When It Comes to Student Loans, Forget Everything You Knew
As you get your children ready for the college admissions process
, you may be wondering what all the financial aid fuss is about. After all, when you attended school, you don't remember student loans being such a big deal. Well, if your last encounter with financial aid was when you graduated from college yourself, here are two words of advice: Brace yourself.
Parents of prospective college students will soon find that health care reform and
student loans have a lot in common, at least legislatively speaking. The health care reform package passed earlier this year contained plenty of major changes to the way the federal government distributes and manages government-issued student loans.
In addition, earlier legislation from the past three years aims to bring more transparency to college costs and to make student loans easier to repay. New provisions designed to help families decipher the true cost of a college education will put more information in the hands of college consumers.
All of these factors mean the upcoming financial aid season will have plenty of new twists and turns in store for students and their families.
The Revamping of Student Loans
So what's new on the student loan horizon? One of the biggest changes involves the way the federal government doles out student loans.
The Obama administration's health care reform package contained within it the
Student Aid and Fiscal Responsibility Act (SAFRA), which brought about arguably the most sweeping and extensive changes to the federal student loan program in over a decade, completely eliminating the third-party lender system that had been in place since 1965.
Under the third-party lender system, known as FFELP (Federal Family Education Loan Program), banks and other private lenders, acting as a middleman, played a major role in distributing and managing federally guaranteed student loans, originating 78percent of all new federal college loans. But as of July1, 2010, FFELP has ceased to exist, and private lenders may no longer issue federal parent or student loans on behalf of the government. Instead, students will go directly to the Education Department for all federal student loans, parent loans, and graduate loans.
Private lenders can still issue private student loans, however, which aren't guaranteed by the federal government and which can carry higher interest rates than their government-backed counterparts, particularly for those student borrowers who have weak or less-established credit. Students are cautioned to exhaust all their federal financial aid options first before seeking out private student loans.
Making Student Loans Easier to Repay
SAFRA and other recent legislation has also made it easier for borrowers to repay their federal college loans.
The College Cost Reduction and Access Act of 2007 created a new student loan repayment plan,
income-based repayment, which became available on July1, 2009. Borrowers who qualify for income-based repayment have their student loan payments capped at 15percent of their discretionary income.
Additionally, borrowers who make payments on their student loans under the income-based repayment plan for 25years will have any remaining student loan balances forgiven. This forgiveness period is only 10years for any borrowers who are in the military or who work in the public service sector.
SAFRA expands the benefits of the income-based repayment program, lowering the cap on monthly student loan payments from 15percent to 10percent of a borrower's discretionary income and allowing remaining student loan balances to be forgiven after 20years instead of 25. These updates to the income-based repayment plan become effective in 2014.
Federal Grants and the Cost of College
Another new twist? Under SAFRA, the federal Pell Grant program has been remodeled and updated to provide more grant aid to lower-income students. Beginning in 2013, the new-and-improved Pell Grants will be tied to the cost of living, so that award amounts keep pace with inflation. The maximum Pell Grant award is $5,550 for the current 201011 academic year and will rise to $5,975 by 2017.
Families who have had a difficult time figuring out exactly how much college will cost are about to get a break and quite possibly a big shock. The Higher Education Opportunity Act of 2008, which reauthorized the original Higher Education Act of 1965, contained new provisions that take effect in 2011, requiring colleges and universities to disclose their full cost of attendance, not merely tuition costs. Institutions must also estimate the amount of financial aid, including grants, college loans, and other financial resources, an applicant would need to receive to pay for one of their college degrees.
Whatever the specific changes that may affect you and your college-bound children, one thing is certain: Mounting student loan debts and the unabated rise in the cost of a college education are having an effect on the way the federal government distributes student financial aid. And the best way to navigate the changed financial aid landscape is to talk to your school's financial aid office, research your financial aid options, and be sure to apply for federal financial aid, regardless of your income or financial situation. You never know what grants and college loans you and your children may qualify for.
When It Comes to Student Loans, Forget Everything You Knew
By: Jeff Mictabor
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