Reconciliation Act Restructures Student Loans, Boosts Funding

On March 30, 2010, the president signed the Reconciliation Act of 2010 (P.L. 111-152). In addition to health care reform changes, this legislation restructures the student loan process and uses most of the savings to provide additional funding for Pell grants and other higher education initiatives.

Previously, the federal government guaranteed private institutions originating student loans within the Family Federal Education Loan (FFEL) Program against losses due to borrower default. This law eliminates FFEL and instead originates all new federally backed student loans through the Department of Education’s (ED) Direct Loan Program. This is a major change in the student loan process since private lenders can no longer serve as originators of student loans without fully exposing themselves to the credit risk involved with those loans. However, under the new law, private lenders, including non-profits, will compete for contracts to service the loans.

This change is estimated to save $61 billion over 10 years, according to the Congressional Budget Office (CBO), $36 billion of which will be invested in the Pell Grant Program over 10 years. Another $10 billion is to be used for deficit reduction, $9 billion for new health expenditures, and about $6 billion for other higher education provisions. These higher education provisions include $750 million in formula funding to states through the College Access Challenge Grant Program (CACGP) and $2 billion in funding to community colleges.