Federal Student Loan Reform: Biggest in a Generation

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+.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and she also writes a college blog for CBSMoneyWatch and TheCollegeSolutionBlog. Follow her on Twitter.

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5 Responses to Federal Student Loan Reform: Biggest in a Generation

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  3. Savannah Waldron March 26, 2010 at 8:55 pm #

    Hello-
    I am currently a student attending a California community college. This is my last semester completing my 60 units to transfer and i find myself overwhelmed with the amount of money it costs to attend state and UC colleges. I read your article about the problem with getting financial aid as an independent student and it applies to me in every way. I moved out when i was eighteen. I am the forth of five children in my middle class family and my parents have no way of being able to afford my college. I am the first to attend college in my family. I am afraid to take out loans and have that huge debt looming over me as i begin my adult life. The fear also of not being able to get a job in the career field I am going to school for. My school councilors are no help at all and i really have no idea what to do.

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