With the intense media focus on the nuts and bolts of how the recently passed Affordable Healthcare for America Act would affect the healthcare and health insurance industries, the other major reform passed in that bill was barely discussed at all: an overhaul of the student loan system. Under most other circumstances, this major reform would have been heavily discussed across the airwaves, but because it was packaged into a much larger piece of legislation, many people are unaware that it was included.
Before discussing the reforms, it’s important to recap the system as it currently stands. Students seeking financial aid have two primary options: private lending on terms negotiated between the individual and the lender; or, federal aid on terms set by the government. Federal loans are not purchased directly from the government, however. Students actually get the loans from banks who have the loans backed 100% by federal dollars, whether or not those loans are repaid in full by the students.
The newly passed reform will strip the banks of their middleman role in this process, instead having students borrow directly from the federal government. It is important to note that this is not a federal takeover of a private industry. Loans are already ultimately paid for by federal dollars. The government expects to actually save about $60B over the next decade as a result of this reform, most of which will go to increased funding of Pell Grants and reinvestment in community colleges. Meanwhile, banks that previously facilitated the loans are expected to lose significant amounts of money that was previously guaranteed by the government. Federal student loans are a $70B business, so, depending on how the banks handle private lending, this could amount to a large loss for them.
In addition to switching to direct lending, the reforms also target repayment terms for students. Under the new system, the cap on loan payments will be lowered from 15% of a student’s disposable income to 10%. Furthermore, any debt remaining after 20 years will be forgiven (a reduction from the previous 25 year threshold). That cap is further reduced to 10 years for public servants (teachers, nurses, soldiers, etc.). These terms will not take effect, however, until July 1, 2014. They are also not retroactive; they will not apply to loans taken out before that date. Likewise, private lenders will remain unaffected by the reform, leaving them free to lend and set terms as they have been doing.
This reform is designed to help make college more affordable. Further reform efforts are likely—if not by the current administration, then by future governments. We will continue to update you with additional news on this and other legislation affecting you, your family, and your business.