You are probably well aware how the recent health care laws will affect your taxes. The laws did not just reform health insurance but student loans as well. The Health Care and Education Affordability Reconciliation Act of 2010 that was signed in conjunction with the health care bill will change the federal student loan program for years into the future.
Most significantly, federal student loans made after July 1, 2014, will come with improved repayment options for those on an income-based repayment plan. Loan payments will be reduced to a maximum of 10% of a borrower’s monthly discretionary income, down from the current maximum of 15%. Additionally, the loan forgiveness period was shortened, with any remaining loan balance forgiven after 20 years. Under the Public Service Loan Forgiveness program, teachers, nurses, or member of the armed forces can have their loans forgiven after 10 years of qualifying payments and employment.
Since July 1, 2010, all new federal education loans have been made only through the Direct Loan Program—meaning the funding comes directly from the government.
Because the federal government has a lower cost of funds than private lenders, the Congressional Budget Office estimates that by eliminating financial institutions as lenders, switching to the Direct Loan Program will save almost $68 billion over 10 years. More than half of the savings is earmarked to fund the Pell Grant program, which provides need-based grants to low-income undergraduate and some postbaccalaureate students.
The Pell Grant program will use the money to fulfill a funding shortfall created from the American Recovery and Reinvestment Act of 2009, and make the stimulus bill’s one-year increase more permanent. The maximum grant will remain at $5,550 through the 2012-2013 academic year. For the next five academic years, the maximum Pell Grant will be indexed to the Consumer Price Index inflation rate. While this change falls short of the House of Representatives’ original plan, it prevents the Pell Grants from being cut. The 2010 act also increases the expected family contribution cutoff, which should increase the number of Pell Grant recipients by about 240,000.
On June 29, 2012, Congress approved legislation to stop the interest rate increase on federal subsidized Stafford Loans. Rates on these loans will remain at 3.4% for undergraduates until July 1, 2013. The interest rate was scheduled to revert to 6.8%, as the College Cost Reduction and Access Act, which reduced the interest rates on subsidized Stafford Loans, had sunset.
Additionally, beginning July 1, 2013, undergrads with subsidized Stafford Loans will be limited to a maximum of six years “in-school status” where the federal government will pay the loan interest while the student is in school.
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