Questions and Answers on the Student Loan Bill
By MARK KANTROWITZ</p>
<p>Somewhat lost in the House of Representatives approval of the health care reform bill on Sunday night was its vote in favor of President Obamas overhaul of the federal student loan system. Under the measure, fees paid to private banks as intermediaries would be eliminated; the maximum value of Pell grants would rise though not by as much as in previous versions and college graduates in low-paying jobs would have an easier time paying back loans. </p>
<p>So that students already in college as well as others headed there can get a sense of what the bill might mean to them, I posed several questions to Mark Kantrowitz of the financial aid Web sites finaid.org and fastweb.com. Excerpts from our exchange, conducted via e-mail, appear below. Jacques Steinberg</p>
<p>Q.As a result of the bill, how much will students Pell grant awards rise over each of the next few years?</p>
<p>A.For 2010-11, the maximum award is $5,550. It is unchanged for 2011-12 and 2012-13. It is then indexed to the CPI-U (the Consumer Price Index Summary for all Urban Consumers) for five years through 2017-18. I estimate that the maximum Pell grant will reach $5,900 by 2019-2020. (This is down from the $6,900 estimate for President Obamas original CPI-U + 1 percent proposal.) So the legislation will increase the maximum Pell Grant by $350 the typical annual increase over 10 years.</p>
<p>Q.In general, do you predict that those increases will be sufficient to keep pace with the average increases in tuition and fees at private colleges? At public colleges?</p>
<p>A.These increases not only wont keep pace with tuition inflation, but also fall short of the consumer inflation rate. It is hard to see how President Obama will be able to accomplish his goal of increasing college graduation rates when the maximum Pell grant will be decreasing on a constant dollar basis. When these lukewarm increases in Pell Grant funding are coupled with double-digit tuition inflation rates at public colleges, college will become a lot less affordable, especially for low and moderate income students.</p>
<p>Q.Is one advantage of the bill, in terms of students peace of mind, that those increases will now be automatic as opposed to subject to annual Congressional review and appropriation? Was that the case in prior years?</p>
<p>A.Previously the Pell Grant would go through feast/famine cycles. For example, during the Bush administration the maximum Pell Grant was unchanged for four years in a row. President Obamas proposal was to establish automatic annual increases in the maximum Pell grant to smooth out the volatility. The original House legislation would have indexed the maximum Pell grant to the inflation rate plus 1 percent, but would still have subjected the maximum Pell grant to the annual appropriations process, with the possibility of cuts.</p>
<p>The bill that passed the House Sunday night still maintains the split between discretionary and mandatory funding, so the Pell grant will still be vulnerable to more cuts as part of the annual appropriations process. Moreover, the legislation that passed Sunday does not eliminate the feast/famine cycle because it keeps the maximum Pell grant unchanged for five years and indexes it to the inflation rate for five years.</p>
<p>Q.How will the administration of student loans change as a result of this bill, and what differences will students experience directly?</p>
<p>A.Instead of having to find a bank or other financial institution to get their federal education loans, families will get the loans through the colleges financial aid office. I list the differences here. The major differences are: The interest rate on the PLUS loan is lower in the Direct Loan program (7.9 percent as opposed to 8.5 percent). And the PLUS loan denial rate in the Direct Loan program is half that in the federally guaranteed student loan program, so more parents will qualify for the PLUS loan.</p>
<p>Q.In what ways will this bill directly affect colleges?</p>
<p>A.The switch to the Direct Loan program shifts more of the administrative burden to the colleges, requiring them to make changes to their administrative software systems and to staff training, but also gives them greater control over disbursements of student loans.</p>
<p>Q.What else about the bill is relevant to current and future students?</p>
<p>A.The bill implements the changes to income-based repayment of student loans, as proposed by President Obama in his FY2011 budget. But it does so with a delayed effective date of July 1, 2014.</p>
<p>The changes include cutting the percentage of discretionary income on which repayments will be based from 15 percent to 10 percent, and accelerating the forgiveness from 25 years to 20 years. But those benefits will be available only to new borrowers on new loans originated on or after that date. They are not retroactive.
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