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Major Student Loan Overhaul in Washington

On September 17th the House of Representatives passed the Student Aid and Fiscal Responsibility Act, a bill that provides billions of dollars in federal spending on education and that makes a major change in the structure for student loans in this country. The omnibus bill is described in the New York Times as a step towards the loan relief that has become a major issue as the cost of higher education has soared.

The principal revision in the loan program is eliminating the current loan option of federally guaranteed loans provided by private institutions. Instead, all federally backed student loans will come directly from the government.

Direct loans from the government currently available are based on need. Any student is eligible for a loan that is guaranteed by the government but issued by a private lender, and these are the large majority of all student loans. The loans originated by banks and other lending institutions are called Federal Family Education Loan Program (FFELP) loans - which currently represent about 75% of all student lending. Students who max out on federally guaranteed or subsidized loans also have the option of taking out private loans from banks to meet further needs.

The new legislation raises the limit on direct student loans and will also increase the ceiling for Pell grants, a program that provides direct grants for higher education to low income students. There are also funds to underwrite community college development and some special education programs.

There are current ceilings on student borrowing, both for total student loans and for annual loans. They vary through the undergraduate years and go up for graduate students. Thus a freshman who wants to pursue a business administration degree is may currently borrow a maximum of $5,500 for that year.

The rate rises annually, and by his senior year he can borrow $7,500 for the year. The ceiling rises again for graduate students. If the borrower decides to pursue a management degree through an MBA program, the ceiling can rise to as much as $12,500 for combined subsidized and unsubsidized loans. Those figures will change under the new student loan structure, but they be finalized in the continuing debate on Capitol Hill

But the big change in this legislation is eliminating private lenders from the federal student loan mix. The current loan procedures require college participation and under the new law, schools will be required to switch to the new lending system by July of 2010. That's an enormous bureaucratic shift for the federal government as well, to be accomplished in less that one year.

This bill is expected to pass the Senate, although there is going to be a loud debate about government intervention, big spending, etc. The Obama administration sees the new legislation as a money-saving device. Without the obligation to buy student loans from private institutions, the White House says there will be an $80 billion savings over ten years, which can underwrite the increased Pell grants to low income students.

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