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Experts: Revamping of student loans mixed blessing

Buried in the health care reform signed by President Barack Obama this week and tweaked Thursday by the Senate was less-publicized legislation that will make billions of dollars in lower-interest loans available to college students while removing banks and private lending agencies from the business of making student loans.

The effect for Long Island parents and students will be mixed, experts say.

Parents with credit problems will benefit from the federal government's willingness to lend to borrowers who sometimes pay late. And initial interest rates charged to parents will drop from 8.5 percent to 7.9 percent. On the other hand, private lenders occasionally lowered interest rates for those who made on-time payments three years in a row; the government doesn't offer such rewards for good customers.

"We're thrilled that students and parents will have better deals because the middlemen are being cut out," said Jessica Eads, who oversees Hofstra University's admissions office.

Private lenders will compete for contracts to service the government loans, Bloomberg News reported.

Financial planners, college aid directors and high school guidance counselors have been poring over Web sites to understand the financial aid changes, a major Obama initiative added to the health care package.

Most experts agree that one result will be an increase for Pell Grants, the aid offered to the neediest students. That is especially important to campuses with large populations of students whose families have low incomes.

Among the country's 62 top research universities, for example, Stony Brook University has the second-highest percentage of Pell Grant recipients. Only Carnegie Mellon in Pittsburgh has more.

The legislation increases the maximum amount of money in an annual Pell Grant by $200, to $5,550 in September. And for the first time, the cap will rise intermittently, tied to the rate of inflation, instead of remaining flat.

"For quite a few students, that $200 pays for books, lab fees and things they need for their classes," said Matthew Whelan, Stony Brook's assistant provost for admissions and financial aid. The extra $200 next year "will definitely help out" the 7,000 students at Suffolk County Community College who are eligible for Pell Grants, said spokeswoman Mary Lou Araneo.

The news is more complicated for parents who rely on PLUS loans. Private lenders have rejected many of those with credit problems, and penalized those who paid late. But the government is more willing to work with those who have poor credit ratings, and it makes allowances for borrowers who fall behind on payments when they lose jobs or have severe health problems.

"The direct loan is a better way to go - it cuts down on confusion and paperwork," said Barry Fox, a college financial planner in Merrick.

The government loans will charge parents a fixed rate of 7.9 percent - and that's a break from what private lenders have been charging. But private lenders sometimes rewarded 36 consecutive months of on-time payments by lowering interest from 8.5 percent to just over 7 percent, Fox said, and the government doesn't make such deals for borrowers.

Not everyone endorses giving families easy access to loans. Louis Balsamo, director of guidance in the Bay Shore district, fears that middle-class parents will be tempted to take on too much debt. "Haven't we seen this happen before," Balsamo said, "with the mortgage crisis?"


 

Key new features for student loans and grants

 


Legislation included in the health care reform package will change student loans for college in several ways:

PLUS loans for parents and Stafford loans for students will now be offered by the government at 7.9 percent interest, instead of by private lenders, who charged 8.5 percent.

Fewer families will be denied loans. The government typically denies 21 percent of PLUS loans, compared with 42 percent by private lenders, who examine credit history more closely.

The maximum amount of Pell Grants for the neediest students will increase by $200 a year, to $5,550 this fall.

The government also will set aside $500 million more a year for job training programs at community colleges. Both Suffolk County Community College and Nassau Community College plan to apply for money.

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