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Student Loan Reform: What it Means

Student Loan Reform: What it Means

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By
March 29, 2010
Updated on Mar 29, 2010

Amid news coverage and commentary on the passing of the health care reform bill, it was all too easy to miss. But an important overhaul to the way student loans are administered was approved by the Senate and Congress as part of its passage of the health care legislation, spelling major reforms for the student loan industry.

If you’re still writing checks to Sallie Mae or another private loan provider for your own education, or getting ready to help your child take out loans, you know the basics. But what you may not realize is that up until now, private lending institutions have been federally subsidized to extend those loans through something called the Federal Family Education Loan (FFEL) program.

In a dramatic reorganization, the reform bill would eliminate the FFEL program entirely and ensure that all student loans come directly from the government. By effectively cutting out the middle man, the government could stand to save $61 billion over the next 10 years. U.S. Rep. George Miller (D-CA), chairman of the House Education and Labor Committee and the author of the legislation, lauded Congress for voting “to stop wasting billions of taxpayer dollars to subsidize big banks, and start investing that money directly in our students and families.”

But the reform package has its share of detractors. Among these, unsurprisingly, are the companies being cut out of the deal, as well as the politicians whose constituencies could face job losses as a result. Sallie Mae has estimated that 2,500 jobs, representing about a third of its employees, may be cut. Republicans unanimously opposed the bill in both chambers.

“Anytime you have a big change like this, there are obviously some concerns,” said Haley Chitty of the National Association of Financial Aid Administrators. He cites services such as default prevention, financial literacy, and college access initiatives as programs which could be lost in the changeover, and says that some smaller institutions could struggle to change over by the July 1, 2010 deadline. However, he notes that Congress will allow nonprofit lenders to continue to service the loans, hopefully without a loss to student services.

Just what does the bill accomplish? In addition to saving a projected $61 billion, the plan would do the following:

  • Invest a total of $36 billion into the Pell Grant program over 10 years, including $22.6 billion to increase the maximum Pell Grant award to keep up with inflation
  • Invest $2.55 billion in historically black colleges and universities to help boost college retention and graduation of minority students
  • Invest $2 billion in a competitive grant program for community colleges to develop and improve educational or career training programs

What does this mean for parents and students? If all goes according to plan, families shouldn’t notice much of a change. It’s if the measure didn’t pass that they would be feeling the pinch: According to administration officials, Pell grants, which serve students with demonstrated financial need, would have had to be cut to about $2,150 if the legislation failed to go through. Instead, the maximum Pell grant will go from the current 5,550 to 5,900 by the 2019-2020 school year.

Other changes affecting families include:
  • Automatic increases to maximum Pell grants which will be tied to the rate of inflation
  • Income-based repayment which will have borrowers devote 10 percent of their income to payments, down from the current 15 percent, as well as loan forgiveness after 20 years, down from the current 25.
  • Direct loans to be taken out from college financial aid offices, not from banks
  • Option to consolidate direct loans and loans administered under the FFEL program while still in school.

The passage of student loan reform, which marks a cornerstone of the Obama administration’s education agenda, is a drop in the bucket for most families struggling with college costs. But it may be the first move in a series of changes that could reimagine the nation’s education landscape, especially with a possible revamp of No Child Left Behind on the way.

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