U. to alter loan system by July

To comply with student loan reform passed by Congress last week as part of the larger health care reform legislation, the University will transition from commercial-bank-based lending to federal direct lending by July 1 for student loans processed through the financial aid office.

In a 220-207 vote, the House of Representatives approved the final version of the student loan bill, which the Senate passed 56-43 on Thursday. The Senate added two technical revisions to the bill after the House initially passed it by a 220-211 vote as an amendment to the health care reform legislation.

The student loan bill will expand direct lending by the government and eliminate the current program, in which federal subsidies back private lending through commercial banks like Sallie Mae, allowing these banks to profit without assuming significant risk.

Under the old program, “some student loans have been financed directly by government funds through the Direct Student Loan Program,” Sandy Baum, a policy analyst for the College Board who has testified before Congressional committees on student financial aid, said in an e-mail. “Others have been financed by private lenders but guaranteed by the federal government. The federal government accepted almost all of the risk of the loans and regulated the terms on which the loans were offered.”

Robin Moscato, director of undergraduate financial aid, said the transition should be seamless for the University.

“We think it will be a transition that’s completely transparent to our students, partly because the loan program isn’t changing, simply the origination of the loan funds … and secondly because we have a no-loan [financial aid] program,” Moscato said. “Relatively few of our students actually request a loan.”

Students will receive loans through the new federal direct-lending program under the same terms as the existing program, Baum said.

This overhaul is expected to save taxpayers $61 billion over 10 years, according to the nonpartisan Congressional Budget Office. Most of the savings will be redirected to the Pell grant program for low-income students and other higher-education initiatives.

The legislation will direct $36 billion over 10 years to Pell grants, including automatic annual increases to adjust the award for inflation and $13.5 billion to accommodate an increasing number of students who require financial aid. The maximum Pell grant award will increase from $5,550 this year to $5,900 by 2019. Roughly 11 percent of University students receive Pell grants.

Moscato said that while these changes to lending programs would not significantly impact students at the University, the reforms would still benefit students nationally.

“None of this has a big impact on Princeton, per se,” Moscato said, but she explained that “it simply is, as far as the national financial aid scene, a positive move for students — for Pell grant recipients.”

Another change in the bill is that the Income Based Repayment program, which sets the maximum payment on federal student loans that graduates are expected to make, will become more lenient.

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Students who take out loans after July 1, 2014, will be expected to allocate 10 percent of their income to repaying federal loans, down from the current 15 percent. The legislation also decreases the number of years before loans are forgiven to 20 years, down from the current 25, if payments are made on time.

Some of the savings expected from the legislation have also been directed toward funding initiatives for community colleges and historically black and minority-serving colleges. Money will also be redirected to health care reform programs as part of the budget reconciliation process through which it passed Congress.