Anya Kamenetz Generation Debt

On July 1, Generation Debt got some good news: New rules came into effect making college and graduate school loan repayment much more affordable for a wide range of people.

The idea behind the rules, applauded by student advocates, is to make our higher education system more equitable by helping those who graduate, play by the rules, and meet their obligations to repay the cost of their education.

Helping more qualified young people afford college is a public investment that should see a real return in terms of higher earnings -- and thus more taxes paid -- by members of this generation. And in the case of new programs that target teachers and other public servants, these young people will be filling vital roles in our economy. At a time when the cost of education, food, gas, and everything else continues to rise, it's important that students, families, and recent grads understand these programs and how to take advantage of them.

The College Cost Reduction and Access Act (signed into law on September 27, 2007) lowered the cost of borrowing on all student loans. Starting on July 1, the fixed interest rate for new Stafford federal loans dropped from 6.8 percent to 6.0 percent. As a result, the average four-year college student starting school this fall will save a total of approximately $2,500 in interest. Under current law, rates will step down each year until they reach 3.4 percent.

If you have older Stafford loans with a variable rate (those taken out before July 1, 2006), the rate just dropped three percentage points, to 4.21 percent from 7.22%. That makes now a perfect time to consolidate and lock in that great rate. A consolidation loan means combining your student loans from each year into one sum with one monthly payment. If you graduated in May of this year, you can consolidate now and lock in an even better rate of just 3.6 percent. Do it this summer, because both the 4.2 percent and the 3.6 percent rate could go up in July 2009.

With the current turmoil in the credit markets, there aren't as many private lenders offering consolidation loans these days, much less the special perks and incentives that were popular in years past. The good news is that you can always get a consolidation loan directly from the government, through www.loanconsolidation.ed.gov.

If you work in a qualified public service job for at least 10 years -- and make your debt payments during that time -- the brand-new Public Service Loan Forgiveness program will forgive your remaining debt at the end of those 10 years.

If you are a current student and agree to teach for at least four years, you could be eligible for an additional program, the TEACH grant. This is a grant -- not a loan, so it doesn't have to be repaid -- of up to $4,000 a year.

Who qualifies? There are a lot of fields that qualify as public service under Public Service Loan Forgiveness. You can enroll in this expanded benefit program whether you're now a student or currently employed in an eligible field. This includes any job of 30 hours a week or more with a federal, state, local, or tribal government; the military; public schools and colleges; any post with a 501(c)(3) nonpartisan nonprofit; police officers and other public-safety workers; EMTs; childcare workers; librarians; those who work with the elderly and disabled; public health educators; doctors and nurses in a community clinic; and AmeriCorps workers.

On the other hand, only current college students are eligible for the TEACH grant program. Anyone, student or graduate, who works in public service and has student loans with payments that are scheduled to last longer than October 2017 can sign up for the Public Service Loan Forgiveness Program.

What's the catch? Of course, these programs are designed for people who already have a strong interest in one of the above fields. The commitment is a long one: 10 years of your career for Public Service Loan Forgiveness and four years for the TEACH grant.

Also, your student loans must be with the federal direct loan program, not with a private lender such as Sallie Mae. In order to take advantage of the program, you can consolidate your loans into the Direct Loan program here.

Finally, there is a risk with any program like this that the laws or rules might change during the time you're paying back the loans. In the short term, the exact qualifications might change between now and November 1, when the Department of Education finalizes its rules.

Look out for another improvement to the loan program, coming next July 1. If you have high student loan debt relative to your income, a program called Income Based Repayment can help. It will allow you to repay your loans based on a sliding scale. So for a graduate earning $35,000 with $40,000 in loans, monthly payments would be capped at $242.50, compared to $460.32 under standard repayment. All remaining balances are forgiven after 25 years.

Go here and here for all the details on these new programs.