Change is in the Air for Federal Student Aid | 03.26.10
As of Thursday, March 25, the Senate passed both the hotly contested Healthcare Reform and widely anticipated Student Loan Reform bill. Contained within are a host of changes that seek to streamline the federal student loan process, and redirect money into places it can be better used, such as the Pell Grant program and efforts to reduce the federal deficit.
Of these changes, the biggest relate to how Income Based Repayment (IBR) works for borrowers, and the elimination of the Federal Family Education Loan program. Both of these have implications for all types of students, parents, and individuals repaying their loans.
Changes to Income Based Repayment
As of July 1st, 2010, Income Based Repayment (IBR) is being greatly improved for student borrowers. The major changes are:
- The debt to income ratio of the IBR program has been changed from 15 to 10%
- Loan forgiveness has been accelerated to 20 years, instead of 25
Essentially, these changes mean that it will be easier for borrowers to qualify for the IBR program, and their loans will be cancelled sooner as long as on-time payments are made throughout the life of the loan. The way Income Based Repayment qualification is determined is through looking at the total amount of loan payments for a year and weighing it against your annual income. In the past, if that worked out to more than 15% of your income, you would qualify for IBR and have your payments reduced. Now, that formula has been revised to be 10%. Just for the sake of example:
Say you had $30,000 worth of federal loans going into repayment, and theoretically the monthly payments are $200. Let’s also say that you make $20,000 a year. Under the old formula, you would not qualify for Income Based Repayment. This means that you would have to somehow find a way to pay $2,400 a year (not including any private loan payments, living expenses, rent etc.) Under the new formula, you would be eligible for IBR, and at a salary level of $20,000 a year, your monthly payments would be zero. Yeah you read right, the payments are zero. If you want to see the payments at different incomes, check out our page on income based repayment.
Elimination of the Federal Family Education Loan Program
This sounds scary, but don’t worry… it isn’t. In fact, this an awesome change because it sends all the money in subsidies that went to private banks into places like the Pell Grant program where they can be put to better use. So, what does this mean for you specifically?
If your school previously was part of the FFEL program, they will be switching over to Direct Loans. Your payments will still go to your loan originator (unless you consolidate them under the Direct Loan program), so nothing will change on the front end for you. However, any future loans you take out will come directly from the government instead of a subcontractor bank.
The Pell Grant program is getting a significant boost. When I say significant, I mean huge — to the tune of $13.5 billion dollars. This infusion of money into the program means that the opportunity for lower income students and families to receive federal aid that does not need to be paid back increases dramatically. Also after the 2010-2011 academic year, the maximum Pell Grant award is being increased by $690 per eligible student on top of the existing growth plan.
Short and simple, the passing of this bill in Congress is a win for every student in America. It equalizes the playing field for individuals seeking federal aid for education, and eliminates the middleman to pass the savings back as more financial aid.
What do you think about the Education Reform bill? Leave a comment below with your thoughts!
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