PLANNING TO SEND YOUR

kid off to college anytime soon? Then you need to know about the new financial aid rules that will affect anyone saving for college or planning to take out student loans.

The changes, which go into effect July 1, are part of the Deficit Reduction Omnibus Reconciliation Act that President Bush signed into law Feb. 8. The legislation aims to reduce the deficit by cutting nearly $40 billion in government spending over the next five years. A significant portion of those cuts $12.7 billion will come out of government subsidies for education lenders.

But don't panic. This doesn't mean there will be less federal financial aid available for students. In fact, thanks to a new provision included in the law, new grants will be made available to low- and middle-income families, says Kalman Chany, president of Campus Consultants in New York and author of "Paying for College Without Going Broke." But it does mean that there are some new rules some good, some not so good that all families need be aware of. Here's the deal:

Stafford loans
Right now, these government-sponsored student loans have variable interest rates that are reset each July 1, pegged to the rate of the 91-day Treasury. The current Stafford loan rate is 4.7% during the in-school period and 5.3% thereafter.

As of July 1, 2006, however, the interest rate on Stafford loans changes to a fixed rate of 6.8%. While that may seem like a significant hike, the news isn't all bad, says Tom Joyce, spokesman for education lender Sallie Mae. That's because, in this rising-interest-rate environment, when the rate on Stafford loans is reset this July 1, it would have jumped to somewhere around 6.8% anyway, given the current 91-day T-Bill rates. And if interest rates continue to rise in the near future, a fixed 6.8% may be a good deal. (Should rates start falling, of course, the opposite will be true.)

Additionally, the borrowing limits for freshmen increase from $2,625 to $3,500. For sophomores, the increase is from $3,500 to $4,500. The limits for junior and senior students remain the same, at $5,500. For graduate students, the limit on unsubsidized Stafford loans increases from $10,000 to $12,000 per year.

Origination fees for Stafford loans will also be gradually eliminated, starting with a one-percentage-point decrease (from 3% to 2% of the loan amount) this July 1. Thereafter, fees will drop by 50 basis points each year until they are eliminated in 2010.

PLUS loans
These are government-sponsored loans for parents, who are allowed to borrow up to the cost of their child's college bills minus what is received in financial aid.

Starting July 1, the interest rate on these loans changes from a variable rate of 6.1% to a fixed rate of 8.5%. PLUS loans will also be made available to graduate students for the first time, starting July 1. Since there are no limits on PLUS loans, they become a fixed-rate alternative to private education loans, which typically carry higher, variable rates.

Loan consolidation

Starting July 1, students will not be able to consolidate their loans while in school a loophole that allowed many students to lock in rock-bottom rates last year before the hike on July 1, 2005.

Needless to say, if you're still in school and have Stafford loans at the current 4.7% rate, it may make sense to consolidate before July 1 to lock in a rate lower than 6.8% (if all your loans are at 4.7%, for example, your consolidation rate will be 4.75%).

The interest rate for consolidation loans remains fixed and will be the weighted average of the loans being consolidated.

New grant programs for low-income students
There will be new merit-based grants for students who qualify for Pell grants, maintain a 3.0 GPA and major in specific fields such as science, mathematics, engineering or foreign languages deemed "critical to national security." The supplemental grants will be worth up to $750 for freshmen, $1,300 for sophomores and $4,000 for juniors and seniors.

There will also be extended loan forgiveness provisions for math science and special education teachers serving low-income communities.

529 Savings Plans
Assets in 529 Savings Plans will no longer be assessed as student assets when determining financial aid. (Each year, the financial aid formulas calculate 35% of assets that belong to the student as available to cover the cost of college each year. In contrast, only up to 5.64% of parental assets are considered available to pay for college.) The same applies to Coverdell Education Savings Accounts. In addition to that, starting in the 2007-08 academic year, student assets will be assessed at 20%, down from the current 35%, according to Joe Hurley, who runs Savingforcollege.com, an online resource for 529 Plans.

More good news for savers: Prepaid 529 plans will now be treated as 529 Savings Plans, explains Hurley. Until now, Prepaid 529 plans decreased financial-aid eligibility dollar for dollar.