Health Care Bill Passage Includes Change in How Student Loans are Provided Skip to main content

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Health Care Bill Passage Includes Change in How Student Loans are Provided


There was very important bill passed this week in Washington.

No, not that one.

Attached to the monumental health care bill was a significant alteration to the way student loans are handled by the government.

We have covered this topic several times here on the blog (use the search tool), which is critical to those considering bankruptcy because as of now, outside of very special and rarely granted conditions, student loans are not allowed to be discharged.

Arguments have mounted recently about the role private banks have in backing federal student loans. The primary issue is that the government guarantees close to 90 percent return for the private lender who funds the loan. Currently, this is the most popular way Americans pay for college. During the current 2009-10 school year, banks loaned $67 billion that is federally-backed.

The new legislation will turn the tables on private lenders, primarily Sallie Mae, and allow the U.S. government to loan directly to students.

Starting this summer, the bill outlines $500 billion in straight-to-student loans within the first 10 years, drastically increasing the current rate of direct loans. The most common federally-backed loans are Stafford Loans.

Naturally, backers of the private companies' continued role in the student loan business are citing the move as the proverbial decapitation of their business.

An analyst with a spending research firm in Washington, Teddy Downey of Concept Capital Washington Research, made it clear to the government what the new rules would do to private lenders. "This is bad for Sallie Mae, as it will now be out of the origination business ... there is zero chance for student lenders to stay in that business."

The current law allows private lenders to collect billions on the interest collected from the difference between the rate at which the government provides them the capital and the rate at which they lend it. Additionally, the entire process has gone largely unregulated, allowing private lenders to also issue their own loans.

The proposal is estimated to preserve close to $61 billion in the federal budget over the next decade. A large portion of that figure will flow into Pell Grants, the ubiquitous student loan that has sent millions of Americans to post-secondary education. Because of the recession, college classrooms nationwide need more desks than ever before, seriously impacting the fiscal stability of the Pell program.

The Pell Grant is directly targeted at lower-income and middle-class students and thus, they will benefit tremendously from the new measure. This is especially good news for those who have recently come out of bankruptcy, as it helps provide yet another avenue toward personal re-invention through education, job training and career development.

Proponents of the law are citing stats that show a major cut in loan funding if it is not passed. Supporters are saying that eight million students would feel the impact of a 60 percent decrease in Pell funding and that by 2011, 600,000 students would lose their Pell Grant, forcing them to quickly find another source for college money.

The Obama Administration has set goals for college graduation in America and it appears this is firmly placed rung on the ladder toward that accomplishment. Some financial aid experts are not sure it will help the country get much higher though.

"This bill is not as good as it originally was," said Mark Kantrowitz, who publishes "It is difficult to see how President Obama will be able to meet his college graduation goals."

However, isn't just a few more still a good thing?

If you are in North Carolina and struggling to stay on top of your student loans, contact the Law Offices of John T. Orcutt. Student Loans are non-dischargeable in bankruptcy, but a Chapter 13 will put your loans in deferral status, allowing you to discharge your other unsecured debt and giving much-deserved breathing room while you position yourself to make your next career move. Offices in Raleigh, Fayetteville, Durham and Wilson. Call today. +1-919-646-2654.

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