Posted on 22 July 2010.
The following article is provided by the good folks at The Real College Guide. We are pleased to have them as a Contributor for CheapScholar.org. This article provides a good foundation for the information covered by SAFRA. If you have additional questions or would like me to provide additional details on any aspect of this legislation, don’t hesitate to drop me a line.
Understanding SAFRA and What It Means To You
The college tuition system has been turned upside down now that the Student Aid and Fiscal Responsibility Act (SAFRA) is law. The Student Aid and Fisc-huh?!?
SAFRA is legislation President Obama tacked on to his infamous health care reform bill.
“The White House succeeded in not only getting the health care bill passed, but in making a huge change to the college loan system,” says Eric Yaverbaum, education expert and author of Life’s Little College Admissions Insights. “It’s gone largely unnoticed because it’s seemingly unrelated to the blockbuster changes in the health care industry.”
There’s been some controversy surrounding the issue of combining student aid reform with the seemingly unrelated matter of health care reform. But political views aside, let’s see how SAFRA affects students:
No. 1: You’ll get loans directly from the government — without a middleman.
While some schools have participated in the Federal Direct Loan Program since its inception in the early ’90s, SAFRA requires that all federal student loans now be originated through the U.S. Department of Education. This means funds come directly from the federal government, which provides the loans at a low interest rate.
“It’s so advantageous to students,” says Yaverbaum. “My daughter is about to enter her freshman year, and as a parent I couldn’t be more excited about it. College students are really going to benefit. Paying back college loans kills kids forever. Now it doesn’t have to be such an awful experience.”
Your credit score and employment status are not factored into your application for a direct loan … unless you have extreme adverse credit (say, your car got repossessed or you’re more than 90 days past due on that Urban Outfitters account). If you get denied, you can appeal or get a qualified co-signer.
No matter where you are in the borrowing process, visit StudentLoans.gov to find out if you qualify for one of the four types of Federal Direct Loans:
1. Federal Direct Subsidized Stafford Loans are based on financial need. The government pays the loan interest until you’re out of school.
2. Federal Direct Unsubsidized Stafford Loans are not need-based, and students are required to pay all interest charges.
3. Federal Direct Parent PLUS Loans (“PLUS” stands for “Parent Loans for Undergraduate Students”) allow parents to borrow money to help pay for their child’s education.
4. Federal Direct Graduate PLUS Loans offer the same terms as Parent PLUS for graduate and professional-degree students.
No. 2: You can consolidate loans you already have.
Federally guaranteed student loans will no longer be made by private lending institutions through what many of you already know as the Federal Family Education Loan (FFEL) Program.
What to do if you have an existing FFEL loan? For a one-year stretch — from July 1, 2010 to July 1, 2011 — current students who have FFEL loans can roll those into the Direct Loan program. The benefit is that you’ll only have to deal with a single lender (the Direct Loan Servicing Center) which means paying one monthly payment for all loans. Plus, your minimum monthly payment on a consolidated loan may be lower than the combined payments for FFEL loans.
No. 3: You’ll pay back less per month (and overall) and be done in fewer years.
Carrie Meyer, a rising senior at Ohio State University, has had to rely on three loans to cover her college tuition over the years: federal subsidized, federal unsubsidized and a personal loan. Meyer, a hospitality management student who currently works part time, still worries about paying off her loans after graduation: “With what I want to do, you don’t start out getting a big salary.”
Direct Loan borrowers can choose from several friendly payment plans, depending on needs — and you can switch to a different repayment plan if your situation changes. Beginning in 2014, the Income Based Repayment option will cap monthly loan payments at 10 percent of income and forgive remaining balances after 20 years of repayment. Sound like a lot? Actually, this is a major improvement from the current terms of capping repayments at 15 percent and 25 years, respectively.
No. 4: You could save big-time on loan payments if you go into public service.
Public Service Loan Forgiveness provides incentive for students to enter into full-time public service employment. The program forgives the remaining balance of a Direct Loan after a borrower has completed 120 monthly payments (that’s 10 years) while employed full time in public service. This includes government jobs, military service, safety professions, law enforcement, health care, social work, legal advocacy and some teaching positions.
No. 5: Maximum Pell Grant amounts will increase with inflation.
While SAFRA does not change the process for applying for federal grants, it does increase the amount of money awarded through the ever-popular Pell Grant program, which provides financial aid to low-income undergraduate students. For the 2009 to 2010 school year, the maximum Pell Grant was $5,350. The max will be upped to $5,550 for 2010 to 2011 and will gradually increase based on inflation costs beginning in 2013.
Students interested in applying for aid should complete a Free Application for Federal Student Aid at Fafsa.ed.gov or call 1-800-4-FED-AID. Keep in mind that this is not a one-time thing — students who want to be considered need to apply for aid for every school year, so it’s important to stay on top of application procedures.
A recent report released by the College Board found that millions in financial aid are left untouched by community college students. In the 2007 to 2008 academic year, 58 percent of Pell Grant-eligible students who attended community colleges applied for federal financial aid, compared with 77 percent of eligible students at four-year public institutions.
No. 6: Community colleges and minority schools will get big bucks for improvements.
Says College Board President Gaston Caperton: “Community colleges are a critical part of the education system, serving nearly half of all undergraduates in the United States.” The terms of SAFRA reflect this sentiment, as $2 billion is being committed to improving educational programs and updating facilities at community colleges. In addition, SAFRA has earmarked $2.55 billion to be invested in historically black and minority institutions.
Talk It up!
What do you think about SAFRA and its impact on the college student aid system?