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How Will The Student Loan Bill Affect Students?

How Will The Student Loan Bill Affect Students?

Mark Kantrowitz

March 23, 2010

The US House of Representatives approved the student loan and health care reform legislation on Sunday night, March 21, 2010, by a vote of 220 to 211. No Republicans voted in favor of the legislation. The US Senate is expected to pass the legislation within about a week.

The student loan bill will end the federally-guaranteed student loan program, where banks and financial institutions make federal education loans that are guaranteed against default by the US Department of Education. Instead, all new loans starting July 1, 2010 will be made through the Direct Loan program, where the funding comes directly from the federal government.

The Congressional Budget Office estimated that a mandatory switch to the Direct Loan program will save almost $68 billion over ten years. The savings are partly due to the federal government having a lower cost of funds than private lenders and partly due to eliminating the middleman. Of the total savings, $40 billion will be used to close a funding gap in the Pell Grant program and to slightly increase the maximum Pell Grant, $21 billion will go to deficit reduction, $1.5 billion will fund improvements in the income-based repayment plan and the rest will fund other priorities.

Current students will not notice much of a difference because of the legislation.

The Direct Loan program offers the same Stafford, PLUS and Consolidation loans as the federally-guaranteed student loan program. There are some slight differences in the PLUS loan program. The Direct PLUS loan has a lower interest rate, 7.9% instead of 8.5%, and the PLUS loan approval rate is much higher in the Direct Loan program. Students will obtain their loans from the college financial aid office instead of having to find a lender. But otherwise the loans are nearly identical in the two loan programs.

The increases in the maximum Pell Grant are anemic. The maximum award in 2010-11 will be $5,550 and will remain unchanged in 2011-12 and 2012-13. The Pell Grant will then be increased at the Consumer Price Index inflation rate for five years through 2017-18, after which it will have no further increases. The maximum Pell Grant will be about $5,900 in 2019-2020, about $1,000 less than in President Obama’s original proposal. The $350 increase over the ten year period is about the same as a typical annual increase. Not only does this fail to keep pace with tuition inflation, but the maximum grant will decrease on a constant dollar basis. On average it increases the maximum Pell Grant at an annualized rate of 0.75% less than the Consumer Price Index.

The legislation implements President Obama’s FY2011 proposal for improving the income-based repayment plan. Monthly payments will drop by one third, from 15% of discretionary income to 10% of discretionary income, and the loan forgiveness will be accelerated from 25 years to 20 years. Public service loan forgiveness will remain at 10 years. However, the implementation of the change is delayed, with the improved repayment plan only available to new borrowers of new loans on or after July 1, 2014. The change is not retroactive, so current borrowers will not benefit.

The legislation drops several provisions that were in the version originally passed by the House in September 2009. It does not include the proposal to expand the Perkins loan program nor the proposal to eliminate about a page worth of questions from the Free Application for Federal Student Aid (FAFSA). In particular, the proposal to eliminate all of the asset questions from the FAFSA was not included in the final legislation.

A more technical discussion of the student loan provisions of the Health Care and Education Reconciliation Act of 2010 legislation can be found on the FinAid site.


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