Finance Friday: Federal Loans Get Easier (and Cheaper)

    In recent months there has been lots of hoopla surrounding the "de-privatization" of federal student loans. When this new federal aid legislation was signed into law in late March of 2010, few even knew what the legislation would do; a few months later, though, it behooves you to know. New (and old) student borrowers will get a pleasant surprise: lower interest rates and a simpler loan application process.

    In a nutshell, this is the bulk of what the legislation aimed to do (taken from a March 31, 2010 article in The New York Times):

    The new law will eliminate fees paid to private banks to act as intermediaries in providing loans to college students and use much of the nearly $68 billion in savings over 11 years to expand Pell grants and make it easier for students to repay outstanding loans after graduating. The law also invests $2 billion in community colleges over the next four years to provide education and career training programs to workers eligible for trade adjustment aid after dislocation in their industries.

    The law will increase Pell grants along with inflation in the next few years, which should raise the maximum grant to $5,975 from $5,550 by 2017, according to the White House, and it will also provide 820,000 more grants by 2020.

    Students who borrow money starting in July 2014 will be allowed to cap repayments at 10 percent of income above a basic living allowance, instead of 15 percent. Moreover, if they keep up payments, their balances will be forgiven after 20 years instead of 25 years — or after 10 years if they are in public service, like teaching, nursing or serving in the military.

    Another very welcome change students will see is a much simpler financial aid application process. According to a June 14, 2010 blog post in U.S. News & World Report:

    No longer will those wanting a federal loan to help pay for tuition have—or have the opportunity—to shop for a student Stafford or parent PLUS loan. Starting July 1, students and parents will just fill out the standard applications, and tell their college they want a loan. Colleges [and all other institutes of higher education] will send all federal loan applications straight to the government, which will make all the loans directly. That will reduce the steps and confusion for many, if not most, borrowers.

    In addition, this law will also allow student borrowers to not only see an elimination of "lender's fees" that they would have paid to loan facilitators in the past, but to also benefit from a student loan interest reduction going into effect as of July 1, 2010.

    Is it all peaches and cream? Not yet. According to the same U.S. News blog post:

    The change will mean a some extra minor hassles, however, for a few million students and parents who took out federal loans from companies like Sallie Mae or Citibank previously and who need new loans after July 1. Those borrowers will have to sign a new loan contract, called a Master Promissory Note. But that's not much of a problem, says Jan Brandow, director of financial aid and scholarships at the University of Missouri-Kansas City. Most borrowers will simply click over to the website, and spend a few minutes filling out a form. After graduation, students caught in the transition might also have to sit through two different exit counseling sessions, and will likely receive two different sets of student loan bills: one from their first lender and one from the federal government. However, Brandow notes that most borrowers end up consolidating their federal college loans into a single debt after graduation anyway, and so end up getting only one monthly bill.

    However, these changes may prove to be very beneficial for some law school students applying for loans for the 2010 - 2011 academic year (if they haven't yet completed their financial aid applications), and will definitely be a positive change for students in coming years. Most impressive is the new legislation on loan forgiveness, which lowers the number of years to 20 years from 25, and sets the number of years for public servants at 10. That will prove to be a huge boon for law school students yearning to go into public service after graduation, but fear an inability to repay their loans. With the help of Loan Repayment Assistance Programs (LRAPs), and this new legislation, they may feel the financial noose around their necks loosen.

    What do you think: Is this new legislation helpful or harmful? Would you like to see anything else added to it? Will it benefit you?


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