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Questions about the Health Care and Education Reconciliation Act of 2010

Mark Kantrowitz

April 12, 2010

If you have already graduated from college, will you be affected by the new changes to student loans in the health care bill? — Lauren A.

No. None of the changes enacted by the Health Care and Education Reconciliation Act of 2010 will affect students who have already graduated.

Starting July 1, 2010, all new federal education loans will be made through the Direct Loan program. This includes consolidation loans, but almost all consolidation loans were already being made through the Direct Loan program, as most banks and financial institutions had stopped making consolidation loans. Although the Direct Loan program has a lower interest rate on the PLUS loan, the switch to 100% Direct Lending does not affect existing federal education loans.

The reconciliation bill will cut the monthly payments under income-based repayment by one third from 15% of discretionary income to 10%, and will accelerate the loan forgiveness from 25 years to 20 years. These improvements, however, are effective only for new borrowers of new loans made on or after July 1, 2014. The changes are not retroactive. Although the regulations have not yet been issued, the term ‘new borrower’ will be defined as having no outstanding principal or interest balance on a federal education loan as of July 1, 2014. A borrower who has a consolidation loan that repaid loans made prior to July 1, 2014 is not considered a new borrower. Current borrowers do, however, benefit from the current version of income-based repayment, which is still a pretty good repayment plan for borrowers who are experiencing long-term financial difficulty.

I have heard that the FAFSA will start to ask an asset question in 2011-2012. In short, if the student or parent has $150,000 in countable assets they will not be eligible for federal financial aid. Is this true, or has a decision be made? Will this effect families who qualified for the zero EFC or simplified formula or will they still qualify? — Joseph M.

This change was ultimately not enacted into law.

The Student Aid and Fiscal Responsibility Act of 2009 (SAFRA) proposed to drop the six asset questions from the FAFSA and to replace them with a net asset cap on eligibility for a Pell Grant or subsidized Stafford loan. The net asset cap would not have applied to non-need-based federal aid, such as the unsubsidized Stafford loan and the PLUS loan. The definition of net asset would still exclude retirement plans, the net worth of the family’s principal place of residence, small businesses owned and controlled by the family and a small asset protection allowance based on the age of the older parent. Unfortunately, it would still include college savings plans. The version of SAFRA that passed the US House of Representatives on September 17, 2009 set the net asset cap at $150,000. An unpublished draft of the US Senate version of this legislation would have set the net asset cap at $250,000 and applied it to Federal Work-Study in addition to the Pell Grant and subsidized Stafford loans. The net asset cap would have overruled the simplified needs test and automatic zero EFC.

However, when SAFRA was reintroduced as part of the Health Care and Education Reconciliation Act of 2010 all of the proposed changes to the FAFSA were dropped, including the elimination of the 6 asset questions, the elimination of 12 questions about untaxed income and benefits and the introduction of the net asset cap. The reconciliation bill also dropped the indexing the maximum Pell Grant to inflation plus 1%, the expansion of the Perkins Loan program and billions of dollars of funding for several other programs. The reconciliation bill has much less money available for student financial aid programs than the original version of SAFRA. (Most of the changes to the FAFSA would have increased federal costs by increasing aid eligibility.)

So for the time being there is no asset cap on eligibility for need-based federal student aid. However, Congress will probably reintroduce this proposal in new legislation, as the original version of SAFRA passed the US House of Representatives by a vote of 253 to 171.


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