Changes to Medicare>, prescription coverage and student loans? The health-care legislation approved by the House on Sunday does more than just revamp the health-care system. It also shakes up federal student loans and Pell grants.
The most crucial part of federal student aid reforms includes a transition to 100% federal student loan funding from the direct loan program directly from the government while eliminating banks and private lenders as the middle man. According to the Congressional Budget Office (CBO), this decision will help the government save $61 billion over 10 years savings that are included as part of the health-care overhaul. Of that, at least $10 billion will go toward reducing the national deficit over 10 years, says Edie Irons, a spokeswoman for The Project on Student Debt, an independent nonprofit that tracks college student debt. The huge savings generated by streamlining the student-loan program are part of what made health care possible, she says.
Students can also expect to see increases in the maximum amount of the Pell grant, but those increases will be small compared to President Obama s proposals in his State of the Union address in late January. And changes to income-based repayment plans in which a borrower repays their federal student loans based on their discretionary income (not debt) are now years away from being implemented and will help a fraction of borrowers than what was initially intended.
Here are three changes college students can expect.
Federal loans will be distributed by direct lending only
There used to be two ways to get federal student loans, like Stafford and PLUS loans. One way involved getting these loans through the direct loan program, which is run by the Department of Education; the department sends money to colleges and the colleges then issue loans to the students. Another was getting federal loans through the Federal Family Education Loan Program (FFELP) where loans are subsidized by the Education Department and are provided by private lenders and banks to students and their families.
The new legislation replaces FFELP with 100% direct lending effective July 1, 2010. Students could see few but favorable changes as a result. While the two loan programs are nearly identical, the direct loan program offers more favorable terms for PLUS loans (these loans are available to graduate students and parents of undergraduate students). The interest rate today is lower at 7.9% vs. an interest rate of 8.5% through FFELP. Also, the approval rate for PLUS loans given to parents through the direct loan program is higher than through FFELP; in 2007-08, parent PLUS loan denial rates were 42% in FFELP and 21% in the direct loan program in part because of the stricter terms with which private lenders review applicants credit history, says Mark Kantrowitz, publisher of FinAid.org, which tracks federal student loans.
Watered-down Pell grant increases
Approximately $36 billion of the savings from eliminating FFELP will go toward Pell grant funding over 10 years, says Irons. But the new provisions for the Pell grant fall far short of President Obama s proposals in the State of the Union address.
As of now, the maximum Pell grant amount, which is set at $5,550 for 2010-11, will remain unchanged through the 2012-13 academic year. After that, the amount would increase along with the inflation rate for five years through 2017-18. And for the following academic years, through 2019-20, it would remain flat, says Kantrowitz. In total, this legislation would bring the maximum amount of the Pell grant to $5,975 by 2020 just $425 higher of where it is now. Still, this can total $1,700 in savings for a four-year college education money that most Pell grant recipients, who come from low-income families, would otherwise have to borrow.
The original House legislation would have increased the maximum Pell grant amount to $6,900. And, President Obama s proposal during the State of the Union called for the Pell grant s maximum amount to be pegged to the Consumer Price Index (CPI) plus one point. Instead the new provision averages to three-quarters of a percent under the inflation rate, says Kantrowitz. We re not even keeping up with CPI.
Delayed changes to income-based repayment plans
It won t be until July 1, 2014 when students can start taking advantage of upcoming changes to income-based repayment (IBR) plans. An IBR plan bases a borrower s monthly payment on income rather than debt.
The changes that will impact IBR plans remain the same from Obama s proposal. IBR currently caps monthly payments at 15% of discretionary income that will drop to 10% -- which means borrowers will be required to make smaller monthly payments. It also forgives the outstanding amount owed on the loan after 20 years down from 25 years.
But these new changes will go into effect much later than the president s original proposal for fiscal year 2011. They will also restrict individuals who can take advantage of these terms to new borrowers of new student loans starting July 1, 2014. That means that students who graduate before 2014 won t be able to take advantage of these changes, and undergraduate sophomores, juniors and seniors who had taken out federal student loans before July 2014 will also be left out. Even with delayed implementation and restrictions on eligibility, these changes to IBR plans will still cost $1.5 billion over five years.