How Loans for College are Affected by the Stimulus Plan

Internet and television advertisements are encouraging more people to apply for student loans because of the stimulus plan. The advertisements would have you believe that loans are easy to get and cheap to repay. In reality, most of the stimulus that is directed toward the Department of Education is funding for primary and secondary schools. However, there are some potential changes in student college loans that the plan does lay out. Namely, the stimulus raised limits and expanded eligibility on the HOPE tax credit, Pell Grants ad Stafford loans.

HOPE Scholarship Tax Credit

The HOPE credit is available for first and second year college students. This is a tax credit, not a loan, but it was originally equal to 100 percent of the first $1,000 of money spent on higher education and 50 percent of the second $1,000. President Obama's plan would increase the limit to $2,500. In addition, the HOPE credit income level was raised, so more families could receive the benefit of the tax break. The expenses included in the credit also expanded to encompass text books. Few college loans help cover the cost of text books, so the HOPE credit was unique in taking on this area of college expenses. 

Increased Pell Grant Limits

A Pell Grant is a need-based form of free financing provided to some students. It is estimated that about seven million student take advantage of this program. However, the grant is used to fund only $4,850 of a student's expenses. Since the cost of education has risen sharply since the Pell Grant limit was last raised, the stimulus plan aimed to raise this limit by $500 to $5,350. This amount is still insufficient to cover the majority of expenses facing college students. However, since it is a form of free financing, using a Pell Grant can significantly reduce the overall cost of student loans some would face if they did not reduce the limit on the loans by this $5,350.

Increasing Stafford Loan Limits

Stafford loans are among the most common form of federal student financing. When most borrowers think of "student loans," they are thinking of a program like the Stafford program. This fund is used to provide tuition-only assistance to both needy and well-off students. Needy students receive a subsidized option, meaning they do not need to make any payments while they attend school, and interest will not accumulate during this time period. Unsubsidized loans are also low interest, flexible options, but students need to make payments on the loans while they attend school or face interest during a grace period provision. The stimulus plan allowed for an increase in Stafford Loan limits to $7,500 for freshmen students on the subsidized plan. This was up from $5,500. The loan also increased limits to $8,500 for sophomores and $9,500 for juniors and seniors. Each of these increases represents a significant bump over previous limits. However, the increase only applied to subsidized loans. There is a separate unsubsidized loan limit, which is much higher already than the subsidized loan limit. 

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