Student loan reform, an often-overlooked but important piece of legislation, was signed into law along with the health care reconciliation bill last month.

The Student Aid and Fiscal Responsibility Act (SAFRA), passed as a rider to the Health Care and Education Reconciliation Act of 2010, will end the current system of private loans in which the federal government subsidizes banks and other private lenders through the Federal Family Education Loan Program (FFELP). Under that system, if students default on their loans, the government will still pay the banks.

Starting in July, though, all federal loans will come directly from the U.S. Department of Education. The Obama administration estimates that eliminating the middleman could save up to $61 billion over the next 10 years.

According to Director of Financial Aid Karen Cooper, Stanford has traditionally been a FFELP school, as Stanford students typically have a very low default rate and thus were able to get good deals within the FFELP program.

However, in the last two years, due to the poor economy, many lenders started cutting back on benefits, and some high-volume lenders, including Bank of America, stopped their loan program altogether.

Cooper explained that Stanford was ready to transition to direct lending regardless of whether or not the bill passed. Overall, she said, the loan process will be “simpler, easier to understand, and there will only be one place to go when you’re in repayment.”

On the other hand, Cooper expressed concern about the Department of Education’s ability to handle the amount of loans they will have to process.

“The Department of Education is not a bank and not in the business of doing loans,” Cooper said. “I’m a little worried that they will not provide the level of customer service that our students deserve.”

The transition to direct lending may also lead to job losses in the private loan industries. As reported by news media sources, Senator Lamar Alexander (R., Tenn.) claimed that the bill will lead to the loss of 31,000 jobs. In response, the Obama administration said that it will preserve jobs by hiring many of the same private lenders to service the direct loans.

Pell Grants

One of the most widely hailed aspects of the bill is the $36 billion granted to the federal Pell Grant program, which provides need-based grants to low-income undergraduates. It is estimated that the additional funding will cover an additional 880,000 grants by 2020, and also raise the maximum award from $5550 to about $5900 by 2019.

While increased Pell Grant funding will create more opportunities for low-income students, the amount awarded by the grant is small compared to rising tuition costs for public and private universities. Indeed, even a $5900 grant would only make a small dent in the Stanford annual tuition, which is projected to be $50,576 next year.

However, Cooper said that changes to Stanford’s financial aid policy over the last five years means that the University is still affordable.

“To give you some perspective, Stanford gets $5 million from Federal grant programs, including the Pell Grant, but this year we’re spending over $110 million in institutional money to pay for financial aid,” Cooper said.

Nonetheless, Cooper approves of increased funding to the Pell Grant, for which 12 to 14 percent of Stanford undergraduates are eligible.

“Any increase in federal funding is a good thing,” she said. “We’ll take what we can get.”

On the other hand, Professor Eric Bettinger of the School of Education sees the increased Pell Grant funding as unlikely to make a very large difference.

“According to research, every $1000 of aid given to students gives a three-percent increase in their chance of sticking around,” Bettinger said. “So if our goal is to get more students to stay in college, a $500 increase would only increase the likelihood by 1.5 percent.”

Bettinger hopes that increasing Pell grants will encourage some low-income students to go to college who otherwise might not consider it. However, he said that the complicated application process — FAFSA forms consist of eight pages and 120 questions — intimidate many low-income families and remains the greatest barrier to students receiving the grants they need.

Repayment

Besides eliminating federally subsidized private loans, the bill will also change aspects of loan repayment, such as reducing some interest rates. For parents, the annual interest rate will drop from 8.5 percent to 7.9 percent. For students, rates will remain the same: 4.5 percent for students with financial aid and 6.8 percent for everyone else.

In addition, starting in 2014, the caps on student debt payments will be lowered from 15 percent to 10 percent of borrowers’ discretionary income. If payments are kept up, the government will also forgive any remaining debt after 20 years, down from 25 years under the old program. For those who go into public service, such as teaching and military personnel, debt will be forgiven after 10 years.

Tradition

Stanford’s Financial Aid Office has been preparing for the transition to direct lending for over a year, and Cooper feels confident that Stanford has the technical capabilities to deal with the change.

The Financial Aid Office will start offering direct loans summer quarter. Cooper cautioned students who need loans this spring to take care of the paperwork immediately, as private lenders will start cutting off services before July.