Feds' student loan plan to boost Pell grants

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.

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 Arizona and other states. The Arizona Board of Regents set tuition and mandatory fees 10 to 20 percent higher for students next year at the University of Arizona.

The primary benefit to current students, according to Tom Melecki, director of student financial services at the University of Texas at Austin, 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.

Students' reliance on federal student aid of all forms likely will increase as tuition rises and the state faces a budget crunch. On Wednesday, UA president president Robert Shelton issued a memo  ordering furloughs for employees making more than $40,000. Salary cuts also are planned.

Some of the cut will be covered by attrition, but the UA had no choice other than to furlough workers next year, said Shelton and Provost Meredith Hay in the memo.

"No one likes the idea of furloughs. Through sound fiscal policies the University has been able to avoid them the past two years, and it would certainly be our preference to avoid them for the coming fiscal year. But given the ABOR directive, we are left with no other option," they wrote.

Depending on the fate of Proposition 100, there may be further cuts, the memo said.

"However, it is important to note that more extreme budget actions, including the prospect of additional furlough days, will become necessary if Proposition 100 fails at the ballot on May 18th. The State has approved two budgets for the coming year. The first is dependent on the passage of Proposition 100, which is a temporary three-year sales tax increase of 1 cent. There is a contingency budget that will go into effect if Proposition 100 fails, and that would result in an additional cut of $42 million to the University of Arizona."

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 likely will see few changes, Melecki says, except that in many cases their lender will become the federal government.