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.

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  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.

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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.

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