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.
Other Changes
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.
The Verdict
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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I think that this is a good change for students…making college a bit more affordable. However, there is a segment of the student population that is completely overlooked, the mature student. Many adults are now looking at their jobs and industries being eliminated so they need to find new work. Other adults want to improve their incomes for their families by getting better paying jobs. Both of these scenarios require adults, mature students, returning to school or going to college for the first time. There does not appear to be ANY scholarships, grants and/or loan programs for mature students.
This is another "investment" in the future of America that needs to be made sooner rather than later…..I hope someone can champion this for the tens of thousands potential mature students.
This is awesome!!!!!
Is this just for new loans? And my daughter is getting married. She will still have a year left of school what will the transition be from loans of a single person to married? I'm confused. Also interest rates are higher through the gov.
Hello Rita,
Yes, these changes only apply to new student loans created on or after July 1, 2010. As far as her tax transition from single to married, it will affect her financial aid due to the combined income appearing on her next FAFSA application. I would suggest that they do not file as married on their taxes until she has started her last year of school and already received her federal aid awards.
As far as interest rates go, that isn't necessarily true. It largely depends on your credit. If you have stellar credit (750+), then it might be possible to get an interest rate lower than the government's offerings, but just keep in mind that those rates are fixed, whereas private loans are variable interest.
Thanks for the great question!
Looks like it still means the middle income family, 2 parents working with student who is not fitting into the minority roll still does not qualify for anything, We will still need to borrow for school. Pretty bad.
Just have to bring up a point that has been widely overlooked throughout all the debates over this topic. For students who require "Federal Aid" such as the Pell Grant, this really sounds good, but I have to bring to attention the fact that the long term repercussions of this decision will ultimately mean that the majority of college tuition will likely increase. As more and more students see an opportunity for education and enroll, colleges will also see an opportunity, as the price of tuition is fairly inelastic, meaning that most people who can afford college will pay no matter what the cost is. Overall, I do not see a great change… I see higher tuition.
Already done, the new rates are effective July 1, 2010 at my college.
Not sure yet how this may effect me. I would like to know more about the Pell Grant and how to get money for college because my parents don't have any money to help me.
College costs are outrageous – seems to me there ought to be some kind of incentive for college costs to come down… then everyone would benefit, not just those with low income. Yeah, I suppose I could pay for my kids tuition with my life retirement savings – apparently that makes me to wealthy to benefit from any govt. program out there. If I take out a parent loan – can I transfer that to my daughter after she graduates? so I'll have the ability to take out another loan for my other 2 kids?
this bill does not seem to help students who are unable to get loans because they have no credit, and dont have a co-signer. they are still stuck without money for college
I hope this can help me. They claim I am "maxed out" on my loans.. and I have 2 1/2 years left to go to get my degree. Without loans, I'll have to drop out. So far, no one can give me a direct answer.
My child loses the incentives he had from private Stafford lenders, such as up-front fees pd. by the lender (to the fedl govt), a write-down of 4% of his principal balance at 2 different times during repayment, and the ability to pay only on his unsubsidized loan while in school. Since the loans were t'ferred to the govt, we have gotten a total RUN AROUND trying to get his pmts applied to the loan we specify. Seems the govt doesn't have to provide the up-front transparency that they require of lenders (such as mortgage), and are incapable of simple financial transactions that our private lenders could do with no problem. This will cost us a FORTUNE!
I'm not quite sure what you are referring to here. If you have existing loans through a FFEL bank, they won't be touched unless you purposely consolidate them through the Federal Direct Loan Program.
As far as new loans being made after July 2010, the student doesn't pay anything upfront for them… it is all deferred until 6 months after graduation or leaving school. You still have the option of making interest payments (or paying down the principal) while in school, so I'm not really sure where you got that impression.
I like this! I like this alot! This could help me get funding for the school I really want to go to, which tuition for the total time there is over $75,000!
Shame on me for not being more informed. But I dont pay attention to the news. However this topic is totally relevant to me and this upcoming school year.
Everyone complained that the health care decision was way off track, but it sounds like it will help a lot of people to get the education we so need in America.
i think this will help further down the road. i think that it is an asset to assist those who took out student loans especially those whose incomes are small
I am going to attend college in august 31st and i will like to recieve help from the government and that the decision he made wont effect us as students.
I am going to start college on august and i just hope that the government will help us as students.
could some one tell me why the masseges dont show up?
i have to wait and see how it affects me next semester in order to know how this makes me feel.. after reading i thought "so does that mean I'm getting more money from my stafford loans?".. or is this just on repayment?..
i feel scared for my school future too!!
What is scaring you?
I feel scared for my school future
i am a teacher with 45k in FEDERAL student loan debt. my wife is a children's librarian and has 70k in PRIVATE debt.
does this change make me possible for the IBR plan? when it was first instituted it took both of our incomes into consideration while ignoring her 70k in private debt, thereby making in ineligible for the program. i am not asking for her loans to be forgiven – only for her loans to recognized as debt. This way at least IBR can be used for my loans.
Has anything changed with the updated program?
IBR is only based on your federal loan debt.. so unless your monthly federal payments (for the whole year) are over 10% of your annual income, you probably wouldn't qualify for IBR.
I really doubt that this is going to work. I mean, where is all the money supposed to come from?
It is an excellent change. Hurray for the President and Congress for getting something so very right. My concern is about the changeover. I have a son going to college next year. Is the Dept of Education going to be able to talk to me and to all the millions of parents who will want to learn more about the specific procedures we need to use right now?
This sounds like a sound government decision.
Is the code a reference to David Bowie's song? If so, that's awesome!
It is!