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April 09, 2010

Financial Literacy Month: Changes for the Student Loan Industry

As you probably know, President Obama recently signed health care bill H.R. 4872. What you may not know is how H.R. 4872 impacts the student loan industry.

H.R. 4872’s Impact

Starting July 1, 2010, the U.S. Department of Education (ED) will be the sole provider of federal student loans.

Today, there are 2 sources used to originate federal student loans:

  • ED, through the Direct Loan program (DL).
  • Banks and other private lenders, via the Federal Family Loan Program (FFELP).

H.R. 4872 eliminates FFELP loan origination, meaning ED will be the lender for all federal student loans. This does not impact your current federal student loans or your ability to receive federal student loans—but the way you receive them may change.

Elimination of FFELP

If it has not already, your school will switch to DL. If you previously received loans via FFELP, you will need to complete a new Master Promissory Note to obtain additional federal loans through DL.

As a result, you could end up with federal loans from multiple lenders. Typically, you would have to wait until repayment to consolidate these loans. However, from July 1, 2010, to June 30, 2011, you can consolidate these loans while you are still in school. 

  • To qualify, you must have at least 1 loan from 2 of the following sources: DL, FFELP, or ED (via the Loan Purchase Commitment Program).
  • You must also have not yet entered repayment on at least 1 of those loans.
  • Consolidating your loans while in school may cause you to lose your grace period on loans that were not in repayment before you consolidated.
  • Your Consolidation loan's interest rate will be the weighted average of the loans you consolidated. However, the rate will not be rounded up to the nearest 1/8th of a percent, as usually done with Consolidation loans.

If your existing loans are already from DL, you will not be further affected by the elimination of FFELP.  

However, this legislation—known as the Health Care and Education Reconciliation Act of 2010 (HCERA)—could impact you in ways other than who provides your loan.

How HCERA Affects Students

  • Increased Pell grants. Pell grants, which are given to low-income students, will receive mandatory funding so they can increase with the annual rate of inflation. The maximum amount will increase to $5,500 for 2010-11—and reach up to $6,900 by 2019.
  • Additional funding. HCERA appropriated $750 million for the College Access Challenge Grant Program, which prepares low-income students to enter and succeed in postsecondary education. It also invested $2.55 billion to improve historically black, Hispanic, and other minority-serving colleges.
  • Revised income-based repayment (IBR). For borrowers first taking out loans on or after July 1, 2014, HCERA caps payments at 10% of their discretionary income, down from 15%. It also decreases the amount of time before payments can be forgiven—from 25 years to 20.

Here are some other things to keep in mind about HCERA:

  • Existing loan limits and interest rates will not change because of the new law.
  • Existing federal student loans originated under FFELP will not be affected. When you obtained your FFELP loan, you signed a Master Promissory Note that explained the terms and conditions of your loan—this legislation does not change those terms and conditions.
  • Federal loans issued by private lenders can be sold to the government or a third party—but this legislation does not require lenders to sell existing loans.
  • If your lender decides to sell your loans, they are required to notify you.

With all these changes, it is more important than ever to be financially literate and keep track of your loans—especially if you have multiple lenders. To find your federal loan information, check the U.S. Department of Education’s National Student Loan Data System. You can also learn more about this new legislation with our answers to frequently asked questions about HCERA.