Sweeping changes to the student loan industry were nestled in the health-care reform bill enacted this year. The law, which began affecting millions of college loans this semester, will have far-reaching implications in years to come for parents like Joe Coccia, of New Jersey, father of three.
"It's so confusing, and parents are sort of desperate to get the paperwork completed and sent in to the financial aid office that we don't always know what exactly is going on," said Coccia, whose oldest son Vincent is a junior at Ithaca College in New York. Vincent's tuition is part scholarship, part student loan, Coccia said. His younger son Matt and daughter Juliana are in high school. (For more, see our Student Loans Tutorial.)

"Hopefully, by the time the other kids are ready to go to college, I'll understand a little better."

For parents like Coccia who could use a primer on the changes in student loans, here are the highlights.

IN PICTURES: 8 Financial Tips For Young Adults

  1. No Private Lenders
    Perhaps the most crucial change is the elimination of commercial banks from the student loan business. According to the U.S. Department of Education, about 66% of all undergraduate students received some type of financial aid for the 2007-08 school year. The average loan was $9,100. Students will now take loans directly from their college financial-aid offices. Taxpayers are expected to save $61 billion in fees, according to the Congressional Budget Office, and $40 billion of that will go to higher education.

  2. Pell Grant Changes
    Nearly 8 million low-income students receive money from the Pell grant program, which began in 1973 to help needy students. In 2007-08, federal Pell grants were awarded to 27% of undergraduate students at an average of $2,600.

    Approximately $36 billion of the savings from the student loan reform will go to the Pell grant program, which is on track to run dry due to a sharp increase in recent applications.

    Currently, Pell grants offer students up to $5,550 annually. The maximum amount will rise to $5,900 by the 2019-20 school year. However, Pell grants don't make as much of a dent in rising tuition bills as they once did. While they covered about 75% of costs as the average public university in the 1970s, they now defray only one-third of the cost. (Find out more, in College Cost Reduction Act Helps Students Meet Payment.)

  3. More Money for Low Income Students
    Students applying for aid this year will still have to go through their college or university financial aid office. The application process itself shouldn't be different. However, the federal government, not commercial banks, will make decisions on the loans. Proponents of the overhaul say it will offer far more aid money to lower-income students. Private lenders may still compete for contracts to administer the loans, but they must use employees in the United States and cannot outsource to overseas call centers. Banks will no longer be able to securitize, or bundle loans in securities sold to investors.

  4. Repayment Burden Lessened
    Students will have an easier time repaying their loans. For loans taken after July 2014, the government will cap payments at 10% of a student's income. The current rate is 15%. Loans also will be forgiven after 20 years, instead of the current 25 years. For those who go into the military or other public service, the government will forgive loans after 10 years.

IN PICTURES: Eight Ways To Survive A Market Downturn

The Bottom Line
The shift away from private lenders means students will no longer get certain discounts on borrowing. The maximum lending rate will be 6.8%, with cheaper borrowing available to lower-income students. Community colleges will receive $2 billion in additional aid over the next four years, and institutions with predominant minority enrollment will get $2.55 billion.

Unfortunately, the overhaul will not lower the cost of higher education or affect existing loans. But the Obama administration has strongly urged high education institutions to "do their part" to keep costs down. Most students are eligible for some form of federal grant or loan. The basic eligibility requirements are as follows:

Loans will be offered to students who are U.S. citizens and/or permanent residents, enrolled at least half time in a qualified program at a participating school, and not in default on a prior student loan. Total aid cannot exceed the school's total cost of attendance (tuition and fees, room and board, transportation whenever applicable, and personal and miscellaneous expenses). (To learn more, see The Dangers Of Paying For Your Kid's College.)

For eligibility requirements, see the U.S. Department of Education guidelines.

Find out what happened in financial news this week, with Water Cooler Finance: The New iPod And The Roller Coaster Market.

Related Articles
  1. Credit & Loans

    A FICO-free Loan? See SoFi's Super Bowl Ad

    Non-bank lender SoFi will air its first TV ad during Super Bowl 50. Here's how it's challenging big banks by providing an alternative approach to loans.
  2. Credit & Loans

    Student Loan Forgiveness: A New Route

    DeVry (and other for-profit) students & grads, pay attention: An obscure direct-loan program reg could make it possible to have student loans forgiven.
  3. Personal Finance

    University Donations: Which Schools Got the Most

    A closer look at the staggering $40.3 billion donated to colleges and universities in 2015.
  4. Economics

    What is the American Dream in 2016?

    The American Dream is still alive and well, but it looks very different than it used to.
  5. Credit & Loans

    Debt Forgiveness: How to Get Out of Paying Your Student Loans

    There are income-based plans and forgiveness for public-service employees. The latest wrinkle: loan forgiveness because the school defrauded you.
  6. Credit & Loans

    Student Loan Refinancing: The Pros and Cons

    To refinance your student loan or not? Here are the top pros and cons to consider.
  7. Credit & Loans

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  8. Retirement

    Are Student Loans Putting Your Retirement At Risk?

    Can't think about saving for retirement because you are drowning in student loan debt? Here are some solutions.
  9. Investing

    Job or Internship?: A Guide for College Students

    College students, which is better for your future - an entry-level job or a unpaid internship? Find out now.
  10. Savings

    The Top 12 Weirdest Scholarships Available

    Cut your college expenses drastically by winning one of these off-the-wall scholarships.
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. Who is eligible for student loan forgiveness?

    Your eligibility for student loan forgiveness depends on the type of student loan in question. If you have a federal loan, ... Read Full Answer >>
  3. What’s the difference between the two federal student loan programs (FFEL and Direct)?

    The short answer is that one loan program still exists (Federal Direct Loans) and one was ended by the Health Care and Education ... Read Full Answer >>
  4. Can Sallie Mae loans be forgiven?

    Sallie Mae loans, similar to other private loans, cannot be forgiven. As of 2015, there is no option for private student ... Read Full Answer >>
  5. Can Sallie Mae loans be consolidated?

    Sallie Mae loans can be consolidated with other federal loans, but not with private loans. For federal loan consolidation, ... Read Full Answer >>
  6. How does Sallie Mae disburse funds?

    Sallie Mae is the number one provider of financial aid and student loans in the United States, servicing over 25 million ... Read Full Answer >>
Trading Center