25 March 2010

In light of the economic downturn, budgets are tight and money is in short supply. So how does one afford college during tough times, and what impact will the Reconciliation Act of 2010 (H.R. 4872) have on paying for college?

(EHC Update: The Reconciliation Act of 2010 H.R. 4872 was signed into law on March 30, 2010. An adjustment in the amount of the Pell Grant was made in the final bill. Please see update below).

First, changes in where your student loans come from

According to Inside Higher Ed, all lending will be shifted from the lender-based (but government-subsidized) Federal Family Education Loan Program to the government's Direct Loan Program by July 1, 2010.  Essentially, the new bill shifts the origination of all Federal Stafford, Federal PLUS, Federal Grad PLUS, and Federal Consolidation loans to the Government’s Federal Direct Loan Program.  This simply means your federal loans will come “directly” from the government, and not from private lenders.  Private banks and other lenders are still free to make private loans to students, but they will no longer be making federal loans.

What’s the difference between a federal loan and a private loan? 

• Federal loans are backed by the government and tend to have more favorable terms and conditions than private loans, including fixed interest rates, multiple repayment options, and both deferment and forbearance provisions for borrowers who have difficulty in repayment. 
• Private loans are not backed by the government, and thus tend to be more costly, with variable interest rates that usually have no cap.  They usually offer much less flexibility in terms of repayment options and while they may have options to postpone payments, these tend to come with a cost.

Second, changes in how much money is available and help lowering monthly payments when loans come due

Increase in the maximum Pell Grant. An increase in the federal maximum Pell Grant award will be determined by the change in the Consumer Price Index. The mandatory component of the funding will be determined by inflating the previous year’s total and subtracting the maximum award provided for in the appropriations act for the previous year or $4860, whichever is greater. Beginning in the 2018-2019 academic year, the maximum Pell award will be at the 2017-2018 level.

Lower monthly loan payments. Starting in 2014, new borrowers who are eligible for Income Based Repayment (IBR) will see their monthly payments capped at 10% of their discretionary income, down from the current 15%. Borrowers are eligible for Income Based Repayment when their annual loan payments (as calculated on a ten year Standard repayment plan) exceed 15% of the difference between their AGI and 150% of the poverty level for their family size.

$2 billion for the Community College and Career Training Grant Program.  This program will fund training and education programs at community colleges to help dislocated or laid-off workers find jobs.

$2.55 billion to help Historically Black Colleges and Universities and Minority Serving Institutions. Funding targeted to these colleges recognizes the role Historically Black Colleges and Universities and other Minority Serving Institutions play in educating low-income and minority students. 

$750 million for the College Access Challenge Program. Over the next five years, competitive grants will be awarded to two-year colleges to help low-income students enroll and succeed in college. Services will include management of student loan debt and financial literacy. 

ExploreHealthCareers.org offers information on additional funding sources in the Find Funding searchable database.

Paul S. Garrard, President and Founder of PGPresents, LLC and a 27 year veteran of student financial aid and higher education, contributed to this article.

Updated March 30, 2010