Future Pell Grant recipients will receive loans from federal government, not banks

The effects of a federal student loan program overhaul passed with the health care reform bill Sunday will be felt by future, and not current, Federal Pell Grant recipients, a financial aid official said.

Melet Leafgreen, assistant director of loan programs for the university, said the student loan bill would not affect students who receive a Pell Grant immediately, but it could affect students in the future if the program works as planned.

Currently about 11 percent of university students receive Pell Grants, Leafgreen said.

Mike Scott, director of scholarships and student financial aid, said that in the past the government paid banks to provide federal loans to students, but the program overhaul passed with the health care bill would eliminate banks and the federal government would provide loans directly to students.

“From a student perspective, the loans will be basically exactly the same as they were before,” Scott said.

Leafgreen said future Pell Grants would come from the U.S. Treasury.

The new program could create changes for students by increasing the amount of money students receive from Pell Grants. More students could also be eligible to receive Pell Grants if the formula that determines who is able to receive a Pell Grant changes and allows more people to qualify, Leafgreen said.

President Barack Obama said money that is saved by cutting out the banks would be put back in the Federal Pell Grant Program, Leafgreen said.

Leafgreen said that if this money is given to the Federal Pell Grant Program, the amount of money students receive could increase. She said the highest amount of Pell Grant money a student can receive increases every year by about $200, but the increase could be more than average in the future.

If there aren’t enough savings by cutting out banks, then the government will probably not increase the amount of money future students could receive or the number of students who could receive aid, Leafgreen said.

“We want to be careful about sort of counting on these increases,” Leafgreen said. “We’ve never done this before, where the whole country is on this type of loan program, so we’re not sure exactly how much it’s going to cost.”

The bill rewrites a four-decades-old student loan program, eliminating its reliance on private lenders and uses the savings to direct $36 billion in new spending to Pell Grants for students in financial need.

In the biggest piece of education legislation since No Child Left Behind nine years ago, the bill would also provide more than $4 billion to historically black colleges and community colleges.

The Senate will take up the bill next week under the same expedited rules used for health care legislation. That means the Senate can pass the education measure by a simple majority, virtually guaranteeing its success despite qualms from some Democrats and opposition from Republicans.

House lawmakers passed the bill last year, but in the Senate it did not have 60 votes to overcome a near certain filibuster. By riding shotgun on the fast-track health care bill, the legislation now can avoid that obstacle.

Still, Obama won’t get the Pell Grant expansion he initially sought. Congressional Democrats had to trim their original spending plans when the 10-year savings realized by switching to direct government loans dropped from $87 billion to $61 billion.

Private lenders have conducted an all-out lobbying effort against the bill, arguing it would cost thousands of jobs and unnecessarily put the program in the hands of the government.

Under the college lending program, financial institutions provide college loans at low interest rates, the government guarantees the loans in the event of default and subsidizes private lenders when necessary to keep rates low.

Besides increasing Pell Grants, the bill provides $1.5 billion to make it easier for student borrowers to repay their loans. Beginning in 2014, borrowers would be allowed to devote no more than 10 percent of their monthly income to repay student loans. The current cap is 15 percent.

Instead, the bill proposes no increases in Pell Grants over the next two years and a modest increase over the five years that follow. The maximum Pell Grant, which a House-passed bill last year would have raised to $6,900 over 10 years, will now only increase to $5,900. The current maximum grant for the coming school year is $5,500.

Staff reporter Sarah Fleischer and The Associated Press contributed to this report.