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:

  1. 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.)

  2. 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.)

  3. 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.

  4. 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.

  5. 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.

The Bottom Line
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.

Related Articles
  1. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  2. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  3. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  4. Savings

    A Look at the Cost and Tax Treatment of College

    Is there more we can do to improve the affordability of post-secondary education? We take a look at how students and colleges are taxed today.
  5. Credit & Loans

    10 Ways to Manage Student Loan Debt

    How to manage those pesky payments as you embark on adult life.
  6. Fundamental Analysis

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
  7. Professionals

    Scholar vs. Entrepreneur: What's Your Calling?

    You don't need a bachelor's degree to launch your own company. But which path — school or entrepreneurship — offers a better start to your work life?
  8. Economics

    The Biggest Items Obama Is Still Missing From His Mandate

    Learn how the biggest items missing from Obama's mandate include various forms of tax reform and closing the Guantanamo Bay prison in Cuba.
  9. Economics

    4 Top Changes Obama Has Made with His Mandates

    Learn how Obamacare, equal pay for women and an executive order on immigration represent some of Obama's biggest changes during his presidency.
  10. Credit & Loans

    The Lurking Dangers of Student Loans

    Student loans are popular, but they present many dangers.
  1. Good Student Discount

    An auto insurance policy discount available to young drivers ...
  2. Whartonite

    A graduate of the Wharton School of Business at the University ...
  3. Free Application For Federal Student ...

    The form that must be completed in order to qualify for any type ...
  4. Student Debt

    Money owed on a loan taken out to pay for educational expenses. ...
  5. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans – ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  1. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  2. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  3. What are the differences between delinquency and default?

    Delinquency and default are loan terms that describe failure to make a required payment. A loan in delinquency occurs the ... Read Full Answer >>
  4. When capitalizing interest, will interest accrue while you are in a deferment?

    When capitalizing interest, interest accrues while a person is in a deferment of his loan. In the event of a deferment, the ... Read Full Answer >>
  5. Why is more interest paid over the life of a loan when it is capitalized?

    More interest is paid over the life of a loan when that interest is capitalized because the capitalized interest is added ... Read Full Answer >>
  6. What is the difference between compounding interest and simple interest?

    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!