Limiting Subsidized Loan Eligibility to 150% of Program Length: What You Need to Know

In June of this year Congress passed legislation to extend the 3.4 percent interest rate on subsidized Stafford student loans for one year. The bill temporarily delayed the rate from doubling to 6.8 percent on July 1, 2012.  To pay for part of the $6 billion cost of temporarily extending the 3.4 percent rate, lawmakers agreed to permanently limit eligibility for subsidized loans to 150 percent of the length of the student’s academic program.  

But what does will that mean for students? A summary of the bill is provided below and NASFAA is awaiting guidance from the Department regarding implementation.  

Explaining the “150 Percent” Change

The 150 percent change means students in a four-year program will be eligible for subsidized student loans for the equivalent of six years – three years for students in a two-year program. The student who reaches this limitation could continue to receive unsubsidized Stafford loans if he or she is otherwise eligible (for example, has not run afoul of the school’s satisfactory academic progress requirements).

Once a borrower has reached the 150 percent limitation, his or her eligibility for an interest subsidy also ends for all outstanding subsidized loans that were disbursed on or after July 1, 2013. At that point, interest on those previously borrowed loans would begin to accrue and would be payable in the same manner as interest on unsubsidized loans.

The new limitation appears prospective in nature, affecting new borrowers on or after July 1, 2013. Since only periods for which the student received subsidized loans appear to count, the 150 percent limit would only include periods of borrowing that began on or after July 1, 2013. The bill also addresses transfer students. For borrowers who were enrolled in more than one educational program that began on or after July 1, 2013, the limitation would be calculated by taking the difference between 150 percent of the published program length of the longest educational program in which the borrower was enrolled and any periods of enrollment in which the borrower received a subsidized Stafford loan. 

The legislation mandates that the Department of Education issue regulations on how to determine the aggregate period of eligibility for less than full-time students, students enrolled in preparatory coursework necessary for enrollment in a program leading towards a degree, and students enrolled in a teacher certification program who are not also regular students at the institution. Such regulations are exempt from negotiated rulemaking and not subject to Master Calendar provisions. 

Less clear is how, or more importantly who, would be responsible for tracking whether a student is eligible for the interest subsidy. In discussions with the Department of Education (ED), NASFAA was assured that subsidized loan eligibility information would be provided to the school. 

Budgetary Savings

In his fiscal year (FY) 2013 budget request, President Obama proposed limiting the interest subsidy to 150 percent of program length to help offset the Federal Pell grant shortfall in FY 2014.

The Congressional Budget Office (CBO) estimates the offset would save $1.2 billion a year. CBO also estimates it would cost just under $6 billion to keep the subsidized Stafford interest rate at 3.4 percent for an additional year. The bill offsets the remainder of the cost with changes to worker pensions.

In a statement, NASFAA President Justin Draeger urged Congress to seek long-term solutions to college affordability, rather than short-term fixes:

"We appreciate that lawmakers have come to an agreement that would extend the 3.4 percent subsidized Stafford Loan interest rate for an additional year. However, the extension is only a temporary fix to the problem. We therefore urge Congress and the Obama administration to engage in discussions that seek a long-term solution that would make student loans not only affordable for students and families but also understandable and predictable.

"While we regret to see permanent eligibility changes to the loan program made in order to fund this one-year extension, we are appreciative that a portion of the savings was found from outside of the education programs," he said.

Implementation

ED has not issued guidance on the subject, but NASFAA understands that schools would be expected to report a student’s program length through COD and the Department would be tracking and notifying schools a student’s progress, similar to the current rules regarding Pell Grant Lifetime Eligibility Used (LEU). 

This article was originally published on June 29, 2012.