How Will The Fiscal Cliff Affect Paying Off Student Loans?

By on November 23, 2012

In 2013 the Bush tax cuts will expire and a great deal of federal spending will be cut as a result of the Budget Control Act of 2011. The result is expected to be a dramatic decrease in the national debt by about 70% over the next ten years or so. However, in the meantime there are any number of concerns about the effects of these new laws on the general public. However, not a lot has been said about how this approaching fiscal cliff will affect the student debt crisis. If left unchanged, the new laws will have a significant impact for students.

Student Loan Fiscal Cliff

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According to Mark Kantrowitz, student loan expert and publisher of Finaid.com and Fastweb.com, as it now stands the fiscal cliff will result in approximately an 8% cut in federal student aid. Those cuts can be broken down into three basic categories:

Pell Grants

Pell Grants have been unchanged for the past two years and are about to increase by $85. Due to the upcoming spending cuts, Pell Grants (which are kind of always in trouble) are facing an $8 billion funding shortfall. Something else would have to be cut in order to save the Pell Grant program. Mr. Kantrowitz believes the likely candidate for an alternative cut will be the elimination of subsidized interest on student loans. Such a cut would cover about three quarters of what it would take to retain Pell Grants. A supplemental possibility is that the government will tighten Pell Grant eligibility, so that fewer students will qualify for the grant, thus making up the remaining quarter.

Pell Grants vs. College Cost

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Federal Student Loans

Federal student loans will be affected by the disappearance of subsidized interest on the subsidized Stafford loan. The current 3.4% interest rate was extended this year by one year; that rate is now scheduled to end on June 30 of 2013. It will likely not be extended again next year without the impetus of the presidential elections.

College Tax Credits

Tax breaks are a huge help for college students. The American Opportunity Tax Credit will expire at the end of 2012. Without an extension on this tax credit, students will fall back on the Hope Scholarship Tax Credit. This will mean a decrease in benefit of about $7,000 per year. Also, the Hope Scholarship credit only lasts for two years while the currently available American Opportunity Credit if offered for four years.

American Opportunity Tax Credit For College Students

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Since a market analyst at Goldman Sachs christened the “fiscal cliff” a little over a year ago, other analysts have suggested alternative terms that are a little more accurate and a little less scary sounding; suggestions like, the “fiscal slope” or “fiscal hill” to name a couple. The idea is that the spending cuts and tax expirations will not happen all at once, which, in the event that Congress chooses not to intercede by changing the scheduled new legislation, should give Americans a chance to adjust. Forewarned is forearmed, as the saying goes. The best things that students and borrowers can do are: be prudent in their person finances, proactively look for scholarship opportunities and focus on taking advantage of government programs in order to have the best managed debt repayment plan possible. Fortunately, there are organizations with the expertise to help students best manage their debt.

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