On March 30, President Barack Obama signed a major student loan reform package into law – and many people didn't even notice, at least not right away. Officially known as the Health Care and Education Reconciliation Act, this huge legislation package got a lot more attention for its health care-related content than for the section that deals with funding for higher education. But the changes to the student loan system could also have a big financial affect on many of the country's college students – at least, for those who take out loans in 2014 or later. Approximately two-thirds of college graduates use student loans to help finance their education, incurring an average of $23,000 in debt. As college costs continue to soar, that figure is likely to keep rising. In Pictures: Top 5 Reasons Why People Go Bankrupt
Here's what the student loan changes mean for you:
- Elimination of the Middleman
Starting July 1, 2010, federal student loans will be handled directly by the government, instead of banks and other lending companies who had been handling loan programs. Students will deal with their school's financial aid office, which will work in conjunction with private companies approved by Uncle Sam to disperse loan funds. (Though the U.S. government can help its citizens by subsidizing risky loans, the costs always come back to the taxpayers. Find out more in The Government And Risk: A Love-Hate Relationship.)
- Larger Pell Grants
Although it's being referred to as a "student loan bill," part of the legislation calls for an expansion of the federal Pell grant program. (Unlike loans, grants are a form of student aid that doesn't need to be repaid. A student's eligibility for a Pell grant is determined by household income.) The maximum Pell grant will gradually increase, starting in 2013, to 2017 at the same rate as the Consumer Price Index, but many critics have complained that these increases don't keep pace with the rapid rate at which the typical tuition bill is rising. (Dropping out of school can mean forfeiting all of your tuition. Find out what protection is available, in Tuition Insurance Takes Sting Out Of Withdrawal.)
- Increased Funding for Minority-Serving Institutions
Students at colleges with a student body consisting of a large minority population may notice an increase in services and programs. According to White House figures, the country's Historically Black Colleges and Universities (HBCUs) and Minority Serving Institutions (MSIs) make up nearly one-third of all degree-granting institutions in the U.S., serving nearly 60% of the country's minority undergrads. The new legislation includes $2.55 billion in support for these schools.
- Lower Income-Based Payments
After 2014, those who struggle to make loan payments will be able to take advantage of income-based repayment plans. Under the new rules, loan payments cannot exceed 10% of the borrower's discretionary income (the current maximum is 15%). The White House predicts more than 1.2 million borrowers will be able to take advantage of the expanded income-based payment plan, and says the typical monthly payment would be reduced by $110 for the single borrower who earns $30,000 a year and owes $20,000 in student loans.
- More Forgiveness Opportunities
Again, this part of the law takes effect in 2014. Borrowers who stick with their income-based payment plan for 20 years will then no longer owe a balance, even if they haven't yet paid back all of their loans. Under the current program, borrowers must make payments for 25 years. Borrowers employed in public service will see their balances wiped out in 10 years.
While cash-strapped college students (and their parents) will likely welcome anything that helps them manage those hefty tuition payments, many critics say these measures don't go far enough, especially considering several elements don't go into effect for several years. However, when coupled with recent changes to simply the FAFSA (the form students may complete to apply for federal aid) and the expansion of college-related tax credits, the new legislation may at least provide a little bit of a helping hand to families struggling to afford the overwhelming cost of higher education.
If you're still feeling uninformed, check out last week's business highlights in Water Cooler Finance: Auto Hope, Bubbling Oil and Obamanomics.