Change in Financial Aid
In December 2005, Congress passed a deficit-reduction package that has several ramifications for future college students. Over the next five years, federal funding for student-loan programs will be reduced by $12.7 billion. This represents the largest cut the federal government has made to student aid and is expected to increase the debt burden of students, as many borrowers of student loans will face higher interest payments.
According to the Wall Street Journal, Congress raised rates on popular Stafford loans to a fixed 6.8%, from the previous variable rate that was as low as 4.7%. Federal Plus loans now carry a fixed rate of 8.5%, up from the previous 6.1% variable rate. Over the term of a typical student loan, the increases will net thousands in higher payments.
Families to be hit hardest are those with annual household income between $30,000 and $50,000 and working students who fall outside the narrow range of financial aid support.
During the 2006/07 academic year, dependant students are only able to earn $3,000 and still qualify for a maximum Pell Grant of $4,050. Pell Grant values are reduced by 50% on each dollar earned above $3,000.
Working-class students are not well served, financial-aid experts say, by a student-aid system created in the 1960s and 70s. The formula assesses a student’s need assuming they come from a traditional two parent family who pay at least a portion of their child’s college bills. Any income earned by the student, therefore, is considered largely discretionary and assumes 50% can be used to pay college costs.
According to a 2002 Education Department report, only about, 30% of undergraduate students can be considered “traditional”- meaning they enroll in college straight from high school, depend on their parents for financial support, and don’t work.
For families funding college, the best approach remains an early start in a tax-advantaged college savings account. The alternatives for most are less than favorable and include a student overworking while attending college or carrying a considerable student loan, with now higher interest rates.
Analysts at the American Council on Education believe a student should not work more than 15 hours a week while attending college as it can have a negative impact on degree completion. Furthermore, students who carry loans to pay for college are financially saddling themselves for years to come.