The New Financial Aid Formula

By Claudine Vainrub, MBA and Principal of EduPlan

With the passing of the healthcare bill, the topic of education has taken a second place in the minds of the Americans. However, there are interesting news regarding financial aid as this bill was merged with the health reform legislation. Although a more conservative version of the original plan expected to pass in September, the Government is again supporting an initiative to increase Financial Aid support for college-bound students, as well as allocate new funds for other educational areas, including historically black colleges, Hispanic and tribal colleges.

As Inside Higher Ed explains, here are the differences between what was proposed in September and the new bill:

In total, it is expected that subsidies and eliminating the middleman will generate around $61 billion in savings over 10 years. Pell grants would be assigned $36 billion, raising the annual Pell grant amount to $5,975 (and a maximum of $6,400) from $5,550, and it would be linked to the consumer price index.

This is somewhat discouraging, since the original Pell grant target was $6,900, closer to the real needs of students eligible for this grant. Community colleges would get $2 billion, down from $10 billion in the original bill. $2.6 billion is allocated to historically black colleges, Hispanic and tribal colleges , which need it to ensure their survival throughout this recession. The new bill also includes a $1.5 billion initiative that would cap a borrower’s monthly loan payments at 10 percent of income, down from 15 percent.

Until now, student loans have been mostly handled through private banks and other financial institutions. As part of this process, while the Federal Government sponsors these loans, private banks offering and managing loan programs benefit from earning a percentage. This percentage is one that will soon cease to exist for the Pell grant program, as a new bill is passed in Government. The plan is for the Fed to bypass banks and private lenders to provide these loans directly to students – no middleman involved. As Inside Higher Ed explains, “The legislation (H.R. 4872) would shift all lending from the bank-based Federal Family Education Loan Program to the Direct Loan Program and use $61 billion in savings over 10 years to shore up the Pell Grant Program and for a handful of other education priorities.”

How does the new bill directly affect us?

In simple terms, the over 8 million students depending on the Pell grant program to subsidize their education will continue to be able to do so receiving most likely maximum amounts, as opposed to lesser or no grant funds, as money becomes more available for education. Cutting the middlemen in this program will support the government in being able to allocate more funds by saving money in their program that will directly end in the hands of low and middle-income students. This investment will provide relief to students that otherwise would have to abandon their college work for lack of aid. In this way, the government is taking one step ahead in their goal of graduating more college students and helping raise the level of education in the U.S. population.