March 29, 2010/Detroit Free Press
By Lori Higgins
Changes coming to the world of college lending could mean less confusion for students taking out federal loans, more flexibility in repaying those loans,more money for Pell Grants and more students being eligible for the grants.
The changes are part of legislation that cleared Congress last week and now await President Barack Obama's signature.
The college lending bill bars banks and private lenders from issuing federal loans. Beginning July 1, all federal student loans must go through a federal direct loan program.
"That will simplify the loan process for a lot of students," said Cindy Hermsen, director of financial aid for Oakland University.
But the changes are creating ripples in the student financial aid industry, particularly for companies that received federal subsidies to issue federal loans. Sallie Mae, the largest provider of student loans, said it'll be forced to cut 2,500 workers.
Students are hopeful
Moneer Al-Nabolsi, an aspiring dentist and a junior at the University of Michigan-Dearborn, figures he'll have amassed $200,000 in debt by the time he graduates from dental school. So he's pleased with student-aid changes because they might mean a bigger Pell Grant award and better loan terms.
"It's just going to mean there are more students who can afford classes," Al-Nabolsi said.
The legislation would provide $36 billion more for the Pell Grant Program, the largest federal grant program for college students. A big chunk of it -- $13 billion -- will go toward reducing the deficit of the needs-based program, a shortfall that has resulted from increased need as more Americans go back to school and a greater number meet the income guidelines because of the economy.
Much of the rest will go toward increasing the amount of the grants. The maximum now is $5,500. Beginning in 2013, the award would increase annually with the rate of inflation.
"It certainly will provide some relief," said Haley Chitty, of the National Association of Student Financial Aid Administrators.
Allison Horkey of Roscommon, a graduate student at the University of Michigan, said increasing the Pell Grant is necessary.
"There were a few semesters where I got those," she said. "Ultimately, it's not enough."
Al-Nabolsi said he doesn't believe the planned increases will keep up with rising tuition costs in Michigan.
"Our tuition is rising ... two to three times the rate of inflation," he said.
That's a valid concern, said Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. "I certainly hope this isn't the end of it. It's hard to see how President Obama is going to achieve his goal of a dramatic increase in the number of college graduates."
Federal vs. private loans
A controversial provision of the legislation is the elimination of the Federal Family Education Loan Program. Under that program, which is to cease July 1, banks and private lenders received federal subsidies to issue federal loans that were guaranteed by the government. After July 1, all federal loans would be through the Direct Loan program, with the money coming directly from the government.
Democrats pushed for the change to get private lenders out of what has become a lucrative market for federal loans. Republicans in Congress were unanimously opposed to the measure. So were the loan providers now being shut out of the federal loan market.
"The student loan provisions ... intentionally eliminate private-sector jobs and student services at a time when our country can least afford them," said Martha Holler, spokeswoman for Sallie Mae.
The company can continue to issue private loans to students, Holler said.
But private loans are not ideal. Hermsen said federal loans are more attractive because the interest rates are generally lower and they're guaranteed by the federal government.
Help after graduation, too
The switch to direct student loans is expected to pay off for students once they graduate and start having to repay them.
Among the provisions: Borrowers, in some cases, would make payments totaling 10% of their income, down from the current 15% required. Also, those who make regular payments would be able to have their loans forgiven after 20 years, down from 25 years.
"This is critical in expanding the access students have to higher education," Hermsen said.