Financial Aid Rules ChangedBy Eva Moy
Recent changes in the Higher Education Act of 1965 have substantially increased eligibility for students from middle class families for federally-funded loans and grants. The changes include higher maximum loan amounts, the creation of an unsubsidized Stafford Loan, and a move from fixed to variable interest rates.
The various federal programs have raised the eligibility thresholds for parental and student assets. The assets of families with below $50,000 per year will not be considered in determining the family contribution. In addition, home equity will not be included as an asset.
"Potentially we can [triple] the number of loans we give out," said Stanley G. Hudson, director of the Student Financial Aid Office. Students may choose to refinance their current loans at the new rates, he added.
He estimated that under the new policies there will be $5 million more in federal aid for which the MIT population is eligible. However, the actual amount awarded will still depend on how much money Congress appropriates for financial aid.
The private banking industry funds the federal loans. While some loans are interest-free for students, the banks charge interest on all the loans. The federal government then pays the interest on the interest-free loans. Thus, these loans pose no risk to the banks, Hudson said.
Unsubsidized Stafford Loans created
Students of all levels of financial need are eligible for the newly-created unsubsidized Stafford Loan. This loan is for students who do not qualify for part or all of the full amount of a subsidized Stafford Loan.
The federal government does not waive the interest on this loan while the student is attending college -- hence the term "unsubsidized." These loans are subject to the same interest rate formula as the subsidized loans. The unsubsidized loan also includes an "origination fee" of 6.5 percent of the amount of the loan, as opposed to 5 percent for the other federal aid programs.
After a student applies for a Stafford Loan, the college will determine his or her eligibility for the subsidized loan. Then it will offer the student a combination of subsidized and unsubsidized loans based on financial need, which each student can choose to accept or decline.
In addition, the new policy increases the maximum annual amounts for Stafford Loans. Starting on July 1, 1993, sophomores can borrow $3,500 (previously $2,625), and juniors, seniors, and fifth year students can borrow $5,500 (previously $4,000). Beginning in the spring of 1994, graduate students can borrow $8,500 (previously $7,500). The maximum amount a freshman can borrow will remain fixed at $2,625.
The maximum aggregate loan amount will be $23,000 for undergraduate loans and $65,600 for combined undergraduate and graduate Stafford Loans.
Variable rate Stafford Loans
All Stafford Loans have been changed from a fixed to a variable interest rate based on the current interest rate of 91-day Treasury bills, with a maximum of 9 percent. These changes were effective on Oct. 1.
The subsidized Stafford Loan is still interest-free while the student is attending school. For current loans, the interest rate is 8 percent after graduation and 10 percent after the tenth year of the loan. Future loans will be changed to variable rates.
The government made this change to more accurately reflect the current rates of other lending agencies. Although the new variable interest loans went into effect on Oct. 1, students will not be able to receive such loans until next term because federal loans are determined on a semester-by-semester basis.
"We can't tell you what your repayment rate is going to be in four years," Hudson said. But "it's still well below what you'd get from a bank," he added.
PLUS and SLS loans
Effective July 1, 1993, parents can now borrow the entire cost of education minus other aid through the Parent Loan for Undergraduate Students. This is increased from the current limit of $4,000 per student per year. Thus it is possible for the parent of an MIT student to borrow up to $26,000 per year, Hudson said. The annual rate of these loans is based on the 52-week T-Bill, with a cap of 10 percent.
The maximum amounts for Supplemental Loans for Students, which are taken mostly by graduate students and independent undergraduate students, will also increase starting July 1, 1993. Freshmen and sophomores can still borrow the current limit of $4,000. But other undergraduates can borrow up to $5,000, and graduate students can borrow up to $10,000. The interest rates are the same as for the PLUS loans, except that the maximum is 11 percent annually.
Unfairness an issue
Despite these changes at the federal level, eligibility for MIT-based aid will remain the same. "We're very concerned about `horizontal equity,' " Hudson said. Two very similar families can look very different on paper, he added.
Under the new federal guidelines, for example, a family making $50,000 would have its assets considered in the aid package, while a family making $49,000 would not. There is also a discrepancy between families who rent and own their houses.
Hudson felt pessimistic about these recent changes in the Higher Education Act, which is reauthorized about every five years. "The law we're working with now bears little resemblance" to the one passed in 1965, Hudson said. He cited the Middle Income Assistance Act from the early 1980s, which created the Guaranteed Student Loan for families with incomes up to $125,000. The program lasted 18 months before Congress became unwilling to pay for these loans.
The unsubsidized Stafford Loan "opened up the doors to any person who wants to borrow the money," Hudson said. He said the program is vulnerable to being shut down like the GSL.
In addition to federal loans, eligibility for Pell Grants has also increased, meaning that this program will in general award less money to each student, according to Hudson.
These changes in federal financial eligibility could be viewed as a misuse of government funds to subsidize loans for upper-income families who could otherwise pay from their own sources, Hudson said.
Application process split
Another change is that the application for financial aid is now divided into two parts. One is for federal programs, and requires no fee, Hudson emphasized. The second part is the Financial Aid Form, which requires a fee.
A student can be considered for federal financial aid without completing the second part of the application. However, the FAF is needed for campus-based federal money and grants in which MIT makes the decision about the nature and size of a financial package.
The Student Financial Aid Office will send out re-application packets in February for people currently receiving financial aid.