What You Need to Know about Changes in Federal Student Aid

President Obama recently signed the Health Care and Education Reconciliation Act of 2010, celebrating with students at the Northern Virginia Community College (NOVA) “the largest rewrite” of federal college assistance programs in four decades.

While the feds continue to work with individual financial aid offices to implement program specifics, students should be aware of the most basic changes and how they may affect the aid they receive.

No More Middlemen
Beginning July 1st, all federal student loans will only be provided by the government instead of through banks or other lending institutions. Students will deal directly with college financial aid offices, which will work with private companies approved by the feds to lend funds through the “Direct Loan Program.” In other words, all students applying for federal loans will do so through their college or university. Students who previously received a federal student loan from a private lender under the Federal Family Education Loan (FFEL) Program will need to complete a new promissory note to receive assistance under the Direct Loan Program. And, between July 1st and June 30, 2011, students still in school who have multiple federal loans can consolidate them into a single federal loan through the same program. If you haven’t completed a FAFSA, you won’t qualify.

Increased Pell Grants
Unlike loans, grants are a form of student aid that doesn’t need to be repaid. In the case of Pell grants, a student’s eligibility is determined by household income. For now, the maximum Pell grant will remain $5550, but between 2014 and 2018, maximum grants will increase with the rate of inflation which is estimated to bring the maximum award to $5975.

Lower Income-Based Payments
After 2014, student loan payments will be capped at 10 percent of “discretionary income” or income after living expenses. It is estimated that more than 1.2 million borrowers will be able to take advantage of the expanded income-based payment plan, and typical monthly payments will be significantly reduced for many borrowers.

More Forgiveness
Also beginning in 2014, borrowers who stick with their income-based payment plan for 20 years will be forgiven if they have not yet paid off their loans. Currently, borrowers must make payments for 25 years before loan forgiveness kicks in. Public service employees (teachers, nurses, military) will see their balances wiped out in 10 years.

Note that rules governing private student loans were not affected. While federal loans have fixed rates and fees, private student loans come in many different shapes and forms. It’s advisable to compare options before agreeing to terms.

Together with the expansion of college-related tax credits and simplifications in the FAFSA, the changes in federal student aid are designed to make the entire process more “user friendly.” If you have questions about how the new law will affect you, contact your financial aid office.