Student Loan Reform Law: What it Means for College Students

With all the attention that accompanied the new health care law, largely overlooked were the education provisions within it. Officially known as the Health Care and Education Reconciliation Act of 2010, this new student lending law signed by President Obama on March 30, 2010 will result in significant changes for the vast majority of college students, who pay for their courses through government-backed loans and grants.

While politicians quibble over the long-term consequences of the legislation, millions of college students simply want to know what impact this new law will have on their college money and on current lending practices. To put these reforms in perspective for these students, here are highlights of the new law along with information on how it actually affects students.

Private Lenders No Longer Involved in College Loans

Rolling out over the next several years, the initial stages of this student loan overhaul will begin in July 2010 when the U.S. Department of Education becomes the sole provider of federal student loans. Until now, private lenders have received substantial federal subsidies for essentially filling the role of "middlemen" in providing college money for students receiving federal student loans and grants.

Eliminating the position of banks and other financial institutions, the Department of Education will undertake responsibility for all federal student loans, under the Direct Loans Program. While banks still will be allowed to offer student loans, these loans will no longer have government backing, which will significantly decrease the number they offer.

The result is that the new student lending law potentially lowers the cost of loans for college students, as some experts anticipate a lower interest rate under the new program. Additionally, no longer subsidizing the private banks means that the approximately $68 billion saved by the governmentover the next 11 years will be invested in Pell Grants.

Investment in Pell Grants

Currently, Pell Grants provide up to $5,350 in college funds to individual undergraduate students (and some graduate students), based on financial need. For the 2010-2011 school year, this amount will rise to $5,550 and will continue to increase at a rate of 1% above the consumer price index, with a projected maximum amount of $5,975 by 2017. Moreover, by 2020 this new law will have provided 820,000 new grants.

Unlike student loans, students never have to repay grants. Under these new reforms, grant money will now be available for summer school, which has not previously been the case. The obvious benefit for college students is that these Pell Grants amount to free money for any college expense from books to tuition.

Revision of Student Loan Repayment

Currently, as many college graduates can attest, paying back student loans consumes a major portion of their income for many years. This will change under the new student loan reforms. Beginning in July 2014, any money that students borrow for college will have an annual repayment cap of 10% of the students' income. All student loans made prior to that date will retain the current 15% cap.

Additionally, under the new law, any balance that remains on the loan after 20 years will be forgiven as long as all payments have been made on time. Those in service professions such as teachers, nurses and military personnel will have their loans forgiven after 10 years.

Investment in Community Colleges and Minority-Serving Institutions

Another portion of this student loan overhaul involves money designated specifically for bolstering community colleges and Minority-Serving Institutions (MSIs), which include Historically Black Colleges (HBCUs), Hispanic-Serving Institutions (HSIs) and tribal colleges. A total of $2 billion in competitive grants is to be invested in community colleges, with an additional $2.55 billion to be shared among MSIs.

This infusion of funds augments such programs as STEM (science, technology, engineering and math) in MSIs. Furthermore, it is expected to increase enrollment in community colleges alone by about 5 million students, providing college access to students who might not otherwise have been able to attend.

Sources:

http://my.barackobama.com/page/content/studentloanreform/
http://www.islate.org/?p=1370
http://www.whitehouse.gov/blog/2010/03/30/a-victory-students-and-their-families.
http://www.nytimes.com/2010/03/31/us/politics/31obama.html?ref=education
http://blog.scholarships.com/fafsa/yet-another-boost-to-pell-grants-in-2010-budget-proposal/