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Student loans get an Obama overhaul

Law makes government the primary lender.

WASHINGTON - Bigger grants for low-income college students. Relaxed repayment terms on student loans. More money for community colleges and historically black institutions.

The law that President Obama signed yesterday - cutting banks out of the government-backed student loan business - will mean big changes for hard-pressed students and colleges.

The new law, part of a package that also includes fixes to the health-care overhaul, makes government the primary issuer of student loans.

It eliminates fees paid to private banks to act as intermediaries in providing student loans and will use much of the projected $68 billion in savings over 11 years to expand Pell Grants for low-income students and make it easier for students to repay loans after graduating.

The size of Pell Grants will increase along with inflation, and by 2017 should raise the maximum grant to $5,975 from $5,550, according to the White House.

The law will also provide 820,000 more grants by 2020.

Students who have low incomes or meet certain other eligibility requirements and who borrow money after July 1, 2014, will be allowed to cap their repayments at 10 percent of their income above basic living requirements, instead of 15 percent.

If they keep up their payments, they will have any remaining debt forgiven after 20 years instead of 25 years - or after 10 years if they are in a public service, such as teaching, nursing, or serving in the military.

Some of the money will address shortfalls in the Pell Grant program that have developed because students are qualifying for more and larger grants. More than six million students received such grants in the 2008-09 academic year, an increase of about 50 percent from a decade earlier, according to the College Board.

$2 billion will be invested in community colleges - which enroll six million students and are growing fast - over the next four years to provide education and career training programs to workers eligible for Trade Adjustment aid.

Institutions that serve mostly minority student bodies will share $2.55 billion in additional funding over the next decade.

Speaking to a cheering crowd at a community college in Washington's Virgina suburbs, Obama yesterday portrayed the overhaul of the student-loan program as a triumph over an "army of lobbyists."

He singled out Sallie Mae - the Reston, Va.-based lender SLM Corp. - which he said spent $3 million to try to stop the changes.

"For almost two decades, we've been trying to fix a sweetheart deal in federal law that essentially gave billions of dollars to banks," he said. He said the money "was spent padding student lenders' pockets."

Including money from last year's stimulus program and regular budget increases, the White House said the Obama administration has now doubled spending on Pell Grants.

But the law has detractors:

Sallie Mae said it will end up costing jobs. The loan company said it may have to eliminate a third of its 8,500 jobs nationwide.

A number of lawmakers opposed the health-care reconciliation bill in part because of the student-loan provisions.

Sen. Ben Nelson, Democrat of Nebraska, who voted in favor of the health-care legislation in December, voted against the reconciliation bill. Nelnet, one of the nation's largest private student lenders, is headquartered in Nelson's home state.

Sen. Lamar Alexander, Republican of Tennessee and a former education secretary, also spoke out angrily against the plan to end the subsidies to private banks.

Tennessee, too, is home to some big players in the private student-lending industry. In a statement yesterday, he lamented that the government was getting more deeply and directly into the student-loan business.

"The Obama administration's motto is turning out to be: 'If we can find it in the Yellow Pages, the government ought to try to do it,' " Alexander said.

He said that 31,000 private sector workers would be out of jobs and students would be forced to rely on four federal call centers instead of more than 2,000 community and nonprofit lenders.

The health-care portion of the bill Obama signed yesterday eliminates provisions in the Senate version of legislation that benefited specific states and other special-interest items.

The House passed that version on March 21 with the understanding that the companion measure making changes to it would become law.

Republicans say they will move to repeal the overhaul package and replace it with a less ambitious program.

Private lenders can still make student loans that are not backed by the government, and they will continue to have contracts to service some federal loans. But the new law represents a significant change in what has been a multibillion-dollar business for the banking industry.

Under the new law, all colleges and universities must switch to the direct lending program by July 1.

Will the changes bring down college costs?

Sorry, no. Obama acknowledged as much before signing the bill when he urged colleges and universities to "do their part" to hold down costs.