The Budget Control Act (BCA) of 2011 was signed into law on August 2, 2011. This Act makes two changes to the Federal Direct Loan Program.
Loss of Subsidized Loan Eligibility for Graduate and Professional Students
Effective for loans made for periods of enrollment beginning on or after July 1, 2012 (Fall 2012), graduate and professional students are no longer eligible to receive Federal Direct Subsidized Loans. The terms and conditions of Direct Subsidized Loans received by any student for loan periods beginning before July 1, 2012, for either graduate or undergraduate study, are not affected by this change.
The annual loan limit for graduate and professional students remains unchanged at $20,500, but this amount will now be limited to Direct Unsubsidized Loans.
The aggregate loan limit for graduate and professional students remains unchanged at $138,500, not more than $65,500 of which may be in subsidized loans.
The elimination of subsidized loan eligibility for graduate and professional students does not affect undergraduate student borrowers, who remain eligible to receive Direct Subsidized Loans.
Termination of Direct Loan Borrower Repayment Incentives
With one exception as noted below, the Budget Control Act terminates the authority of the Department of Education (the Department) to offer any repayment incentives to Direct Loan borrowers to encourage on-time repayment of loans, including any reduction in the interest rate or origination fee, effective for loans first disbursed on or after July 1, 2012. As a result of this change, the up-front interest rebate that has been provided to Direct Loan borrowers at the time of their loan disbursement will no longer be offered on any Direct Loan Program loan with a first disbursement date that is on or after July 1, 2012 (this includes the Direct PLUS / Grad PLUS Program).
The law continues to authorize the Department to offer interest rate reductions to Direct Loan borrowers who agree to have payments automatically electronically debited from a bank account.
Under the College Cost Reduction and Access Act (CCRAA) (Public Law 110-84), signed into law on September 27, 2007, the interest rate on subsidized loans made to undergraduate students under the William D. Ford Federal Direct Loan (Direct Loan) Program and the Federal Family Education Loan (FFEL) Program was reduced in stages from 6.8 percent to the current 3.4 percent that applies to loans first disbursed on or after July 1, 2011, and before July 1, 2012. That reduced rate ends for loans first disbursed on or after July 1, 2012.
As a result, the interest rate for undergraduate students on new Direct Subsidized Loans first disbursed on or after July 1, 2012 will be a fixed interest rate of 3.4 percent. President Obama, in his State of the Union Address on January 24, asked Congress to enact legislation to extend the current 3.4 percent interest rate for another year. It is important to remember that this is only a proposal at this time. Absent Congressional action, the interest rate will return to 6.8 percent on July 1, 2012, per the statute.