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Big Changes Coming For College Financial Aid Programs

Most people did not realize that major and sweeping changes to college financial aid were included in the recent health care law that was passed a few days ago.  Why was college financial aid addressed in the the health care law?  I am not sure, and can’t seem to find a reasonable answer anywhere.  I guess the reason our elected representatives did this was because they could.  I have personally given up on understanding the process by which laws are passed in Washington.  As I did last week, I will offer you my analysis of these changes despite the fact that I many not totally agree with them.  Critics of the law say it is yet another government takeover of a private sector function.

The law intends to eliminate fees paid to private banks that act as middle men in providing loans to college students. the $68 billion in savings over 11 years will be used to expand Pell Grants and reduce student loan payments after graduation. The law also infuses $2 billion in community colleges over the next four years.

1.  Uncle Sam To Fund College Loans Directly

In the past there have been both direct government loans and private loans for college.  Private loans would be made by non-government entities such as Salle Mae (but were backed up with a government guarantee of repayment).  Whether a student borrowed directly from the government or from Salle Mae was determined by the college they attended.  Starting July 1, all colleges will be required to make available the direct government loan program.  The theory is that by eliminating private lenders from the transaction there will be a significant savings realized.  Sallie Mae, the largest private source of student loans, expects to slash one third of its workforce immediately.  This may well be described as the socialization of college financing and will put most private college lenders out of business.  

2.  Expansion Of Pell Grants

More money will be made available for Pell Grants.  For example, a state such as Illinois will see an increase of more than $300 million dollars next year to use toward funding Pell Grants.  Students can expect as much as a 10 percent increase in the amount of money they can be awarded through a Pell Grant.  Although most Pell Grants are awarded to students with a family income below $20,000, they can be awarded to students from a family with an annual income of as much as $50,000.  Remember that grants do not have to be repaid, which is why experts advise that they be pursued before considering going into debt wiht a student loan.

3.  Caps On Loan Payments After Graduation

Although the new law most applies to new college loans, the provision regarding caps on loan repayment affects new and existing student loans.  Starting in 2014 the new law caps payments for qualified borrowers at no more than 10% of discretionary income.  If the loan payments are made as agreed, any remaining balance still owed after 20 years will be forgiven.  At the time of writing this article, I was unable to get my hands on the exact formula that will be used to determine discretionary income.  I am assuming that this will become available shortly. 

What seems clear now is that money is flowing from the government for college tuition.  If you are considering going to college (or going back to finish) there may be no better time than the present.  The starting point is to complete the Free Application For Federal Student Aid to see what you might qualify for.  Your best resource would be to contact the financial aid office of the college you are considering attending.

Note that in the second half of this video, the President addresses the changes to college financial aid.

Helping you make the most of God’s money!

James L. Paris
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