On March 30, President Obama signed a new law that redefines the roles of much of the student loan industry. The law appears to be better for the government and better for those taking out student loans. Big banks are going to take a hit, however.
In the old world, students (or parents) would apply for the student loan through a major bank approved for student lending. When I needed to apply, I found the best long term deal applying through Citi Group. In exchange for processing and lending, the government subsidized the bank to keep rates fixed at 6.8% with no application or origination fees.
The savings for the US Government will be about $68 billion over the next ten years. Some of the savings will go to increase subsidized Pell Grants, for student demonstrating financial needs, and other scholarship programs.
For existing loan holders, it doesn’t look like you will see any major changes. I am expecting to keep paying my loans as usual, which means new servicers every year or so that screw up my account and take over a month to fix it.
For anyone with a new student loan starting in July, 2014, there are some great new provisions. Student loan payments will be capped at 10% of annual income above a defined living allowance, where it was 15% before. If you make regular payments at that rate for 20 years, your loans will be forgiven, rather than 25 years under the old law. The forgiveness period is still ten years for certain government employees, teachers, health care workers, and the military.
If you are reading this, it is probably to late for the new laws to effect you directly, but your kids might have a much easier time dealing with student debt than you.