If you have a child headed to college in the fall or if you are going to college or graduate school yourself, a major overhaul to the federal student loan program that passed the House on Sunday night is something you should know about.
First, a little background.
The legislation was added to the health care overhaul moving though Congress, and passed the House on Sunday night by a vote of 220-211. If passed by the Senate, it will eliminate the role of private lenders in originating federal student loans, a change that the Congressional Budget Office estimates will save the federal government between $6 billion and $7 billion per year. For more than 35 years, the government has paid private banks billions of dollars in subsidies to encourage them to lend to students, then guaranteed the loans anyway.
Rep. George Miller (D-Calif. ), the chairman of the House committee that wrote the legislation, said that the bill is coming at no cost to tax payers because it is ending an existing federal subsidy. "Congress voted to stop wasting billions of taxpayer dollars to subsidize big banks, and start investing that money directly in our students and families," Miller said Sunday night.
Education Secretary Arne Duncan explained last week that of the $61 billion in savings that's expected, $36 billion will be recycled back into the Pell Grant program
, and the rest will be used to reduce the federal debt. "We can plow those savings back to students and make college dramatically more affordable," he said.
Some Democrats, including Nebraska Sen. Ben Nelson, oppose the changes because they say ending the banks' roll in originating loans will force layoffs of the employees who do it. Both Virginia senators, Jim Webb and Mark Warner, have raised the same objections.
So what does all of this mean for you? With the help of Rachel Racuson, a spokeswoman for the House Education Committee, and Pedro de la Torre of Campus Progress
, here are answers to questions parents, students and people with existing loans are likely to have about the bill: When do the changes take place?
If the Senate passes the bill, the changes will take place for loans originating on or after July 1 of this year. How does the bill affect Pell grants?
Because of a spike in demand for Pell grants, the program was on course to run out of money this year, a shortfall that the Department of Education warned could cut or drop scholarships for as many as 8 million low-income students.
The Pell grant program will now remain solvent, and eligible students will see the maximum Pell grant rise from $5,550 this year to $5,975 in 2017. How does this affect students applying to college in the fall?
The people who will notice the biggest difference in the new rules will be financial aid officers, who used to decide which private lenders they would use to originate federal loans for their students. Those loans will now all be originated by the U.S. Department of Education and will have the same terms and conditions that have been in effect for years.
Students will still apply for federal loans through the student financial aid office at their college or university. What changes will students see?
Racuson said that students will notice a difference in two ways. First, while they are in school, they will have one reliable source of financing. The 2008 credit crisis left some private lenders without access to capital, which left students worrying about whether they would still get their student money while they were in school. "From a student perspective, it will give them a peace of mind and security, they''ll know that their loans will be there," Racuson said.
Second, when students graduate and begin to repay their loans, they should have a better customer experience. Private lenders will still service federal loans, but must win a competitive bidding process through the Department of Education to do it. Racuson said those contracts will focus on customer service. To win a contract, those servicing the loans must be staffed by employees based in the United States -- they cannot outsource servicing to call centers overseas.
De la Torre added that because the loans will be owned by the government, rather than private lenders, students' loans cannot be "securitized
" -- that is, bundling a group of financial assets into a security -- and sold off to another bank.
Does this apply to loans for graduate school?
Yes -- it applies to all federal student loans.
What about existing loans?
The bill will not change anything about loans that students have already taken out, but it does make helpful changes to the existing Income-Based Repayment program, which allows some borrowers to cap their monthly payments on federal loans at 15 percent of their discretionary income.
For new borrowers, the bill will lower that cap to 10 percent of discretionary income and shorten the window for repayment from 25 years to 20 years, at which time the remaining balance of the loan may be forgiven.
What about private student loans?
This does not affect private student loans in any way, but Racuson recommends that people try to exhaust all of their grants and federal loans, which are capped at a 6.8 percent interest rate, before taking out private loans, which usually have much higher interest rates. Who is eligible for federal grants and loans?
Most students are eligible for some form of federal grant or loan. For eligibility requirements, see the U.S. Department of Education guidelines.
Is this a done deal?
Not quite. The Senate still must pass the bill, which is expected to happen later this week.
"We're cautiously optimistic, but the Senate is complicated and student loan companies are still fighting to kill the bill," de la Torre said. If the Senate does pass it, the bill will go to President Obama for his signature, and changes will go into effect July 1.