What does the recent Student Loan Reform mean?

Last March (2010), President Obama signed legislation expanding access to college for many more students.   Over $68 billion of tax-payer money that commerical banks previously received as subsidies for writing student loans will now be re-directed to student financial aid funding and support.   Areas that will be affected by this change, include the following:

• Pell Grant funding will double
• Funding for community colleges will increase
• Support for minority-serving institutions will be increased
• Student loan payments will be capped at 10% of a graduate's discretionary income with forgiveness of the loan remainder after 20 years, and after 10 years if you have a career in public service
• Commercial banks will no longer receive government subsidies for writing federal guaranteed student loans, and these loans will now be provided directly from the federal government's Department of Education.
You may remember much discussion in the media in recent years where some schools were being investigated for accepting incentives from commercial lenders to place them on preferred lenders lists so that they (the banks) could increase the numbers of loans written, and therefore the amount of government subsidy received.   These subsidies are what will be re-injected into the student financial aid system, helping students directly.

With reform, for all intents and purposes there are now only two major categories of loans 1) Direct Federal Guaranteed Loans and 2) Private Loans, which include loans that schools may make in partnership with a commercial institution.

As I have mentioned on this blog before, if you qualify, grant aid should be your first source of funding your education, as this aid does not have to be repaid, then if you must use loans, you should always seek to use federally guaranteed loans first, and private loans only as a last resort.    Ask a lot of questions to ensure that you really understand what type of loan you are signing up for.    Some private loans are being named in such a way that they tend to suggest, intentionally or otherwise that they may be federal loans.     

The Federal guaranteed loans are the following loans

Federal Perkins Loans

Direct Stafford Loans

a)    Unsubsidized Stafford Loans

b)    Subsidized Stafford Loans

Direct PLUS Loans for Parents      and

Direct PLUS Loans for Graduate and Professional Degree Students