college

Financial aid changes in health reform law

Stack of books, green apple, graduation hat and an equation written on the board
Highlights
  • Changing the distribution of federal loans means bigger Pell Grants.
  • Graduate students and parents will receive lower PLUS loan rates.
  • Students will get easier income-based repayment terms.

Health care wasn't the only reform enacted by lawmakers recently. The $940 billion health care reform overhaul also brought dramatic changes to financial aid that will permanently alter the student lending market. The law eliminates the Federal Family Education Loan Program (otherwise known as FFELP) and redirects more funds into the federal Pell Grant program. While the changes will provide a much-needed boost to low-income students, they could reduce loan options for middle-income students, critics say. Here's what the bill means for tomorrow's college students.

No middle man, bigger Pell Grants

Instead of hiring private institutions to originate federal loans, the government will now do it directly. This will save the taxpayer an estimated $61 billion over the next 10 years, reports the Congressional Budget Office.

The savings will be split, with $9 billion directed to reducing the national deficit and about $36 billion going to increase the Pell Grant program, which targets students from the lowest-income households. While such an increase seems like a major boost to the program, Mark Kantrowitz, publisher of the financial aid Web site Finaid.org, says that most of those funds will be used to simply keep the Pell Grant at its current level.

"Since the government underestimated how many people would qualify for the Pell Grant, about $19 billion of the money will be spent on paying off a current deficit in the program," says Kantrowitz. "The rest will go to increasing the Pell Grant, but at a rather anemic rate."

In the short-term, a portion of the funds will go to maintaining the current Pell Grant level of $5,550 per year, an amount which was slated to decrease at the end of this year. Beginning in 2013, the Pell Grant will steadily increase 1 percent to 2 percent each year over the next five years, up to a maximum annual amount of $5,975. The problem, says Kantrowitz, is that the planned increases will be far outpaced by the average rate of tuition, which rises 8 percent each year, according to Finaid.org, making the Pell Grant slightly less valuable over time relative to the price of college.

advertisement

Lower rates for PLUS loans

The elimination of FFELP will also reduce the interest rate on federal parent PLUS loans and graduate PLUS loans, explains Lauren Asher, president of the Berkeley, California-based think tank, the Institute for College Access and Success. Currently schools administer these loans under one of two programs, the FFELP program, which comes with a slightly higher PLUS loan interest rate, or the Direct Loan lending program, which incurs a slightly lower one.

 

 

Show Bankrate's community sharing policy
          Connect with us
  • at
  • Private student loan search by SimpleTuition.com
advertisement
FRUGAL NEWSLETTER

Discover new ways to cut costs and save more every day. Reduce your spending, not life’s pleasures. Delivered weekly.

advertisement
Partner Center
advertisement

Connect with us