If you are a student or parent struggling to pay for the cost of college, whether you have already graduated or are still in school, help is on the way. The College Cost Reduction and Access Act of 2007 is here, and will provide over $20 billion of aid to students and their parents over the next five years. This Act will benefit students and families from all walks of life, and not just the poor or middle class.

One of the key benefits provided by this Act is the drastic reduction of interest rates on subsidized Stafford Loans from its current level of 6.8% down to 3.4%, prorated over the next five years. The first drop in rates will go into effect in July of 2008, with subsequent rate reductions following through 2012. While the actual amount saved by students will obviously vary according to the size of their loan balance, the dollar reduction in payment amount for students with larger balances could easily add up to $1-2,000 per year.

The new legislation also calculates financial aid for 529 plan beneficiaries according to a new formula. If the owner of the plan is someone other than the student’s parent, then plan withdrawals won’t be counted as income or assets for financial aid purposes. However, the bad news is that withdrawals from any 529 plan owned by the student will now be counted as income in the financial aid formula, thus reducing the amount of aid the student is eligible for. It is therefore now in the best interest of both student and parent savers to transfer the ownership of the student’s 529 plan to a grandparent or other third-party owner in order to avoid this dilemma.

New graduates that are struggling to make ends meet on a small paycheck can opt for a new program that will recalculate their loan payments according to a more forgiving formula. The new formula limits the amount of the graduate’s monthly loan payment to 15% of his or her discretionary income. But after 25 years, any remaining debt is automatically canceled. This is obviously a huge windfall for students such as those in the medical or dental professions who can easily amass student loan balances of several hundred thousand dollars. Unfortunately, this provision will not apply retroactively.

But another key feature of this provision is that if the payment is capped at an amount that does not cover interest, then that interest is added to the loan balance, thus lengthening the repayment period and increasing the overall loan balance. Therefore, graduates should think carefully and calculate the possible effects of entering this program before committing. If they feel certain that their incomes will increase in the future, then this may be a safe alternative for now. If not, then this could end up being a trap.

Students that go on to work as teachers or social workers will have the remainder of their student loan balances forgiven after making 120 payments. Again, this provision is only valid going forward, and the schedule begins with payments made after October 1, 2007. The only possible disadvantage of this program is that under the current provision, the forgiven loan balance will be taxed as income to the graduate. Furthermore, upfront tuition assistance for students who agree to become public teachers in poverty-stricken schools or in subjects that are in great need of teachers will be made available. Graduates in other areas of public service, such as law enforcement and firefighting will be eligible for forgiveness of up to $5,000 of loans as well.

Lower income students will be able to receive an additional $500 in Pell Grant scholarships over the next five years, which could bring the total Pell Grant limit to over $5,000 in some cases by 2013. Pell Grants will now become available year-round as well. This could benefit approximately 5.5 million students altogether. About 600,000 additional students will become eligible for these grants as well. Finally, the College Savings Act raises the amount of money that students can borrow, thus reducing their dependence on more expensive loans from the private sector.

There are also many miscellaneous provisions that will help students defray the cost of their education. They include:

  • Streamline the financial aid process
  • Help students plan for textbook costs in advance each semester
  • Strengthen college readiness programs
  • Improve tuition and fee support for military and veteran students
  • Make college campuses safer and provide increased assistance for schools trying to rebuild after a disaster
  • Mandate equal opportunity for disabled students
  • Increase the emphasis on science, technology and foreign language education
  • Millions of students are going to benefit from these new rules in many ways. Look for more news on this development in the near future from your educational institution and in the media.