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Federal Student Loan Changes

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My wife recently started graduate school, so like millions of other Americans we've paid close attention to news about changes in the student loan programs. For example, a key component of the recently passed Health Care and Education Reconciliation Act will result in several significant modifications to the how federal student loans are offered and processed.

According to the nonpartisan Congressional Budget Office, the changes will save approximately $61 billion over the next 10 years -- money that will be partially used to expand the Pell Grant program for low-income students, beef up community college funding and eventually lower monthly loan repayment amounts for lower-income earners participating in the Income-Based Repayment Plan.

Here's an overview of key changes:

As of July 1, all new federally backed student loans are now issued directly through the Department of Education's Direct Loan program, thereby eliminating the Federal Family Education Loan Program (FFELP), which had allowed banks and other private lenders to offer federally guaranteed loans. Essentially, the government is eliminating banks as the middleman for these loans.

Affected loans include subsidized and unsubsidized Stafford Loans for undergraduate and graduate students, PLUS loans for parents and PLUS Loans for Graduate and Professional Degree Students. Under Direct Loan, the latter two actually have lower interest rates than they did under FFELP (7.9 percent vs. 8.5 percent); and, the approval rate for parent loans tends to be higher. Many colleges had already converted to the Direct Loan program long before the Act's passage.

Private lenders will continue servicing student loans already on their books and may continue offering student and parental loans that are not federally guaranteed, just as they always have. Such uninsured loans typically have higher interest rates but may allow greater loan amounts.

Another new feature: For federal loans granted beginning in 2014, lower-income graduates with outstanding Stafford or Grad PLUS loans who opt for an Income-Based Repayment (IBR) plan will see their monthly repayment amount capped at 10 percent of their income, compared to the current 15 percent, provided their loan debt qualifies as high relative to their income and family size. Click HERE to use the government's IBR eligibility calculator.

These changes do not impact the process of applying for federal grants, loans or work-study programs or change the amount of federal aid that students are eligible to receive. The first step for students interested in receiving federal aid continues to be completing a Free Application for Federal Student Aid (FAFSA), which is available online, through the school's guidance counselor or financial aid office, or by calling 1-800-4-FED-AID.

Most of the savings reaped by eliminating FFELP will be applied toward the Federal Pell Grant program. (Pell Grants are scholarships given to students from lower-income families that needn't be repaid.) Beginning with the 2010-2011 academic year (July 1, 2010 to June 30, 2011), the maximum Pell Grant amount increases by $200 to $5,550, where it will remain until 2013-2014. Then, for the next five years, the amount will be indexed for inflation, as measured by the Consumer Price Index for all Urban Consumers (CPI-U), capping out at $5,975 in 2017-2018.

For more details on the budgetary impacts of this Act, visit the website for the Congressional Committee on Education & Labor.

This article is intended to provide general information and should not be considered tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how tax laws apply to you and about your individual financial situation.

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