SAFRA: Big Reform in the Student Aid Industry | Financial Aid News

HOME CURRENT ISSUE SUBSCRIBE FOR FREE! ABOUT BACK ISSUES RSS / FEED Search the archive...

Home » Headline, News

SAFRA: Big Reform in the Student Aid

Industry
12 APRIL 2010 1 VIEWS NO COMMENT

On March 30, 2010, President Obama signed the Student Aid Fiscal Responsibility Act (SAFRA) into law. This
landmark piece of reform legislation is intended to reboot the floundering student loan industry by redirecting
all new federal loans through the Department of Education, bolstering several pro-financial aid initiatives, and
ending the hotly-contested Federal Family Education Loan (FFEL) Program. I would like to walk you through
these changes, explain how they will affect the average student, and attempt to answer any burning questions
you may have about them.

FFEL, and Why It’s Going Away

Subscribe For Free

The Federal Family Education Loan Program was established in 1965 as a way to provide access to college
for students requiring financial aid. At the time, the government was not participating heavily in the origination
of student loans, but recognized the need. In order to create a less credit-heavy lending option for students,
the government began to allow private banks to originate loans for students that were backed with federal
funds. Essentially, this created a near risk-free environment for private banks to lend money to students and
earn interest on the borrowed funds. Further, these banks have been paid subsidies as an incentive to create
these loans; the result is them getting paid by the government to make a student loan that is guaranteed
money for the bank, even if the borrower defaults. The long and short: the banks win on both sides of the
Recent Posts
equation, and make a ton of money doing very little.
SAFRA: Big Reform in the Student Aid Industry
To add insult to the injury, many FFEL lenders have been accused of purposely providing poor customer Nebraska: Woman Accused of Using Son’s Name for
Loans (Associated Press)
service in an attempt to increase delinquency rates. This difference can be easily seen when one looks at the
Florida: 10 Years in, ‘One Florida’ Posts Mixed Results for
default rates for 2009: 7.2% for FFEL, 4.8% for the Direct Loan program (data sourced from ED.gov.) This Minorities at Universities (Orlando Sentinel)
activity supposedly is overlooked due to the much larger commission a FFEL bank’s collection department is Financial Aid 101 (Wall Street Journal)
authorized to take for recovering a defaulted FFEL student loan; in some cases it has been reported to be as More Cities Look to Universities to Share Costs Amid
Recession (Boston Globe)
high as 38.5% of the loan’s balance (The Huffington Post).

Categories
The effect of the SAFRA bill is these subsidies and current relationships between private bank and the federal
Admissions
government dissolve. Ideally, this will liberate up to $61 billion over the next 10 years to be reinvested in other
Banking
initiatives (such as the Pell Grant program) and potentially pay down some of the federal deficit. Keep in mind
Charity
that much of this is sensationalism however, considering the fact that our total deficit is currently in the region
Conferences
of $12.7 trillion; the estimated $10 billion would be a drop in the bucket toward paying down our national debt, Contest
but every bit counts. CoverCast
Credit
Federal Student Loan Restructuring Defaulted loans
Economics 101
As of July 2010, all new federal student loans will be originated through the Department of Education’s
Education
Federal Direct Loan Program (FDLP). In the past, FFEL banks were allowed to originate federal loans, but Expert interview
due to the issues listed above and shady practices, Congress has reached a consensus that the program is Eye on the Economy
overdue for the guillotine and needs to end. Thus, the relationship between private bank and government is FAFSA
set to change in a way that is mostly invisible to the borrower. This difference is in the execution: although Featured
new loans will be created by FDLP, the government will now require private banks and non-profit entities to Financial Aid 101

compete in order to service them. They plan to make this attractive to their former FFEL partners by paying Focus on Financial Aid
Free Stuff
premium and competitive market rates for the first 100,000 loans serviced per bank. The end result is this: the
Graduate Students
Department of Education makes your loan, but the customer service is handled by a private bank or large
Headline
non-profit. Supposedly this will provide a higher quality experience for borrowers, but the reality of the change

http://www.financialaidnews.com/news/safra-big-reform-in-the-student-aid-industry/[4/12/10 6:24:13 PM]

SAFRA: Big Reform in the Student Aid Industry | Financial Aid News

Jobs and Employment

is yet to be seen.
Loan Consolidation
Mailbag
As someone with a lot of experience with finance and the business world, I personally do not understand why
Military
a private bank would want to service federal loans. It can’t be lucrative enough to make the entire process
Music
worthwhile, and no extra funds appear on the banks’ balance sheets because the government is handling the News
money on both sides of the equation. My sixth sense says there are other kickbacks in place for the banks News You Can Use
involved (possibly tax breaks, or something similar.) It is likely that lobbyists and media will be keeping a very Newsletter
close eye on whatever transpires in this arena; if you are interested in following how this process is evolving, Online Degrees

check a trusted news source (such as the Wall Street Journal) regularly. PLUS Loans
Podcast
If you are currently a student or parental borrower, your existing federal loans will remain unchanged by this Podsafe Music

switch. The only difference you may see going forward is if you attend a FFEL school; they will be migrating to Politics

the Direct Loan Program in the next six months. Originally, most schools were one or the other exclusively Press Release
Privacy
depending on what type of benefits they could get for their students from each institution. After July, any new
Private student loans
loans you take out will all be through FDLP, at a lower interest rate, and with a more flexible array of
Rants
repayment plans.
Saving Money
Scams and Ripoffs
Improvements to the IBR Program
Scholarship Search
Scholarship Update
Income Based Repayment (IBR) is one of the best things to ever happen to student borrowers. Essentially, if
Scholarships
your total payments for the year equate to higher than 15% of your annual income, you are eligible to have
Stafford Loan
your payments drastically lowered. For instance, under IBR, an income of $15,000 (for a household size of
Student Loan Radio
one) or less would make your monthly payment on all federal student loans $0. That’s right, no payments at Student Loan TV
all. As the household size increases, the maximum income level to qualify for IBR rises as well. The Student Student Loans
Loan Network has assembled a great chart on Income Based Repayment information that presents the data Survey
in an easy-to-digest format. Taxes and the IRS
Transcript
The benefits of IBR don’t stop there. In addition to potentially having your monthly payments significantly Video Podcast
reduced (or eliminated), you actually can have the loans forgiven if they are in good standing and all payments YouTube
are made on time for a certain amount of time. In some cases, federal student loans will be forgiven after 10
Ratings
years (this is based on a “hot fields” list of desirable professions) and 25 years for everyone else. If you are
Government Takeover of Federal Student Loans Destined
wondering what is exactly meant by loan “forgiveness”, it means your loan gets cancelled, and you no longer
for Failure (5.00 out of 5)
have to pay it back or have the debt sitting on your credit history. Financial Aid News 141: The lowest student loan rates in
history that you can’t have (5.00 out of 5)
So what are the technical changes to this program? Thanks to a $1.5 billion infusion of funds provided by New Rules Require More Sunshine on Terms of Private
cutting the FFEL program, eligibility requirements are going to be relaxed further and loan forgiveness will be Student Loans (The Chronicle of Higher Education)
(5.00 out of 5)
accelerated. Assuming no amendments or further changes to SAFRA, starting in 2014, the payments to
Audio: In a Washington Minute — Student-Loan Bill
income ratio for eligibility is being dropped to 10%. This is fantastic given the amount of debt the average Heads to the Senate (The Chronicle of Higher Education)
student graduates with (federal and otherwise) and allows for greater ability to manage finances and afford (5.00 out of 5)

living costs. Additionally, instead of the previous 25-year period before loan forgiveness, the program is being Financial Aid News 139: Nursing scholarship, saving
money on tuition (5.00 out of 5)
accelerated to 20 years. This is an absolutely major win for responsible student borrowers.
Why Stafford loans? (5.00 out of 5)
Student Loan Network $10,000 Scholarship Now
Ongoing Pell Grant Enhancements
Available (5.00 out of 5)
Financial Aid News 134: US National Sales Tax Proposal
The Pell Grant program is widely appreciated in the financial aid industry as a resource of funds for low- in Congress (5.00 out of 5)
income individuals to help afford the cost of education. Although the purchasing power parity of this type of Financial Aid News 140: College degrees and
grant has fallen sharply over the years — largely due to inflation and the rapid growth of tuition costs — it is unemployment (5.00 out of 5)

still a significant help to needy students that does not require repayment. The majority of the cost savings from The Future of Student Loans: June 2009 Newsletter
(5.00 out of 5)
cutting the FFEL program are planned on being redirected to the Pell Grant program, infusing an estimated
$49.5 billion over the next 10 years. Views

Financial Aid Podcast 935: FAFSA verification, tuition

The effects of this investment are adding at least a million more recipients per year, raising the award increases, holiday free stuff - 7,230 views
amounts, and linking future grant awards to popular economic indicators in the future. Currently, the maximum Daily Aid 101: Step by step affiliate marketing setup for
Pell Grant award is set to be $5,550 for 2010; the new legislation increases the award up to $5,975 in 2019. Amazon.com - 5,908 views
Using Your Summer Break to Search for Scholarships -
In addition, the Pell Grant program is going to be linked to the Consumer Price Index (CPI) starting in 2014,
4,384 views
which will help the grant awards keep pace with inflation and maintain their buying power. Updated rules for appealing for financial aid - 3,136 views
Financial Aid News 162: Save $100 a year on fees -
What The Changes Mean To You 2,924 views
Financial Aid News 141: The lowest student loan rates in

http://www.financialaidnews.com/news/safra-big-reform-in-the-student-aid-industry/[4/12/10 6:24:13 PM]

SAFRA: Big Reform in the Student Aid Industry | Financial Aid News

As a current or future student borrower, the massive overhaul probably seems intimidating and difficult to history that you can’t have - 2,306 views
understand. The bottom line of the legislation is to improve access to financial aid and make school more 2008 NCAA Men's Basketball Brackets – My Picks - 1,858
views
affordable for all levels of family income. For low income families, this comes in the form of increased grants;
Financial Aid Podcast 933: ECASLA, UC Tuition, $10,000
for everyone else, improved repayment programs and a simplified loan application process. Very little will be Scholarship, Free Stuff - 1,603 views
different on the front end for most students and parents, and again, there will be no change to existing loans. January 2009: Scholarships, Scholarships, Scholarships -
1,121 views
If you are concerned about finding money for school, keep in mind that there are options other than federal Negotiating your financial aid award package - 1,033
views
aid available too. Scholarships are an excellent resource because they do not need to be paid back and you
can find them in amounts ranging up into the thousands of dollars. Websites like
StudentScholarshipSearch.com and ScholarshipPoints.com are quite popular for finding scholarship money Pages Financial Aid News
Archives
and cost nothing to join. In the end, affording college is always a balance of savings, smart borrowing, and About
maximizing the amount of scholarships and grants possible to finance your education. It is entirely possible to About the Financial Aid April 2010
Podcast March 2010
get a degree without putting yourself into insane amounts of debt, so take the time to read informative
Be on the Show! February 2010
financial aid literature and educate yourself on finding money for school.
Blog Posts January 2010
Contact The Financial December 2009
(No Ratings Yet) Aid Podcast
November 2009
Contact Us
October 2009
Financial Aid Podcast
Financial Aid News is sponsored in part by: September 2009
Free Internet Radio
Show August 2009
Stimulus Financial Aid July 2009
Financial Aid Podcast
Take Advantage of Stimulus Bill Aid for Education. Find a School Here!
Show Calendar June 2009
FinancialAid.Search-Schools.com
Financial Aid Podcast May 2009
Show Notes
April 2009
Financial Aid Podcast
Leave your response! Starter Pack – Financial
March 2009
Aid 101 February 2009
Add your comment below, or trackback from your own site. You can also subscribe to these comments via Free Stuff Compendium January 2009
RSS. Goofy stuff December 2008
Got Financial Aid? November 2008
Be nice. Keep it clean. Stay on topic. No spam. October 2008
How to Participate in the
Financial Aid Podcast September 2008
Name (required) Links and Resources August 2008
Matthew Ebel Economic July 2008
Index
Mail (will not be published) (required) June 2008
My Virtual Business
Card May 2008

Past Episodes Index April 2008

Website (optional)
Past Issues of the March 2008
Financial Aid Newsletter February 2008
Share the Financial Aid January 2008
Podcast! December 2007
Stopping by? November 2007
Student Loan TV Live October 2007
Subscribe September 2007
Testimonials and August 2007
Awards
July 2007
Testing!
June 2007
Thanks for accepting a
Financial Aid Podcast May 2007
Postcard! April 2007
Thanks for signing up! March 2007
Thanks for stopping by! February 2007
The Financial Aid January 2007
Podcast for Financial
You can use these tags: December 2006
Aid Professionals
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> November 2006
<cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong> The Financial Aid
Podcast for Parents October 2006
This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar. The Financial Aid September 2006
Podcast for Students August 2006
Video Library July 2006
June 2006
May 2006
April 2006
Type the two words:
March 2006

http://www.financialaidnews.com/news/safra-big-reform-in-the-student-aid-industry/[4/12/10 6:24:13 PM]