Financial Aid: Help Is on the Way

Changes to big financial aid programs, including federal student loans and Pell grants, will make more students eligible and terms more attractive

By Alison Damast

Students taking out federal student loans will be confronted with a bevy of changes when they visit their school's financial aid office this fall. This spring, the U.S. Senate passed a student loan bill—the Student Aid & Fiscal Responsibility Act—that led to a major revamping of the federal student loan program, shifting everything from how students obtain their loans to the amount of aid doled out through such programs as the Pell Grant.

"This bill was the largest investment in higher education since the GI bill," says Edie Irons, a spokeswoman for The Project on Student Debt, an initiative of the Institute for College Access & Success, referring to the 1944 legislation that provided educational and other benefits for returning World War II veterans. "It is definitely a historic change."

The new student aid regulations went into effect on July 1, and college financial aid officers will be spending the next few weeks getting students up to speed on the updated guidelines before the start of the school year. In addition to these changes, there are important updates to the Income-Based Repayment loan program, which caps monthly loan payments for borrowers. Some of these changes will be obvious to families, but others will require borrowers to do more research to determine if they qualify for the revamped programs. For most families, the transition should be relatively seamless, says Allesandra Lanza, a spokeswoman for American Student Assistance, a Boston-based nonprofit that helps students and families manage higher education debt.

"People might not be aware that some of these changes have occurred, but I think schools and colleges are by and large ready for this," Lanza says.

For borrowers who want to prepare themselves beforehand, here's a roundup of some of the most important new federal loan reforms for recent graduates and current students, as well as strategies on how to get the maximum benefit out of them:

Federal Student Loans

Previously, the majority of families and students who obtained federal loans did so through the Family Education Loan Program (FELP), rather than directly through the government's Direct Loan Program. Under the FELP program, the government paid commercial banks such as Sallie Mae and Nelnet fees to act as intermediaries between the government and the student borrower. The banks would originate the federal loans to students, administer them, and collect payments after graduation. As of July 1st, that program is no longer in place; now all federal student loans are available from the U.S. Education Dept. through the Direct Loan program, and students can no longer obtain such loans through commercial banks. This is an important step that will make the student loan process more transparent for students and families, says Irons. "[When] private lenders were making both federal and private loans, it could sometimes be hard for the consumer to know what type of student loan they were getting," she says. "From now on, it should be clearer."

Still, students who used to obtain federal loans through the FELP program may temporarily be confused by the transition to the Direct Loan program, says Kalman Chany, author of Paying for College Without Going Broke. In the last few weeks, he has received several "panicked" phone calls from parents who thought the federal student loan program had ended. "Don't believe those rumors," Chany says. "The only thing that has changed is that the middleman—the banks—are now removed from the federal loan program."

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