Federal Financial Aid Changes 2009 - 2010

Editors note: This article covers changes for the 2009-2010 academic year. Please see Federal Financial Aid Changes 2010-2011 for more recent updates.
After years of watching how increasing tuition rates have been putting college out of reach for more and more students, President Obama and lawmakers have determined that the status-quo cannot continue. Obama has set a goal that by 2020, America will have the highest proportion of college graduates in the world. To meet this goal, the federal government has made changes to the financial aid application process and to existing federal financial aid programs. These changes are focused on making it easier for low and middle-income students to get federal financial aid to help pay for college. Each recent change is discussed below.
Federal Student Loan Origination
As of July 2010, federal student loan programs will no longer be originated by private banks. Up until that time, schools could chose whether to have federal loans administered through the federal government directly, or through private banks. Students who already have federal loans originated by private banks will be able to consolidate these loans with direct loans to simplify the repayment process. The loans will be serviced by a small number of banks selected by the federal government. This change affects Stafford loans and PLUS loans.
Income Based Repayment Plan
Starting July 1, 2009, a new Income Based Repayment plan for federal loans was rolled out. This new repayment option caps monthly payments at 15 percent of gross income for the highest earners that qualify and a lower percentage as a person’s income is lower on the scale. Family size is also taken into consideration. The Department of Education provides a calculator for borrowers to determine if they are eligible and what their monthly repayment amount may be. This plan is available to student federal loan borrowers that are not in default but is not available to parent borrowers. After the borrower has been repaying the loan for 25 years, if certain other requirements are met, the remaining loan will be forgiven. Those who work in public service may have their loans forgiven after ten years. Federal loans originated by a private bank will need to be moved to the Federal Direct Loan Program (FDLP) to be eligible for Income Based Repayment.
In the future, federal loan repayment terms will be further improved so that the amount any graduate has to repay is capped at 10 percent of disposable income. After 20 years, any remaining loan amount will be forgiven. These new repayment terms will only apply to loans signed after July 1, 2014.
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Free Application for Federal Student Aid (FAFSA) Changes
The Free Application for Federal Student Aid, also known as the FAFSA, is a cumbersome application that takes several hours to complete. It is believed that the difficulty of the application process prevents many students from applying for aid and deters many from attending college since they don’t know if they will qualify for aid. There are proposals for significant changes in the future, but in the meantime, some improvements have been rolled out that make steps in the right direction.
Beginning in January 2010, questions that don’t apply to certain groups of students are automatically skipped. For instance, low-income students no longer have to answer irrelevant asset questions and people who have lived in the same place for five years won't have to answer residency questions. Married students at least 24 years old have 11 fewer questions to answer and an additional 22 questions have been eliminated for everyone. In a pilot project, financial aid applicants for the 2010-2011 school year are able to view and retrieve tax information from the IRS directly into the FAFSA. This is an optional feature that most applicants will have the ability to use and will save them time and improve accuracy.
Some other recent improvements include instant estimates about Pell grant and loan eligibility and links to information about graduation rates and tuition rates for colleges the student listed on the application.
Decrease in Interest Rates
Interest rates for subsidized Stafford loans have decreased from 6 percent to 5.6 percent for loans disbursed on or after July 1, 2009. They will decrease to 4.5 percent on July 1, 2010 and 3.4 percent on July 1, 2011. Rates for unsubsidized Stafford loans remain at a fixed 6.8 percent.
Expanded GI Bill
Veterans attending college in the fall of 2009 and beyond will benefit from the Post 9/11 GI Bill. This new bill provides for payment of full in-state public college tuition and expenses for anyone who has served for three years on active duty in the military since September 11, 2001. Those who have served for three months or more will qualify for partial benefits. The money can be applied to a private or out-of-state college as well. There is also a provision that allows service members to transfer the benefits to a spouse or dependent if they have served at least six years and commit to serve for four more years. The Department of Veterans Affairs has a website which details all the specifics of the program.
Increased Pell Grant Funding
Recently passed education bills have allocated $30.8 billion to increase Pell grant awards and increase tuition tax credits. The maximum Pell grants award has been increased to $5550 for the 2010-2011 school year. Additionally, from 2013 until 2017, Pell grant increases will be tied to the Consumer Price Index rather than being subject to the yearly budget appropriation process. Students may now also get additional Pell Grant funding if they attend school during the summer in addition to the full academic year.
Hope Scholarship Tax Credit
The Hope Scholarship Tax Credit has been increased to as much as $2500 per student per year for 2009 and 2010 tax returns. It also expands eligibility by allowing the tax credit for students in their third and fourth years of school rather than just the first two.
Other Topics under Discussion
The method used to calculate how much a student's Expected Family Contribution (EFC) currently includes both income and asset information. There have been discussions and analysis done of the impact of changing the calculation to only use only income information. This would simplify the FAFSA application, reducing the number of needy families that don't apply because of the level of complication, resulting in more aid going to families who really need it.