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New Law Changes Student Loan Landscape

March 30, 2010 at 12:00 AM EDT
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President Obama enacted a sweeping remake of the student lending market by signing the final piece of the health care overhaul into law. Jeffrey Brown talks to a higher education reporter about how the new law will impact college students and their universities.
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JIM LEHRER: The president checked off two major items on his domestic agenda today. In a single signing, he finished work on the health care overhaul and a sweeping remake of student lending.

“NewsHour” correspondent Kwame Holman begins our coverage.

KWAME HOLMAN: Today’s ceremony came with less fanfare than last week, when Mr. Obama signed the main health care overhaul bill.

U.S. PRESIDENT BARACK OBAMA: Today, we mark an important milestone. But, more broadly, this day affirms our ability to overcome the challenges of our politics and meet the challenges of our time.

KWAME HOLMAN: The new measure includes a number of fixes to the health care law. Among them, it expands insurance subsidies for low- and middle-income families, and adds more Medicaid funding for all of the states.

But the president also said on NBC’s “Today Show” that more changes will be needed down the road.

BARACK OBAMA: I think it is a critical first step in making a health care system that works for all Americans. It’s not going to be the only thing. We’re still going to have adjustments that have to be made to further reduce costs.

KWAME HOLMAN: The secretary of health and human services, Kathleen Sebelius, already is making an adjustment to resolve one dispute. She’s issuing regulations to make sure children with preexisting medical problems are not denied coverage. The insurance industry agreed last night not to fight the move.

In the meantime, the administration will be touting the other new law included in the bill-signing.

The setting for today’s event was Northern Virginia Community College just outside Washington. The president chose it to highlight the largest rewrite of student lending in four decades. It’s attached to the health care fixes bill, and it makes the government, not banks, the primary lender for college students.

The vice president’s wife, Jill Biden, teaches at the college.

JILL BIDEN, wife of Vice President Joe Biden: All of us here today know that higher education is essential to the success of our children and vital to the economic future of our country.

KWAME HOLMAN: Mr. Obama said cutting out banks as the middlemen will save $68 billion in fees over 10 years. Some of the savings will go to help community colleges and historically black institutions. The rest will fund additional Pell Grants for needy students.

BARACK OBAMA: Those are billions of dollars that could have been spent helping more of our students attend and complete college, that could have been spent advancing the dreams of our children, that could have been spent easing the burden of tuition on middle-class families. Instead, that money was spent padding student lenders’ profits.

KWAME HOLMAN: The government will assume formal control of the student lending program in July.

JUDY WOODRUFF: Jeffrey Brown takes a closer look at the new law on student loans.

JEFFREY BROWN: And, for that, I’m joined by Jeff Selingo, editor of “The Chronicle of Higher Education.”

Welcome to you.

JEFFREY SELINGO, “The Chronicle of Higher Education”: It’s good to be here.

JEFFREY BROWN: So, the major shift is who makes the loan?

JEFFREY SELINGO: Yes.

So, now it’s going to be basically the federal government. The banks who used to give these loans out through subsidies given by the federal government will be out of the system now.

JEFFREY BROWN: And what’s the process? If you’re an individual student or a family applying to college, how’s it work?

JEFFREY SELINGO: The process is really not going to change, even though the federal government is now the direct lender.

Students would fill out the federal application for student aid. The schools will give them financial aid packages that include federal loans. In the past, they used to get a list of lenders. Now that lender is going to be the federal government.

JEFFREY BROWN: The big change here and a lot more money coming into the Pell Grant program. Now, explain what that is…

JEFFREY SELINGO: Yes.

JEFFREY BROWN: … who it serves.

JEFFREY SELINGO: The Pell Grant program is the federal government’s main student aid program for low-income students. Students with family incomes up to about $50,000 are eligible for some sort of — some sort of Pell Grant.

And the big winner here is the Pell Grant program. So, most of the savings from this bill will go to increase the Pell Grant over the next 10 years about — to about $6,900 by the end of the decade from about $5,550 right now.

JEFFREY BROWN: So, the — so, individual Pell Grants can — will go up over time…

JEFFREY SELINGO: Yes.

JEFFREY BROWN: … but not all that much.

JEFFREY SELINGO: no, not at all that much. In fact, President Obama really wanted it to go up by about another $1,000. When he first proposed this plan a year ago, the savings from this switch in direct lending was supposed to be a lot more.

Over the course of the year, the Congressional Budget Office kept coming out with estimates, and those estimates kept going down. And, as a result, the Pell Grant increase is not as generous as it was going to be.

JEFFREY BROWN: So, for the majority of students, will they see any immediate changes, either in process or — or content?

JEFFREY SELINGO: They’re not supposed to. You know, the federal government is supposed to deliver student loans just like the banks did.

JEFFREY BROWN: That’s what they say they’re going to do.

JEFFREY SELINGO: That’s what they say they’re going to do.

JEFFREY BROWN: So, that’s the issue.

JEFFREY SELINGO: Yes. You know, the banks really fought this proposal. You know, they still wanted to be in the business. And they still wanted to get these government subsidies. And their claim was that the government can’t deliver the service as well as they could.

Only time will tell.

JEFFREY BROWN: And what about in any impact on the interest rate?

JEFFREY SELINGO: Again, the banks said, because of the subsidies, they were able to have a lot more flexibility in the services that they offered to students. Under this plan, there is going to be no competition. And Congress sets the — sets the interest rate.

JEFFREY BROWN: One area that does see change is for people having to pay back their loans.

JEFFREY SELINGO: Yes.

JEFFREY BROWN: So, there are some provisions there to help them.

JEFFREY SELINGO: Yes.

Basically, for students who are not in very high-paying jobs, right now, they’re basically — they — they’re limited to about 15 percent of their discretionary income goes to their monthly payments. That’s now going to decrease to about 10 percent. And the loans would be forgiven after 20 years, instead of the current 25.

So, it’s going to be a much more generous offering to students in low-income jobs.

JEFFREY BROWN: So, the idea to help people once they’re done with school pay back their loans?

JEFFREY SELINGO: Yes. Yes.

JEFFREY BROWN: The — the big overarching question, I guess, for a lot of people, there’s still this continuing rise in tuition, right, for private and public colleges.

JEFFREY SELINGO: Yes.

JEFFREY BROWN: Does this make a dent? In what ways might this make a dent, if any?

JEFFREY SELINGO: Well, in some ways, the increase in the Pell Grant will help poorer students pay for college.

But one of the concerns by people against this bill was that colleges would just be encouraged to increase their tuition by even higher amounts, knowing the federal government was there with more money.

JEFFREY BROWN: So…

JEFFREY SELINGO: So, it could be just continued increases in college costs.

JEFFREY BROWN: All right.

Jeff Selingo, “Chronicle of Higher Education,” thank you very much.

JEFFREY SELINGO: It was good to be here. Thanks.