ED Explains Changes to Direct Loan Program

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September 8, 2011

The Department of Education has issued a Dear Colleague letter (GEN-11-16) explaining changes to the Direct Loan program mandated by the Budget Control Act. The legislation, signed into law in August, saves money by restricting benefits to borrowers in two ways. First, graduate students will no longer be eligible for subsidized loans made for enrollment periods beginning on or after July 1, 2012. Loans received for loan periods before that date are not affected.

Second, for Direct Loans first disbursed on or after July 1, 2012, the law eliminates ED’s ability to offer incentives to encourage on-time repayment by borrowers. Previously, ED decreased the interest rate on a borrower’s Direct Loan if the borrower paid on time for one year. The law does allow ED to reduce Direct Loan interest rates for borrowers who set up direct, automatic payments from their bank accounts.