The new law eliminates the Federal Family Education Loan Program and cuts out private lenders. Beginning on July 1, all federal loans will originate through the federal Direct Loan Program. According to the non-partisan Congressional Budget Office, cutting out banks and private lenders from the student loan business will save taxpayers $61 billion over the next 10 years, at least $10 billion of which will reduce the federal deficit and help underwrite the cost of health reform.
The new law also includes $36 billion for Pell Grants, which provide subsidies to low-income and some middle-income students. The maximum amount of Pell Grants this year will grow to $5,300 and to almost $6,000 in 2017. Without the new law, Pell Grants would have been limited to $2,150 next year. Students receiving larger Pell Grants will need to borrow less to pay for college.
Beginning in 2014, borrowers will also get better debt repayment terms. Current borrowers can limit monthly federal student loan payments to 15 percent of their discretionary income. In 2014, this cap will be reduced to 10 percent of discretionary income.
The only role left for the private sector will be loan servicing, and the legislative intent appears to be to ensure that these contracts will be performance-based and awarded to the loan servicing companies providing the best customer service.
It seems ironic that this last minute addition to the health care reform legislation indeed amounts to a federal takeover. While it’s hard to take seriously the argument that the new health care law amounts to a takeover of health care, the new law absolutely seems to put the federal government directly in charge of lending to our nation’s students.
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