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Candice Choi

US debt deal means paying for college - especially graduate school - will get tougher

By Candice Choi
Associated Press / August 4, 2011

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College is expensive. Now the 11th-hour agreement to raise the US debt ceiling is set to push costs higher. That’s particularly true for those pursuing advanced degrees, with subsidies to graduate and professional students ending. The upside: The savings will be used to help preserve Pell grants, which help low-income students.

A bipartisan panel is set to identify at least another $1.2 trillion in reductions by Thanksgiving, meaning college aid could face further cuts. There’s also the lingering possibility the country could lose its top-notch credit rating, which would push up interest rates on private student loans. Here’s how the deal in Washington could affect students:

Subsidized loans. Starting next July, graduate and professional students will no longer be eligible for subsidized federal loans.

Graduate students can take out up to $107,500 in federal loans, of which $42,500 can be subsidized. They’ll still be able to borrow the same amount, but no subsidized loans will be available. The additional cost could push up total debt at graduation by an average of about 16 percent.

Pell grants. They provide undergraduate funding to the neediest students; the vast majority of the 10 million recipients have family incomes of $40,000 or less. For now, students will still be able to get a maximum grant of $5,550 a year. But the odds aren’t looking good for the annual increases scheduled from 2013 to 2017, notes the American Council on Education.

Even with the funding injection, the program faces an estimated shortfall of $1 billion for the 2012 school year.

Loan discounts. The debt deal also eliminates a discount given to borrowers who make their payments on time. The amount varies, depending on when the loan was issued. The incentive disappears for loans disbursed after July of next year. But the debt deal keeps another key discount. Borrowers who set up automatic debit payments get an interest rate reduction of 0.25 percent. Most federal loans come with a fixed 6.8 percent rate.

Interest rates. Federal loans come with a fixed interest rate that tends to be lower than the variable rates on private loans. But the debt-ceiling ordeal raised the question of whether the government will keep its 6.8 percent rate.

Meanwhile, the rates on private loans would no doubt rise if the country’s credit rating took a hit.

Tax breaks. They could be scaled back. Nearly 10 million taxpayers deducted student loan interest in 2009, according to H&R Block. Taxpayers can also claim a credit of up to $2,500 through next year. After that, they’ll be able to claim a credit of up to $1,800 for the first two years of college.

College savings plans. They let families sock away money in mutual funds and withdraw money tax-free for school expenses. But several factors could negatively affect the stock market. So for peace of mind, families may want to call their financial planners to reassess their allocations.

Candice Choi writes for the Associated Press.