President Obama’s signing of the Health Care and Education Reconciliation Act signals a major shift in the student loan process, with the federal government replacing banks as the primary lender to students. Instead of using a private bank, students will now take out their loans through their college’s financial aid office. The news is good for students, who will likely find it easier to repay their loans because caps will be set on annual payments based on income. Those who take out new loans after July 1, 2014 will have to commit 10% of their income payments, down from 15%, and those who keep up their payments will have their loans forgiven after 20 years, reduced from the current 25. The Pell grant program will receive $36 billion over ten years for students from low-income families, bringing the maximum grant to $5,900 in 2019-20, up from the current $5,550. If the bill had not passed, Pell grants would have been cut to $2,120 and some $500,000 students would have been dropped from the program.
The news is not as positive for community colleges, which had been slated to receive $10 billion under the proposed “American Graduation Initiative” announced last summer by President Obama. Instead, community colleges will get $2 billion for bolstering existing job training programs. The American Graduation Initiative had been designed to boost community college funding and produce five million more graduates by 2020, a goal unlikely to be met given reduced federal funding.