Student loans undergo more serious changes

Every year on July 1, with summer in full swing and fall tuition payments on the horizon, interest rates on federal student loans reset. But this year, along with rate decreases on some loan types, came major changes to the way students will borrow money in the coming years.

Beginning this month, federal student loans are no longer offered through banks. Instead, students will receive those loans directly from the federal government, a system many schools have used for years.

Some argue less choice will mean higher costs and poorer service, but it's too early to tell. But going direct is certain to ease the confusion about where to borrow money first. In the past, when banks offered federal loans in addition to the private loans for which they set the terms, students sometimes took out pricier private loans before exhausting their federally backed options. Going forward, there will be no doubt: Take federal loans first.

As for the process of getting aid? It still starts with filling out the Free Application for Federal Student Aid at www.fafsa.ed.gov. The site has a new Fafsa4caster, which helps estimate federal financial aid eligibility early on while there's more time to make a plan.

Completing the FAFSA unlocks the ability to take out loans from the federal government. Rates on subsidized Stafford loans, which means the government pays the interest during school, are dropping to 4.5 percent. Rates on Parent PLUS loans are now set at 7.9 percent. Unsubsidized Stafford loans and graduate loans remain at 6.8 percent.

Recent changes make it possible for more graduates to repay their federal loans using income-based repayment, which allows monthly loan payments to be reduced based on a person's monthly income and family size. Most end up paying no more than 10 percent of their income under this plan, according to Ibrinfo.org, a site run by the Project on Student Debt.

Another change: Eligibility for income-based repayment can be based on either the initial loan balance, or the current loan amount, whichever is higher. Being able to use the current loan amount is helpful for struggling students, who might have seen their loan balance grow through forbearance or deferment.