New Student Loan Law Goes Into Effect in U.S.

Attached to the huge and controversial health care bill was a new student loan law that made sweeping reforms in the laws governing student loans. Why would these two items be attached together when the health care bill, which was already well over 2300 pages, was complicated enough? The reason is that cutting out student loan companies from federally guaranteed loans will save $68 billion over the next 11 years. Essentially the congress has been giving away billions in taxpayer funds to student

loan companies. The $68 billion saved makes the health care bill look better.

Of course the government already has plans for this money, so money saved because of the new student loan law will not go towards offsetting the costs of health care. It will be used for education, however, so there will be benefits for a number of people. In addition, there are changes in the new student loan laws compared to laws and practices that are on the books now.

First of all about $40 billion will go to increase the Pell Grant program. Pell Grants are grants (with grants the money does not have to be paid back as is the case with student loans) for low income individuals. Between 2013 and 2017 the maximum award of Pell Grants will go from $5,550 to $5,975. In addition the government expects that the new law will make it possible for an additional 820,000 awards to be granted by 2020.

Besides greatly enhancing the Pell Grant program there are other benefits to students in the new student loan law. For loans after July 1, 2014 students will be required to pay a maximum of 10% of their discretionary income when it comes time to repay their loans. The current maximum is 15%. This will hopefully help people to avoid letting their loans go into default, the result of which is often huge financial and other problems. If there is a balance on loans after paying them back on time for 20 years, the government will forgive the balance. The current length of time for this happening is 25 years of on-time payments. For people who go into certain public service fields as a career the time for loan forgiveness drops to 10 years.

There are other benefits in the new student loan law. Community colleges will share about $2 billion, and another $2.55 billion will be shared by certain colleges that serve predominantly minority student bodies. In particular community colleges are growing at a fast pace as many students are attending these schools and living at home for a year or two before moving on to a larger university or college in order to save money. With the ever-increasing cost of higher education people are resorting to tactics like this to keep from racking up enormous student loan debts.

So the result is that the new student loan law cuts out private banks and lenders like Sallie Mae from the federal student loan business. This is bound to be a good thing in the future. These companies have been nothing less than predatory in the past so moving them out of the picture will do more than just save money. A recent blog post by a well known financial writer was titled something like “When Did Student Loans Become So Sleazy”? This title alone says a lot about the state of the student loan industry. These companies will continue to make private student loans, however, and none of the benefits mentioned above will apply to private student loans. It would be advisable to avoid private student loans altogether- they have higher interest rates and far fewer benefits to borrowers.