New student loan law changes lending landscape

http://www.savingforcollege.com/articles/20100423-new-student-loan-law-changes-lending-landscape

Bigger government grants, better student loan repayment terms and more funding for financial literacy programs are some of the primary provisions of the new federal student lending law.

Passed in conjunction with the health care reform law last month, the new student loan legislation is the most significant college financial aid reform since the Pell Grant started in the mid-1960s. Injecting $61 billion into higher education programs over the next decade, the law will help students before, during and after college. It goes into effect this July.

Here's the help you'll receive along your college journey from the new law.

High school years

Students desperately trying to pay for college will get a helping hand thanks to student loan reform. Allocating $750 million to bolster college access programs aimed at low-income high school students, the law will provide support for counseling workshops across the nation on financial literacy, college retention and admissions to college through the College Access Challenge Grant Program.

College years

Low-income students in need of an extra financial boost may get one through the newly increased Pell Grant. Starting in 2013, the federal government's largest financial aid program will inject $36 billion into the Pell Grant Program, steadily increasing the award from its current level at $5,550 a year to $5,975 over a five-year period.

"This bill makes a massive (infusion) into the Pell Grant to keep its purchasing power strong," says Rich Williams, higher education associate for the U.S. Public Interest Research Groups in Washington D.C. "When the Pell Grant was originally created, it could fund about 72 percent of a public education at a four-year university. Today, the grant can only afford about 32 percent."

With tuition inflation increasing more than three times faster than the annual rate of inflation, it's going to take more than a nominal grant increase to restore college affordability. Williams adds that each year more than 400,000 qualified high school grads delay or forgo college because it costs too much.

While the grant increase is a good start, it could potentially decrease college affordability in the long run if states continue to cut higher education budgets, says Tim Ranzetta, founder of the student loan research firm Student Lending Analytics in Palo Alto, Calif.

"Some will argue that by continuing to (increase grant funding), there's little incentive for schools to keep costs under control," says Ranzetta. "The increase will make college more affordable in the short term, but you've still got this long-term tuition spiral."

With college costs reaching an all-time high, students are increasingly forced to rely on federal student loans, which were overhauled in the new law. The government will originate and distribute its own federal student loans rather than contract with a private lender to do it.

The switch from the Federal Family Education Loan Program to direct government lending will save an estimated $61 billion in private lender fees, with some of that savings going to the Pell Grant increase, a $2.55 billion boost to the White House Initiative on Historically Black Colleges and Universities and similar programs, and $10 billion to trim the national deficit.

"It shouldn't change things much for students," says Ranzetta. "The loan amounts and terms will stay the same. Students should contact their financial aid office to sign a new promissory note if they need to."

After college

The silver lining to student loans piling up is that the new law will help you pay them off faster and more cheaply. Under an expanded income-based repayment plan, students paying back federal loans starting in and after 2014 will have the option of capping their monthly loan bills at 10 percent of their discretionary income -- defined as any income above 150 percent of the poverty line -- and dismissing all remaining debt after 20 consecutive years of payment.

Students enrolling in income-based repayment before 2014 will have to stick to the current 15 percent monthly cap with all federal student loan debt dismissed after 25 years. Under either version of the program, students who choose to enter a public service field such as teaching or social work after graduation can qualify to have all remaining debt forgiven after 10 years of consecutive payments.

"With this law, students looking to go into socially valuable careers will finally have the support and means to do that even if they have a loan debt that would normally push them out," says U.S. PIRG's Rich Williams.

While Williams is quick to point out that the law is far from a perfect solution to the college affordability problem, it's a solid first step to make college accessible to those who need it most.

"Education is pretty much a necessity and this bill brings help at a time when students and families are struggling," says Williams. "Right now, we're really excited and really satisfied."

Posted April 23, 2010