Big Changes Coming to Student Loans

Cutting out middlemen raises cash for bigger grants, easier loan paybacks.

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Buried deep in the controversial healthcare bill are provisions that promise to make big changes to the student loan industry. The reforms were passed by the House and now await Senate passage and the president's signature. Because the provisions require only a simple majority, lobbyists said they had a good chance of becoming law.

By eliminating taxpayer subsidies to corporate middlemen who marketed and originated federal student loans, the Obama administration says it will raise more than $60 billion over the next 10 years that will be spent on more and bigger grants, easier repayment terms, and even a little deficit reduction.

Here are some answers to the most important questions students and parents may have about the new loan landscape:

How will the new student loan reform bill affect students wishing to take out federal loans for college?

Most student borrowers won't notice much difference, since most of the changes are behind the scenes. If anything, the new system will be simpler and less confusing. Starting July 1, no students will be asked to—or have the opportunity to—shop for their Stafford loan, which is the most common kind of student loan, available to all citizens attending undergraduate or graduate programs at least half time. All colleges will arrange for students to take their federal Stafford loans directly from the government. The biggest immediate downside for students is that some won't get the small discounts that certain lenders offered on Stafford loans. But all undergraduates will continue to be eligible to borrow Stafford funds of least $5,500 (and, depending upon their age and year in college, up to $12,500) at an interest rate that cannot exceed 6.8 percent a year. Students who qualify as "needy" will continue to be able to borrow at lower rates of interest. All graduate students will be eligible for Stafford loans of up to $20,500 a year at an interest rate of no more than 6.8 percent. Graduate students will also continue to be able to borrow their full cost of attendance (less any other financial aid) through the Grad PLUS program at an annual rate of no more than 7.9 percent.

[Read 8 Happy and 3 Scary Trends in Financial Aid.]

How will the new student loan reform bill affect parents wishing to take out a federal PLUS loan?

The bill could make things easier for many parents. Starting July 1, parents will be able to borrow PLUS funds directly from the federal government only. In many cases, this will save parents money because the direct federal PLUS rate is capped at 7.9 percent a year, while private lenders often charged as much as 8.5 percent. In addition, some research shows that the federal government was more lenient on parents who had credit problems and less likely to reject parents' PLUS applications than private banks.

[Read U.S. News's Paying for College guide.]

How will the new student loan reform bill affect graduates attempting to pay back their loans?

It will make it easier for future graduates to pay back their student loans. Starting with federal student loans taken out in 2014, future graduates will be able to sign up for an "income-based repayment" plan that will cap their monthly payments at 10 percent of their income. Anyone paying back federal student loans now can sign up for the current IBR program that caps payments below 15 percent of a graduate's income.

[Read more details about income-based repayment.]

How will the new student loan reform bill affect students who need financial aid?

It will make more grant money available to more students. By stopping subsidies to private companies that made Stafford loans, the federal government will raise money that it will use to fund more and bigger Pell grants, which typically go to students from families earning less than about $45,000 a year. In 2010–11, the maximum Pell grant will rise $200 to $5,550. The bill also calls for some future Pell grant increases to be made according to the consumer price index. By some estimates, the maximum Pell grant could rise to $5,900 over the next decade.