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House Passes Student Loan Makeover

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Although healthcare reform legislation was the most visible and contentious part of the budget reconciliation bill passed by the House of Representatives on Sunday March 21, it’s not the only part of the bill that will affect advisors and their clients. Also included in the legislation that was passed without a single Republican vote (and without some Democrats as well), was language that will give the student loan industry a complete makeover.

The student loan portion of the bill (H.R. 4872) would end the 45-year-old Federal Family Education Loan Program under which private financial institutions make tuition loans that are guaranteed by the federal government. Instead the Direct Loan Program be would be expanded, saving, according to the Congressional Budget Office, more than $61 billion over 10 years, and at least $36 billion of those savings would be shifted into the Pell grant program.

Currently more than six million American students depend on Pell grants which the Washington Post reports had an unexpected shortfall when it became “oversubscribed because of the recession,” and was in danger of being forced to drop more than half a million students from the program.

Reforming the student loan program is an important part of the Obama Administration’s agenda, but like many goals, this one has been subject to compromise and debate. Those opposed call it a government takeover of the loan program and complain it will reduce options for students. Supporters argue that by eliminating middlemen, the government will save billions of dollars which is only justified since it is the government through its guarantees that is actually taking the risk on the loan.

According to The New York Times both lenders and colleges have been anticipating changes in the program and the volume of subsidized loans has been declining (from $61 billion in FY 2009 to $50 billion in FY 2010) while direct government lending has been on the rise, going from $21 billion to $30 billion in the same period.


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