On September 27, 2007, President Bush signed into law the College Cost Reduction and Access Act (H.R. 2669). The legislation makes immediate changes to the federal student loan program, phases in an interest rate cut for certain borrowers and significantly increases the funding available for the Pell Grant program. H.R. 2669, approved as part of the congressional budget reconciliation process, permanently cuts the Federal Family Education Loan Program (FFELP) by $22.3 billion, applies $752 million to reduce the federal budget deficit and spends the remaining $20.2 billion to change loan options and expand grant aid over the next five years.

Several of the new provisions have different effective dates, while some changes go into effect immediately as of October 1, 2007.

Interest Rate Changes: Beginning in AY08/09, students who take out a new subsidized Stafford loan will receive a fixed interest rate of 6.0 percent. Each subsequent year the interest rate on new subsidized Stafford loans will drop to 5.6 percent, 4.5 percent, and then 3.4 percent before returning to the current rate of 6.8 percent in AY12/13. That means that new students, as well as those students currently in school, will have a mix of fixed interest rates on their subsidized Stafford loans at graduation. It is important to note that the phased-in interest rate reduction applies only to subsidized Stafford loans. Students who take out unsubsidized Stafford loans will still receive the current fixed rate of 6.8 percent. Upon graduation, if a student decides to consolidate their loans, the interest rate will be the weighted average of the underlying loans rounded up to the nearest 1/8th of a percent, which is not a change from the current structure.

Pell Grants: For AY08/09 through AY09/10 the maximum Pell Grant award will be increased by $490 to $4,800. In AY10/11 and AY11/12 the maximum award will rise to $5,000 before reaching $5,400 for AY12/13. While the bill pays for these increases over the next 5 years, maintaining the higher Pell Grant funding levels will require Congress to pass additional legislation to pay for extending the new increased levels. Also, the tuition sensitivity requirement for Pell Grants has been eliminated by this legislation.

Auctions of Parent PLUS loans: H.R. 2669 requires the U.S. Department of Education to auction off the rights to make all Parent PLUS loans in every state. Beginning in AY 09/10 and for every subsequent year, every parent PLUS loan at all FFELP schools in the country must be provided by only those lenders that had won the rights to make those loans through a yet-to-be established auction process. Two winning lenders in each state will ultimately be allowed to make parent PLUS loans to all new cohorts of borrowers applying for loans for the first time during the two-year period following the auction. At the end of the two-year period, the auction process would be repeated in each state, requiring schools to brace for changes every two years. Borrowers who consolidate their loan could choose among any eligible lenders; however, the lender that provided the original loan would have the option of matching any terms offered by other lenders. PLUS loans made to graduate students will not be made through this new auction-based system.

Loan Repayment: Beginning in AY/09, student borrowers with lower incomes will be eligible for a new Income-Based Repayment program. For those students that qualify, monthly payments will not exceed 15 percent of the income they receive above 150 percent of the poverty line. In addition, the government will pay on behalf of the borrower the accrued interest for up to three years. This means that for that period of time, even if a borrower is not covering interest, they will not add to the principal balance of the loan.

Student Loan Reductions: Beginning immediately on October 1, 2007, the legislation reduces special allowance payments to lenders, increases the amount of risk a lender must absorb on defaulted loans and doubles the fees charged by the Department of Education to lenders on all loans. These increased costs will mean program economics will no longer be sustainable for some lenders, forcing them to exit the program. Others will be forced to reduce or eliminate borrower benefits and services. Over the next few weeks, individual lenders are expected to announce new benefits and pricing for the upcoming Academic Year.

There are several other provisions in the new law including modifications to current deferments, extension of deferment for those servicing in the military, and targeted loan forgiveness for public sector employees after 10 years of service. As with all major changes to the Higher Education Act, soon the U.S. Department of Education will issue guidance and regulations clarifying some of the new provisions.

As these legislative changes are implemented over time, financial aid offices will be affected in several significant ways. For example, financial aid offices will need to alter award packages reflecting Pell Grant changes, closely examine the loan options of the lenders that remain committed to the student loan program and adjust to those lenders that significantly alter borrower benefits or exit the program. Financial aid offices will also need to begin preparing to only use two lenders for parent PLUS loans as directed by the Department, implement strategies to counsel graduating students on the new repayment options including income-based repayment, the consolidation of mixed-rate loans, and the new deferments modifications in the near future.

With the legislative process now complete, the real work falls to the financial aid community, as always, to ensure that families and students understand the real impact of these changes and help them make wise choices about financing a college education.