Borrow and Mend

New federal legislation that cuts “middle man” private banks out of financial aid will save the federal government a projected $68 billion — much of which will be directed to shore up Pell Grants for students, including tens of thousands in Texas. The new rules, passed along with the controversial health care legislation, will prevent feared reductions in financial aid to students who are paying ever-increasing tuition in Texas and other states.

The primary benefit to current students, according to Tom Melecki, director of student financial services at the University of Texas, is that the size of their Pell Grants won’t shrink while they’re in school: $40 billion will be infused into the program, preventing grant amounts from falling as more students become eligible for money.

“Had this legislation not been enacted, Congress might have been forced to reduce the Pell Grant awards they had originally appropriated this money for in the upcoming year,” Melecki says.

Pell Grants likely won’t see a significant increase until 2014, when they will be indexed to inflation. The current maximum Pell Grant award, $5,500, could grow to almost $6,000 by 2017. Also effective in 2014, graduates will have more flexibility in choosing lower loan repayment amounts, and the federal government will begin paying off a borrower’s student loans after 20 years, an improvement on the current 25-year requirement — as long as the borrower hasn't defaulted on the loans, Melecki says.

Texas students' reliance on federal student aid of all forms likely will increase as tuition rises and the state faces a budget crunch, says George Torres, senior adviser to the president of Texas Guarantee, the statewide administrator of private, federally backed loans. “Tuition is going up, and the next session of the Legislature is going to be faced with, it appears, a record deficit in the next biennium,” he said. “I think it’s really questionable whether the Legislature will be able to maintain funding for the state programs.”

Beginning June 1, private bank loans subsidized by the federal government will be phased out, and all college and university students will receive loans directly from the feds. Students with loans will likely see few changes, Melecki says, except that in many cases their lender will become the federal government. About 60 percent of UT students receive some form of federal student loan.

Seeing clear signs of the coming change, UT started preparing for the transition from private to public loans more than a year ago, Melecki says. A growing number of private lenders — 71 percent in the last two years — have dropped out of the Federal Family Education Loan Program, which subsidizes student loans from private institutions. And since last December, 61 percent of private guaranteed loans to UT students have been sold to the federal government, he says. 

Terry Bazan, the financial assistance director at Austin Community College, says her biggest concern is making the 36 percent of students on financial aid at the school aware that they will now be making payments to both private banks and the federal government and helping them keep track of all the payments.

Statewide, roughly 70 percent of Texas post-secondary students receive some form of federal financial assistance, including Pell Grants. Of that number, two-thirds receive federal student loans, says Texas Guarantee spokeswoman Kristina Tirloni.

The biggest question many Texas universities and community colleges have about the financial aid reform is whether the revamped student loan system will provide the support services they received under the Federal Family program, says Torres, of Texas Guarantee, which provides counseling and training to university financial offices to help prevent students from defaulting on their loans.

Gwendolyn Cubit, a second-year student at the Rio Grande campus of Austin Community College, said that for now she is still trying to make due with Pell Grants as her only form of financial aid. The Pell Grant has paid for all of her tuition costs and books for her first three semesters. Cubit, who plans to study social work at a four-year institution, said she is thankful that the size of the awards will be maintained. And the grant will likely become even more important when her daughter enrolls as a freshman at Kansas State University in the fall.

“I know that the Pell Grant is my best friend,” she says, “as far as returning to school as a single parent.”