal government launched in July 2009 complained of confusing instructions, incorrect bills, and lots of red tape, says Heather Jarvis, a senior program manager for Equal Justice Works and expert on student debt. Contractors handling IBR calls and applications for the government sometimes improperly steered applicants to a soundalike program that isn't considered as good for borrowers, called "Income-Contingent Repayment," she said. Applicants still have to be vigilant, but "there has been a lot of improvement recently in processing" IBR applications, Jarvis says. Borrowers who consolidate their federal student loans with the federal government can sign up for IBR and cap their payments below 15 percent of their income. Public servants who make 10 years' worth of IBR payments have the rest of their loans forgiven. Anyone who makes 25 years worth of IBR payments will have the rest of their loans forgiven, no matter what kind of job they have.

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