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Bill Includes New Student Loan Forgiveness Program

Today we’re wrapping up the in-depth look at the health care bill [1] and how it might impact your finances. Today we will cover the new student loan reform included in the health care bill.

Student Loan Reform Bill

The federal government has officially ended the bank-based system of distributing federally subsidized student loans through the passing of the Student Aid and Fiscal Responsibility Act (SAFRA), which was included in the health care bill signed into law on March 30, 2010.

This has been in the works for quite some time; over the past five months or so when I signed into my Sallie Mae account, the loan manager tab became separated by “loans owned by the government” versus ones that are not owned by the government. This is because with the drying up of the credit markets in 2008, the government stepped in and purchased the government-backed student loans from lenders such as Sallie Mae and Bank of America. The Department of Education has already directly purchased $52.3 billion in loans from private companies through the Loans Purchase Commitment Program, and now they own roughly 80% of all student loans.  

So how will this new law affect students?

Where to Get Your Student Loans

Beginning on July 1, 2010, students will go to designated private lenders, who are competing for the contracts from the US Department of Education. Included in the Obama student loan reform, private lenders must lend loans from the Direct Loan Program to students at the same rates, terms and benefits.

Expanded Financial Aid

More than $40 billion in Pell Grants will be available now due to the health care bill student loan provision, which will roughly double the total amount of funding available for Pell Grants. The Federal Pell Grant will be awarded according to the Consumer Price Index from 2013-2017 at an estimate of $5,550-$5,975. Currently the maximum Pell Grant awarded for 2009-2010 academic year is $5,350, with an added option for receiving an additional disbursement of $2,675 in the summer.

Help to Community Colleges

The government will now be saving an estimated $67 billion by directly loaning to students and cutting out the middle man in the student loan bill. The government plans to use $2 billion of this money to bolster community colleges, which are becoming a much more popular and viable education option for working adults and older students.

Student Loan Forgiveness Program

The student loan [2] bill expands the existing income-based student loan repayment program (IBR). According to a White House press release, students who borrow money starting July 1, 2014 will be able to cap their student loan repayments [3] at 10% of their discretionary income (currently it is 15%).

After 20 years of consistent, on-time payments, a student’s loans will be forgiven. Furthermore, public service workers (teachers, nurses, military service) will have debt forgiveness after 10 years.

More Student Loan Information

Check out the entire health care series: