Student Loan Changes Move Forward

   Posted 05 Apr, 2010

It has been over a year since President Obama announced his hopes to bolster student aid by overhauling the student loan system, and last week (in the same piece of legislation that pushed through his health care reform) changes were finally made–but they weren’t at all what many higher education advocates, parents and students had hoped for.

The Real Deal

As I mentioned recently, the bill’s long hold up in Congress meant that funding dropped by $26 billion, taking away critical funds that could have gone to uphold the impressive outline for change President Obama initially announced in February of last year. Subtract from that the $19 billion reallocated to help cover the cost of the new health care initiative, and students now get less than half of what the Obama administration initially projected. With the legislation now passed, we can finally analyze what changes have–and have not–been made.

What Will Change

  • Direct Lending. Federal student loans will now be available only through the Direct Lending program (I explain Direct Lending at the bottom of this post), meaning students and parents can no longer borrow federal funds through private lenders such as Wells Fargo or Sallie Mae.
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  • Funding for Minority Colleges. $2.55 billion will go to schools that have historically served black, hispanic or Native American students over the next ten years.
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  • More Pell Grants. The majority of the funds will be directed to rescue the floundering Pell Grant program - the funding for students that have the greatest financial need. Many students could have experienced a serious decrease in their Pell Grant funding–or even lost their grants completely–if this bill had not passed.

What Will Not Change

President Obama’s 2009 higher education budget proposals also included several more significant improvements; all which had to be scrapped due to the budget cuts that became necessary to get the bill to the point where it would pass. Here is a quick summary of the proposed changes that will NOT go into effect:

  • No Further Interest Rate Reduction. Federal student loan interest rates have been the lowest in years, and the original bill had intended to extend those low interest rates beyond their current expiration date. Unless new legislation is passed before then, expect rates to start climbing again in 2012.
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  • No Change to the Perkins Loans. Perkins loans (loans for low-income students) will not be getting the long awaited overhaul that would have changed the eligibility criteria to improve college access for low-income students.
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  • No American Graduation Initiative. Congress has also foregone President Obama’s American Graduation Initiative, a program intended to assist community colleges and increase their graduation rates. The goal of the initiative was to help produce 5 million more college graduates by 2020.
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  • No New Accountability Rules. Finally, the new version of the legislation drops the accountability regulations President Obama had hoped to impose on colleges that received federal funds.

Will This Hurt Your Family’s College Funding Plans?

While the new version of the bill certainly won’t help as many families as its original draft, it most likely won’t materially affect your college funding plan.

However, the new Direct-Lending-only policy does mean that private lenders will no longer be able to offer federal loans–and the interest rate and loan origination discounts of the past that helped private lenders compete and families reduce their borrowing costs, were all eliminated with the stroke of President Obama’s pen. Think of it as just one more reason to do all you can to minimize your child’s need to acquire student loan debt.

All the best,
Deborah Fox

Deborah Fox is the founder of Fox College Funding®, a nationwide company that helps families find creative ways to reduce their college costs.

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