Before and During College: Students Should Avoid Extra Borrowing Costs by Graduating Before the 150% Rule Affects Them

Here’s a tale of two brothers. Their father died years ago, and while their mother wanted to help them pay for college, her annual income has always been too low for her to do so. Because they’re financially needy, Dick and Mark are among the postsecondary students who borrow over $20 billion in subsidized debt from the Federal Direct Loan Program (FDLP) every year.

Dick began borrowing these loans when his freshman year began in the fall of 2012. But the family’s finances were so shaky that he had to “stop out” of 3 times to college to work and earn money. And like the majority of undergraduates, Dick changed majors, causing him to stay in school for some extra semesters to complete additional classes his new major required.

Dick’s university defines the educational program for his major as a 4-year program. But it took Dick 6½ years to earn his bachelor’s degree.

Mark, who’s 7 years younger than Dick, begins college next fall. He needs all the financial aid he can get, too, including subsidized FDLP loans. He’ll find that these are the least expensive college loans available but, if he takes as long as Dick to graduate from the 4-year program for his major, his subsidized loans will be more expensive than they were for Dick.

What happened? In 2013, Congress changed a longstanding federal rule that made subsidized loans interest-free until their student borrowers completed the 6-month grace periods due to them after they leave school. The change Congress made created the “150% rule,” which limits subsidized FDLP interest-free periods to timeframes equaling 150% of the length of their educational programs.

The 150% rule affects undergraduates with no outstanding FDLP or Federal Family Education Loan debt on July 1, 2013. Dick owed on Federal Direct Loans he’d borrowed before that date, so he was unaffected. But Mark borrows his first Federal Direct Loan in a few months, so he is affected by the 150% rule.

It’s important for Mark to avoid doing what Dick did – i.e. taking more than 6 years to complete his 4-year educational program. If he doesn’t, he’ll be charged interest on his subsidized loans while still in school and/or during his grace period. At current interest rates, this could add no less than $620 to what Mark, and borrowers like him, end up repaying on their Federal Direct Loans.

The 150% rule makes college less, not more affordable. Today’s student borrowers, almost all of whom are subject to the 150% rule, need to complete their studies, graduate, and get into the workforce so they can afford to begin repaying interest as soon as possible.

Contact College Affordability Solutions if you ever want help figuring out how to keep your student loan borrowing costs as low as possible.


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