Cutting out the middleman: How it works

Amid the talk about health care, you probably missed the sweeping student loan reform tucked inside the same bill.

On Sunday the House passed measures that would overhaul the business dramatically, forever changing the way students pay for college and replacing laws that have been on the books for decades. The bill would eliminate banks that act as middlemen between the government and students and allow the federal government to lend directly to students.

The savings reach into the billions — the only reason it was passed with health care reform. Here’s how it breaks down:

HOW IT WORKS NOW
Currently the government sets the funding levels of Pell Grants — one main way the federal government supports students — and banks give out low-interest loans. The government covers the loan defaults and pays banks to keep rates low for students.

HOW IT COULD WORK
Instead of going to a bank, you could borrow through IU or other universities’ financial aid offices. The government would no longer have to pay banks but would still be responsible for loan defaults.

WHERE ARE THE SAVINGS?
The Congressional Budget Office estimates savings of $61B by cutting out the middlemen. Of that, $36B will be reinvested into Pell Grants, $13B of which will cover a funding shortfall. Additional money will go for things such as community colleges. Finally, $19B of the savings will help fund health care overhaul.

WHY INCLUDE IT IN THE HEALTH CARE BILL?
Obama and Democrats tried to pass the bill last year and it failed at a Senate filibuster. But when they needed funding for the health care bill, they saw an opportunity. Complicated Congressional law allows the approved student loan reform provisions to go to the Senate without being filibustered.

WHAT’S NEXT?
It’s in the Senate’s hands. Only a simple 51-vote majority is needed and most believe that will not be hard to get. Then President Obama must sign it into law.

WHAT DOES IT ALL MEAN?
Here’s the short list of what you can expect if the Senate passes the bill.
•    There’d be more of a burden on colleges’ financial aid offices.
•    Thousands of jobs in the lending and banking industry will be lost.
•    Students will borrow directly from the federal government via their university.
•    Interest rates will be 7.9 percent — the current federal level.
•    Loan repayments will be based on 10 percent — rather than the current 15 percent — of one’s discretionary annual income.
•    Loan forgiveness will go from 25 years to 20 years.
•    More students and parents will qualify for direct government loans.