What some people might not know is that Federal Student Loan process was dramatically changed by the new healthcare legislation. I'm not sure why, Congress decided to include the changes to loans within the healthcare legislation. But that's what they chose to do and is one of the reasons why many are concerned about the health care legislation beyond just the health care issues.
But the good news is most of the changes to the student loan process are to the student's benefit. Student loans have always been quite a challenge for anyone not familiar with all the ins and outs of the federal and private lender rules. These new laws that go into effect are meant to simplify and make it easier for students to both qualify for the loans and ease the payment terms for the students.
These new processes are also responsible for some of the planned monies available to reduce the federal budget deficit. Based on current projections, the proposed $10 billion in savings from these new processes will be directly applied to reduce the federal budget deficit. Another very subjective area, who knows if these savings will materialize.
The major changes have to do with both repayment of the loans, and even the amounts that the students will have to pay back. Currently, students don't have to pay back more than 15% of their incomes each month on any student loans. There is a cap on the number of months, or in this case years, that the students will have to pay back on any loans and is currently set at 25 years. In this new change to the rules the monthly maximal amount of income is 10% rather than the 15% and the maximum number of years a student will have to pay on the loan is 25 and will be 20 under this new law.
One of the reasons this new process saves the government money is the fact that the government will no longer subsidize the private lenders by guaranteeing the payback. In other words, if the student defaults on the loan now guaranteed by the government, the government will pay the loan back to the private lender. But in this new set of laws the government will no longer guarantee payback so more private lenders will probably reduce the amount of loans offered to students since they no longer have a guarantee of payment by the government.
These new laws also expand the grants that go to lower income students. Currently, students who qualify for federal grants can obtain up to a maximum of $5,300 per year. But with these new laws they will be able to qualify for up to $6,000 per school year.
The two existing loan programs for students consists of one that is offered directly from the government and the other is offered through the private lenders, which is called the Federal Family Education Loan Program and is subsidized by the federal government with a guarantee payback. The Federal Family Education Loan Program will end as of the first of July this year.
Additional funding is also included in these new laws for community colleges to offer more affordable retraining for unemployed people. Given our current high unemployment rates this is probably one of the best features under these new student loan changes.
The banks and Sallie Mae are very unhappy with this new change in loan rules. Sallie Mae has stated that this change will force them to reduce their workforce from about 8600 people now to less than 6000 after these changes take effect. This is a net loss of over 2500 jobs. Sallie Mae is one of the largest private student loan providers.
It's hard to say how much of an impact that these new changes will have on private lenders and the student borrowers. It is safe to say that the student loan private lenders will be less motivated to offer student loans with higher risk. If the government picks up the slack and provides these loans at a lower rate and offers easier repayment terms of student borrowers will benefit.
I would highly recommend that anyone who is considering applying for student loan make sure that they understand exactly what the terms are in any loan agreement regardless of these new changes. And from any lender, to include the Federal Government.
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