The student loan landscape changed forever when Congress passed the 2010 Student Aid and Fiscal Responsibility Act. The law’s passage virtually ensured that the federal government would become the primary lender of student loans. Already, nearly half of all college students receive some sort of federal financial aid to finance their education. That number is expected to grow as federal programs expand.
This law impacts federal student loans, not private student loans. However, private lenders will feel the effects of this bill. As the government continues to offer loans with lower fixed interest rates and looser borrower requirements, competition will be very stiff. The bill also has provisions that could change the federal student loan consolidation process.
With the passage of this bill, the federal government gained complete control over the federal lending process and increased the dollar amount of Pell Grants. Let’s take a look at the changes borrowers need to be aware of:
- Say Goodbye to Private Lenders – The federal government relied on private lenders to issue federal student loans. Students and their parents could receive federal and private student loans from private lenders. The government paid these lenders a fee to offer this service, so the bank essentially acted as a middleman for the government. This legislation ended that arrangement. Private lenders will no longer be paid to offer student loans, which eliminates them completely from the federal loan process. All federal student loans will now be administered directly through the United States Department of Education. There are no changes to the private student loans these lenders can offer.
- Pell Grant Increases – It is estimated that over 8.5 million college students attend school with the help of the Pell Grant. The maximum yearly amount a student can receive is determined by Congress. Often, the maximum was decided by how much money the federal government had available. This legislation states that Pell Grant amounts must keep pace with inflation. This virtually ensures that Pell Grant amounts will continue to rise over the years.
Impacts for Consolidating Federal Loans
For the most part, the process for consolidating your federal loans will not change. You will still get lower monthly payments, capped fixed interest rates, and avoid application fees and prepayment penalties. However, there are a few changes you need to be aware of:
- Fewer Consolidators – Now that private lenders are no longer issuing federal student loans, there will be fewer federal loan consolidators. If a bank no longer issues federal loans, they are less likely to be involved in the federal consolidation process. This means that there could be less competition in the federal loan consolidation market. However, the U.S. Department of Education will still offer contracts to some of the larger players to “service” direct federal student loans.
- Potential Repayment Changes – The federal government offers income-based repayment plans for federal student loans. These plans take a look at your income, family size, and profession to determine how much your monthly student loan payment should be. Many times, the monthly payment will not be enough to cover the interest payments, so the federal government pays the interest for you. Tucked away in this new law is a provision to lower the amount of money these borrowers must eventually pay back. Borrowers who qualify will be able to cap the amount they must spend to pay back their federal loans. The cap will drop from 15% of their discretionary income to 10% of their income. This provision is not expected to take place until 2014.