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Studying Student Loans Part 2

by Ouida on April 29, 2010


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Here is part two about the student loan provisions in the health care bill and how they will affect you.  You can read part one here

Part 2 The Good:

STUDENT LOAN REFORM – DID THE CHICKENS COME HOME TO ROOST?

By Ruth Vincent.

Some good though came from all of this with the entry of Government Direct Loans in 1994-95.  This additional competition resulted in the expedited delivery of student loans and loan proceeds to students/schools through the deployment of innovative computer technology and programs such as METEOR, National Student Loan Clearinghouse, National Student Loan Data System (NSLDS) for loan tracking and Mapping your Future for entrance and exit counseling which in my opinion continue to provide added value.

In 2008 with the financial collapse, student loan lenders were unable to raise capital through securitized bonds, lines of credit, etc. to make loans so the Government stepped in with the ECASLA program which allowed the Government to purchase loans from lenders for purposes of liquidity so they could continue to make FFELP loans to students. This was truly a sweet deal as it paid the lenders $75 per FFEL loan plus all accrued interest as of the date of the sale to the government less any origination fees the lender had paid to the Government. This program will expire June 30 2010 when all FFELP loans are made through the Direct Student Loan Program beginning July 1, 2010.

So what does student loan reform in the Health Care and Education Affordability Reconciliation Act of 2010 (HCEARA) mean for you?

  • All loans with first disbursements after July 1, 2010 will be made through the Direct Student Loan Program. About $40 Billion of the $61 Billion used to pay lender subsidities will be given directly to students through several program improvements:
  • Borrowers will continue to obtain their loans by applying through their financial aid office and will no longer have to be concerned about choosing their lender or having one chosen for them.
  • For a limited period of time July 1, 2010 to June 30, 2010, borrowers may use an In-School Consolidation to consolidate their loans into the Direct Loan program, (1) if the borrower has loans in at least two of the following categories: Federal Direct Loans, FFEL loans owned by a lender, and FFELP loans owned by the government under ECASLA (PUT) loans; (2) At least one of the eligible loans has not entered repayment.  Note of Caution: While there may be an interest break because the interest rate of the Consolidation loan will not be subject to rounding, borrowers lose their grace period consolidating while in school (unless this is subsequently changed in the law) and parent PLUS and Graduate PLUS borrowers are eligible for post-enrollment deferment only on PLUS loans not on Consolidated loansAs a reminder, NSLDS mentioned above can be used to track your loans while you are enrolled.

  • On July 1, 2010, interest rates for Direct PLUS loans will be 7.9% rather than 8.50% under FFELP.  As prescribed by earlier law, interest rates on Direct Stafford undergraduate loans will be 4.5% rather than 5.6 % and Direct Graduate Subsidized and Undsubsidized loans will remain at 6.8%

  • New borrowers as of July 1, 2014 will qualify for Income-Based Repayment (IBR) if the borrower’s standard repayment exceeds 10% of discretionary income (will be lowered to 10% of discretionary income) and loan forgiveness will result in 20 years of repayment. (Discretionary income is the amount of the borrower’s AGI that exceeds 150% of the poverty line for the borrower’s family size.)  Currently it is 15% of discretionary income and 25 years for forgiveness.  See link below:      http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRPlan.jspp

Also (just for information) important under HCERA are the mandatory funding add-ons for Pell grants which raise the maximum grant for 2010-11 to $5500 from $5350 in 2009-10 with annual increases beginning in 2013-14 to match the COI-U (Consumer Price Index for Urban All Consumers).  It also made more students eligible in 2010-2011 by increasing the Expected Family Contribution (EFC) by $656 to 5273.

I have lots of friends in the student loan industry and have some who have lost their jobs.  No, I am not happy about it, but as a taxpayer I was no longer willing to pay for the greed in the industry.  The student loan industry like others undergoing change, must retool itself if it is to survive. It now has an opportunity in its new roles provided in HCERA in such areas as, default prevention and financial literacy at the local level and as cost competitive and effective servicers for the loans that will be originated under the Direct Student Loan program.

Hopefully, Higher Education will not erode these student level gains by continuing to raise its costs and therefore the price of education.  Higher Education where I have many friends is another enterprise needing reform.  All I can say is watch out Higher Education, your chickens are on their way home too!

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