Student Loan Program Will Really End Up Being Nothing But Grants

By Donald Griffith on April 4, 2010, 10:02 am

Students receiving federal financial aid in the form of Pell grants or student loans can expect some changes to those programs beginning this summer. The Health Care and Education Reconciliation Act, signed into law by President Obama on March 23, includes reforms to the student loan program which will cut out the middle man, removing private banks from the government-backed student loan business. The Congressional Budget Office anticipates that the changes will save taxpayers an estimated $61 billion over the next ten years.

What Will Change

Currently, student loans are provided to individuals through private banks, with the government guaranteeing the loans and accepting the risk of default. Beginning July 1, students will receive their loans directly from the Department of Education.

In addition, Pell grants will receive a boost of about $36 billion, translating into a gradual increase in the yearly maximum benefit from the current $5,350 to almost $6,000 by 2017. Community colleges and historically black institutions can also expect to see increased funds.

How Does This Affect Students

Current students and individuals currently paying on loans will see very little change in how their loans work. Students who already have loans and need to borrow more in the fall will need to re-sign master promissory notes due to the switch in lenders, but loan terms will remain the same.

 

Greater changes are coming in the future, but they will only be available for students who take loans after 2014. Those borrowers will see monthly payments capped at ten percent of income, rather than fifteen, and loan forgiveness after twenty years, rather than the current twenty-five.

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3. Pell Grant Falls Short Leaves Many Students Without Options
4. Student Loan Debt Is A Necessary Cross To Bear For A Good Education
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One Response to “Student Loan Program Will Really End Up Being Nothing But Grants”

1. Craigie says:

   April 4, 2010 at 12:40 pm

   They are the same colleges, same low-risk student pools, etc., just a different mode of delivery of the loans. The product is the same. Direct loan has been around for 16 years and has had a corral of large, excellent colleges with loan default rates. These loans are assets not costs to the taxpayer. In FFEL, the loan is an asset to the loan holder but the taxpayer bears most of the risk. In direct lending the taxpayer bears the risk but also holds the asset — and almost all borrowers repay on time.

   Another point — income contingent repayment has been offered since 1996 and has been extremely unpopular with borrowers. If the concern is that most borrowers will pay a minimal amount for 25 years and then get a write-off (which by the way is taxable to the borrower), then this is a needless concern.