A Few Things to Consider About New Financial Aid Regulations
John W. Dysart
The Dysart Group, Inc.
While nothing is ever certain, it does seem we have some new things to consider about laws and regulations related to financial aid.
Federal Stafford Loan limits are going to be increased for undergraduate student beginning in 2007. Consider that these changes in eligibility could be positive for institutions, especially private institutions. Federal Stafford Loan eligibility will increase for freshmen from $2625 per year to $3500. Eligibility for sophomores will increase from $3500 to $4500. Increased borrowing eligibility levels will provide the opportunity for students to cover a greater portion of their costs through the federal programs. Colleges and universities may be able to spend a bit less of their own financial aid resources as a result. The problem is that the government increased the annual limits but did not increase the aggregate limits. Students borrowing more during freshmen and sophomore years will have less funds available to them if they need more than four years to complete their degrees. The implications for degree completion rates and expenditure of institutional funds after the initial four years of enrolment are real.
There will be changes in interest rates. Interest rates for Stafford loans will change from variable to 6.8 percent. The interest rates for PLUS loans will increase from 7.9 percent to 8.5 percent. Institutional administrators should be aware that increased interest rates will make financial aid loans more difficult to sell to prospective students and their families.
Changes in the federal methodology to determine financial need might make the expected family contribution (the amount families are expected to pay) more realistic. Unfortunately, as the formula changes create more aggregate financial need, there are no increases in grant programs from the federal government to meet this newly created need.
We have a lot of good news for graduate students. Increases in the unsubsidized loan program for these students as well as a new opportunity to participate in the PLUS loan program may significantly reduce the need for private and alternative loans for many students. The down side is the increased emphasis on borrowing. Graduate students are going to continue to leave school with even greater indebtedness. This will impact their lives in ways they are unlikely to comprehend. Large monthly loan payments are going to influence everything from job selection and retirement planning to home purchasing decisions. The need for more effective debt counseling will increase at a time when financial aid officers are already over-burdened with other, equally important tasks.
The origination fees for Stafford loans will be systematically reduced and eventually eliminated by 2010. This will be good news for students and will moderately impact cash flow for schools as the amount of Stafford loan disbursements will increase slightly.
These changes are important for senior administrators and bring to mind a number of questions to ask of our professionals working in admission, financial aid and business:
- How will the new loan amounts provide opportunities for changes in award policies for undergraduate students?
- How can we reduce institutional discount rates as a result of the changes in loan eligibility for freshmen and sophomore students?
- How must we prepare to finance fifth and sixth year undergraduates since increased annual loan limits have not changed aggregate loan limits?
- What are the best ways to address increases in student and parent loan interest rates? How do we adapt our marketing strategies for new and returning students to sell the new interest rates?
- How should we deal with the probability of increased demonstrated financial need without increased federal grant resources?
- How will the new loan opportunities and increased loan limits for graduate students impact future institutional decisions regarding pricing, recruitment and retention?
- How is the institution going to respond to improve debt counselling programs for graduate and undergraduate students given the likely increases in borrowing?
- The decrease and eventual elimination of Federal Stafford Loan origination fees will have implications for college and university business offices. How will the appropriate changes be made to billing and financial aid computer systems to account for the change?
Chief administrators should begin thinking about and planning for these changes. The first step is gathering the folks involved in the trenches and asking the right questions. Early questions will mean earlier changes in process and procedure designed to effectively deal with regulatory changes in a manner that serves the institution and its students well.