Recent Changes in Student Loans

When the Health Care Reform bill was passed last year, few people noticed the government changed the way student loans work. Let’s take a look.

Pros
The government has cut out subsidies to private banks making Stafford loans – instead giving out the loans itself. This change saves the government all of that subsidy money, while increasing revenue through receiving interest payments itself. The Obama administration calculated savings at $60 billion over 10 years.

That also means that there should be more money available to give out as grants. The Pell grants are now going to be linked to inflation – so, in a decade’s time, they should be almost 10% larger than they are now.
Loans are also being locked in at lower guaranteed rates – no more than 6.8% going forward. For graduate students, the rate is capped at 7.9% – compared with the 8.5% or even higher at some private banks offered under the previous system.

The government is going to be more flexible when being repaid – no payment plan will exceed 10% of a graduate’s income. In addition, the government is more lenient in accepting applications. The entire system has been simplified. Rather than shop various banks for the best Stafford loan, you simply go to the government, and pay whatever interest rate you qualify for (the needier the student, the lower the interest rate).

Cons

While some banks would aim to get every possible penny, others offered discounts to students. A savvy shopper could sometimes find a great deal. The new program is one-size-fits-all, so there aren’t any deals or discounts available.

The program itself is slightly riskier as well. It used to be that banks and the government would share the risk – true, the government guaranteed 97% of the value of a loan, but the bank still had a share. Now, the government bears full responsibility. That, coupled with more lax standards for loans and lower interest rates for bigger risks, could potentially lead to problems in any sort of financial crisis.

In addition, should a different administration decide to change the rules, there won’t be many alternatives. Again – you can no longer shop banks. You’ve got the one stop – the government.

In all, the majority of students won’t notice a big difference. Hopefully more money will go to students, and less to middle men. At least that’s what they’re saying will happen…