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Obama's Changes to Student Loans - As Part of the Health Care Package

May 24, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

The health care overhaul signed into law in March 2010 also contained significant changes to federal education funding. The education funding overhaul was ostensibly included in the bill because of its role in funding health care—some of the money saved through the changes will go toward funding Obama’s new health care initiative.

However, these changes weren’t made simply to finance health care. Education funding reform has been on President Obama’s agenda for a long time, and including the changes to student loans in the health care bill prevents a separate fight in the House and Congress. This makes it easier for these measures to pass, even though fighting has been fierce already with bank lobbyists protesting up until the last minute that the changes will reduce jobs and decrease the quality of loan servicing to students. And while some of the money saved will be spent on health care, the majority of the funding will go towards additional aid for the over 14 million students who receive federal aid every year.

Here’s an overview of the changes to federal education funding that are included in the health care bill—and how these changes might affect individual students.



student loan

The government will no longer provide subsidies for private banks

Under the old system, the government subsidized banks that provided federal loans. That is, when a student defaulted on a loan, the government would pay back the bank for its loss. This made education lending virtually risk-free for banks—but it cost the government a lot of money.

Under the new plan, the government will be the sole provider of federal loans. Students will get all their federal loans directly through their college’s financial aid office—not a bank. This will save billions—it’s estimated about $61 billion over the next ten years. Some of those savings will go toward the health care bill, but about two-thirds will go toward increasing federal Pell grants.

Pell Grants will increase every year

The bill mandates that Pell Grants increase on a yearly basis, projected to rise from $5,350 in 2010 to $5,975 in 2017. While these rises represent over $50 billion in additional funding, the benefit to individual students isn’t much--$625 in additional funding for individual Pell Grant recipients over seven years, while it will doubtless be appreciated, is a drop in the bucket compared with college tuition increases that far outstrip inflation.

A reduction in income devoted to loan repayment

Under current rules, students must devote 15% of their income to paying back student loans. With the new legislation, students will have to devote only 10% of their income to their loans—but only for new loans taken out after July 1, 2014. In addition, if you keep up your repayments at this rate, your loans will be forgiven after twenty years—down from twenty-five years under the old law.

Some money set aside for the deficit

About $10 billion will be put toward paying off the federal deficit. The deficit is at $1.42 trillion as of 2009—a $908 billion increase from 2008. Under President Obama, it’s forecasted to decline slightly—to $1.17 trillion this year, and to $533 billion by 2013. High debt levels could lead to higher taxes in the future, as well as a decline in the value of the dollar overseas. $10 billion may seem like a lot—but it’s not much compared with the large volume of the country’s debt overall.

The cost of education—like the cost of health care—continues to rise. Although the changes to federal education funding included in the health care bill pass on significant savings to the Pell Grant program and other programs designed to relieve student debt, the changes seen by individual students are likely to stay incremental. Still, it’s a step in the right direction—and hopefully the changes will make it a little bit easier for students to pay for college.


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