Congress is on the verge of enacting the biggest federal student loan reform in a generation.
I’ve been following the high-stakes fight on Capitol Hill between the student lending giants and the Obama administration for some time, but I didn’t feel compelled to share the news until the legislation looked like a sure thing. The Democrats have tucked the federal student loan bill into the historic healthcare legislation, which Congress could vote on this weekend.
What I am most pleased about is the end of an obscene federal student loan boondoggle that private lenders enjoy. For years the federal government has poured billions of our tax dollars into the coffers of Sallie Mae and other student lenders when there was absolutely no need to do so! Private student lenders pocketed these huge subsidies for lending money to students even though the federal government assumed virtually all the default risk.
The end of the lender subsidies and a switch to direct federal student loan lending will free up $61 billion over the next decade, according to US Rep. George Miller (D-CA). Some of this money will be used to fund the wildly popular Pell Grant program for low and middle-income families. I only wish the end of lender subsidies had freed up more money for higher-ed.
Federal Student Loan Repayments Will Get Easier
The legislation is also going to be great news for future student borrowers. Here’s why:
Under the current student loan repayment program, college grads, who meet the income qualifications, can request that their monthly student loan payments be capped at 15% of their discretionary income. The new provisions will lower this cap to just 10% for new borrowers after 2014. The student loan repayment program can save borrowers hundreds of dollars a month.
The legislation also directs that student borrowers using the federal student loan repayment method will have any remaining student debt forgiven after 20 years instead of the current 25 years.
The big flaw with the current student loan repayment program is that few student loan borrowers know about it. And they could use the help. Two-thirds of college students graduate with an average student debt of $23,000+.