The College Cost Reduction Act, which was signed into law earlier this month is designed to make more financial aid available to the poorest students, as well as to lower interest rates for some new borrowers. As a bonus, the bill also creates an opportunity for students to avoid repayment of some loans ¿ if they engage in certain public service jobs.

But it also puts the squeeze on lenders that make federally guaranteed loans, which could result in higher interest rates for some students. And the law only begins to address the issue of affordability and the huge debt students and their parents face.

Among the bill¿s most important features is an increase in Pell Grants, which are made to lowest income students. These are set to rise from $4,310 in 2007 to $5,400 by 2012 ¿ an additional $11 billion in funding over the next five years.

The bill also eliminates a "tuition sensitivity" provision in the Higher Education Act that prevents Pell Grant recipients at low-cost institutions from receiving their full Pell award.

The interest rates on new subsidized Stafford Loans made after July 1, 2008 will gradually drop from 6.8% to 3.4% over the next five years. However, this is of no help to current borrowers, those who have unsubsidized Stafford loans, or graduate students.

There's also a grant program of $4,000 per year (with a max of $16,000 for undergrads) for those who agree to serve as a full-time teacher in certain disciplines for at least four academic years in a "high-needs" school, within eight years of completing their course of study.

And some borrowers will have the balance of their loans forgiven after 10 years of repayments if they are not in default and are employed in a public service job.

The law also caps the size of monthly payments on student loans at 15% of the difference between a person¿s gross income and 150% of the federal poverty level, or $15,000. However, this unpaid interest is added to the loan balance, potentially creating a huge future liability.

The new law also increases the income protection allowance for both dependent and independent students, thus sheltering more of their income from financial aid means tests.

These features make it appear that more financial aid and grants will be available to students at lower rates -- a good deal for students. But the same bill reduces certain federal subsidies to lenders. And that will impact student borrowers negatively.

Lenders who will face a squeeze on profits because of reduced payments from the government to subsidize their activities are already taking action, according to Kevin Walker, CEO of "We¿re finding, in general, that many lenders have had to cut back on incentives such as interest-rate reductions and principal reductions for on-time payments, since the loans are no longer as profitable."

As the student loan business becomes less profitable, it is likely there will be consolidation among providers and thus less competition -- not a good outcome for those hoping to get better deals on student loans. In fact, just the reverse could occur. The few remaining large lenders would be less likely to lower rates or offer better terms. STORY_PAGE_BREAK/>

You can find further details of the new law at the National Association of Student Financial Aid Administrators' Web site .

Bottom Line: It's Better to Plan Ahead to Get More Aid

As welcome as they are, the aid increases in the new law can't keep up with the spiraling cost of college tuition. Middle-income parents despair of receiving financial aid. Students graduate with huge debt burdens -- larger than their parents' original mortgages.

To keep costs down, many students live at home, or choose schools with lower in-state tuition, or community colleges for the first two years. It's a "free market" reaction to rising, and almost unaffordable, college costs.

Fortunately, many colleges are finally waking up to the fact that they have become unaffordable. As a result, many are reassessing their aid formulas and are willing to give out more grants -- even to higher-income families -- to attract the best students. That's the conclusion of college financial aid expert, Reecy Aresty, author of How to Pay for College Without Going Broke.

His Web site is replete with suggestions to help families qualify for more financial aid, and appeal the aid offers they do receive.

Aresty¿s formula: "By doing income planning and asset repositioning strategies, any family can reduce their expected contribution, thus qualifying for more financial aid -- such as scholarships, grants, loans, and work-study programs."

You need to take these actions well before you reach the student's junior year in high school. That's the year your financial status is used to fill out the dreaded Free Application for Federal Student Aid. And the FAFSA determines your expected family contribution, the minimum amount your family will pay at any school.

The goal is to reduce your EFC, thus increasing the opportunity for financial aid. Strategies such as shifting income and stashing more assets inside retirement accounts or building up home equity (neither of which are counted in the aid formula), are all perfectly legal ways to show less income or fewer assets that count against you in the FAFSA process.

But, advises Aresty, there is another huge window of opportunity even after the school has made its initial offer of financial aid. You can appeal, and ask for more.

So now you¿re ready to file a FAFSA that is designed to give you your best shot at financial aid -- even if you thought it was unlikely. Plus, with schools now more motivated to help good students afford an education, you could be a big winner. And that¿s the Savage Truth.

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Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book, The Savage Number: How Much Money Do You Need? in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.

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