With the nuances of health care reform get­ting all the atten­tion, you may be sur­prised to learn that the recent­ly passed health care legislation—the Patient Pro­tec­tion and Afford­able Care Act of 2010, as amend­ed by the Health Care and Edu­ca­tion Rec­on­cil­i­a­tion Act of 2010—includes sev­er­al pro­vi­sions relat­ed to col­lege. The most note­wor­thy of these pro­vi­sions involve:

  • The dis­tri­b­u­tion of fed­er­al stu­dent loans
  • Pell Grants
  • Income based repay­ment for fed­er­al stu­dent loans


The dis­tri­b­u­tion of fed­er­al stu­dent loans

Cur­rent­ly, there are two ways to obtain a fed­er­al stu­dent loan—borrow direct­ly from the fed­er­al gov­ern­ment under the William D. Ford Fed­er­al Direct Loan (“Direct Loan”) pro­gram or bor­row from a pri­vate lender who par­tic­i­pates in the Fed­er­al Fam­i­ly Edu­ca­tion Loan (FFEL) pro­gram. The FFEL pro­gram has been in exis­tence since 1965 (the Direct Loan pro­gram since 1994), and pri­vate lenders in the FFEL pro­gram receive gov­ern­ment sub­si­dies to encour­age them to loan mon­ey to students.

Under the new leg­is­la­tion, pri­vate lenders will no longer receive gov­ern­ment sub­si­dies to make fed­er­al stu­dent loans, and the FFEL pro­gram will be elim­i­nat­ed. Start­ing July 1, 2010, all fed­er­al stu­dent loans will be made direct­ly from the fed­er­al gov­ern­ment to bor­row­ers under the Direct Loan program.

Gen­er­al­ly, stu­dent bor­row­ers should­n’t notice much of a dif­fer­ence with this change. If any­thing, the new sys­tem should be sim­pler and less con­fus­ing, because bor­row­ers won’t have to “shop around” for a pri­vate lender to obtain their fed­er­al stu­dent loans.

Par­ents who wish to take out a fed­er­al PLUS Loan might find them­selves bet­ter off because the inter­est rate on a fed­er­al PLUS Loan obtained through the Direct Loan pro­gram is capped at 7.9%, com­pared to the inter­est rate on a fed­er­al PLUS Loan obtained through the FFEL pro­gram, which is capped at 8.5%.

Pell Grants

The Pell Grant is the fed­er­al government’s largest finan­cial aid grant pro­gram. It is avail­able to under­grad­u­ate stu­dents with excep­tion­al finan­cial need (typ­i­cal­ly stu­dents from fam­i­lies who earn less than about $45,000 per year). Grad­u­ate stu­dents aren’t eligible.

The new leg­is­la­tion pro­vides for auto­mat­ic annu­al infla­tion-adjust­ed increas­es to the Pell Grant begin­ning in 2013. For the cur­rent aca­d­e­m­ic year 2009/2010 (which runs from July 1, 2009, through June 30, 2010), the max­i­mum Pell Grant is $5,350. It is sched­uled to increase to $5,550 in 2010/2011, and will remain at that lev­el for the fol­low­ing two years. It will then increase by the rate of infla­tion (via the con­sumer price index) in each of the next five years, reach­ing approx­i­mate­ly $5,900 in 2019/2020.

Income based repayment

On July 1, 2009, the fed­er­al gov­ern­men­t’s new Income Based Repay­ment (IBR) pro­gram went into effect. The IBR pro­gram was cre­at­ed to help col­lege grad­u­ates man­age their increas­ing­ly large stu­dent loan pay­ment oblig­a­tions. Under the pro­gram, a borrower’s month­ly stu­dent loan pay­ment is cal­cu­lat­ed based on income and fam­i­ly size. A bor­row­er is allowed to pay 15% of his or her dis­cre­tionary income to stu­dent loan pay­ments, with any remain­ing debt for­giv­en after 25 years. The pro­gram is open to grad­u­ates with a fed­er­al Stafford Loan, Grad­u­ate PLUS Loan, or Con­sol­i­da­tion Loan made under either the Direct Loan pro­gram or the FFEL program.

The new leg­is­la­tion enhances the IBR pro­gram. Under the leg­is­la­tion, bor­row­ers who take out new fed­er­al stu­dent loans after July 1, 2014, will pay 10% of their dis­cre­tionary income to stu­dent loan pay­ments, with any remain­ing debt for­giv­en after 20 years.