Time will tell political effects of loan bill

For college students intimidated by applying for loans, the federal government has taken steps to try to simplify the process.

On Tuesday, President Barack Obama signed into law the new budget reconciliation bill, a bundling of revisions to health care legislation and an overhaul of the federal student loan program.

The Student Aid and Fiscal Responsibility Act will save taxpayers more than $60 billion because the federal government will now lend directly to students, instead of subsidizing bank loans. The switch to Direct Lending will occur on July 1, 2010.

For some members of Congress, the bill’s benefits weren’t as clear. Republicans argued that eliminating private student loans would increase costs and interest rates to students, Bill Andresen, head of Penn’s office in Washington, D.C., wrote in an e-mail.

It is possible, however, that if the bill causes any unexpected job losses in the private sector, there could be some “political fallout” for lawmakers from districts with large numbers of student loan industry workers, he said.

“We’ll have to wait and see about that, however,” Andresen said.

The elimination of the “middleman” is the most significant implication of SAFRA for students, according to a statement from Student Financial Services. Upfront fees will be lower, and federal loans for both undergraduates and graduates under the Direct Loan program will feature a 7.9 percent interest rate.

Under the old Federal Family Education Loan program, the interest rate was 8.5 percent, according to the statement.

The bill also includes appropriations to cover any shortage in funding for Pell Grants, need-based awards given to low-income students from the federal government. Although the maximum Pell Grant for 2010-2011 has been set at $5,550, starting in 2013 the dollar amount of Pell Grants will increase with inflation.

The student loan overhaul “gives kids broader choices,” Cambridge, Mass.-based college admissions consultant Elizabeth Zucker said.

“It’s the transparency and the predictability that makes it easier to plan,” she said, explaining that the Direct Loan process is more straightforward.

Some schools such as Tufts University, Zucker said, have “frankly” expressed preference for students able to pay full tuition — so families who were afraid to apply to schools because of uncertain financial aid may now “be more open-minded.”

SAFRA also provides for income-based repayment beginning on July 1, 2014. Under the new program, a borrower’s monthly payments will be calculated based on his income with a minimum payment of 10 percent of discretionary income.

The current program maintains a minimum repayment of 15 percent of income.

SAFRA will not affect Penn’s no-loan policy. Penn will continue need-blind admission for U.S. citizens, meeting full demonstrated need and mid-year changes in financial aid due to family circumstances, according to SFS. Penn will coordinate Direct Loans for students who decide they need more funding in addition to their aid packages from the University.

The only impact for students at colleges without a no-loan policy — such as Dartmouth College, which removed its no-loan policy last month — is that students will not need to search for lenders other than the government, according to a statement from Dartmouth Director of Financial Aid Virginia Hazen.

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