Feds Take Over Federal Student Loans

As part of health care reconciliation, major changes were enacted into law relating to federal student loan programs. Included in this legislation is what appears to be no less than a federal takeover of federal student loans, along with big increases in Pell Grants.

The new law eliminates the Federal Family Education Loan Program and cuts out private lenders. Beginning on July 1, all federal loans will originate through the federal Direct Loan Program. According to the non-partisan Congressional Budget Office, cutting out banks and private lenders from the student loan business will save taxpayers $61 billion over the next 10 years, at least $10 billion of which will reduce the federal deficit and help underwrite the cost of health reform.

The new law also includes $36 billion for Pell Grants, which provide subsidies to low-income and some middle-income students. The maximum amount of Pell Grants this year will grow to $5,300 and to almost $6,000 in 2017. Without the new law, Pell Grants would have been limited to $2,150 next year. Students receiving larger Pell Grants will need to borrow less to pay for college.

Beginning in 2014, borrowers will also get better debt repayment terms. Current borrowers can limit monthly federal student loan payments to 15 percent of their discretionary income. In 2014, this cap will be reduced to 10 percent of discretionary income.

The only role left for the private sector will be loan servicing, and the legislative intent appears to be to ensure that these contracts will be performance-based and awarded to the loan servicing companies providing the best customer service.

It seems ironic that this last minute addition to the health care reform legislation indeed amounts to a federal takeover. While it’s hard to take seriously the argument that the new health care law amounts to a takeover of health care, the new law absolutely seems to put the federal government directly in charge of lending to our nation’s students.

Jonathan Cykman, EzineArticles.com Basic PLUS Author

About cykman

Jon Cykman works in Washington, DC as a consultant, and is long-time student of American Politics. He started out handing out campaign materials for Hubert Humphrey during the campaign of 1968, and later went on to earn a B.A. in Political Science from the State University of New York, College at Purchase in 1978, and an M.A. in Public Affairs from the University of Texas, Lyndon B. Johnson School of Public Affairs in 1980. Jon retired from Federal Service after 31 years of service, and lives with his family in Catonsville, MD.
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