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Pell Grants Increase While Lender Subsidies Decrease

On Friday June 20, the Senate approved the Higher Education Access Act of 2007 by a vote of 78-18. The bill, if approved by the House, would increase Pell Grant eligibility and lower government subsidies to outside lenders. The House passed a similar proposal—the College Reduction Act of 2007—in June, making a compromise on both versions likely. The overarching theme of the bill was an increase in government aid to students and, at the same time, a decrease in aid provided to student lenders.

Lowered subsidies would likely result in increased interest rates for those who take out student loans from lenders outside of the government. Government student loans offer the best interest rates, but such loans also have smaller borrowing limits. Many students end up looking to lenders subsidized by the government for additional aid. While interest rates on subsidized loans are not as favorable as those offered by the government, they are still more favorable than those offered by private, unsubsidized lenders.

According to MarketWatch, the new bill could save the government up to $15.4 billion by 2012. The bill’s sponsor, Senator Edward Kennedy, D-Mass, was enthusiastic about the approval stating, "The passage of the Higher Education Access Act tonight was a victory not only for students and their families, but for the American people. With this new congress we made education a national priority again, and we’ve given the next generation the tools they need to compete in the global economy."

The bill also addressed concerns that lender subsidy cuts would lead to increased interest rates on non-government loans. Thankfully, cuts on outside lender subsidies were also accompanied by increased caps on government loans as well as by increased laxity on government loan eligibility requirements. These changes are likely to benefit students who don’t borrow much. For those with financial needs that cannot be fulfilled government aid, effects will depend on just how much more the government is willing to lend and on how much outside lenders will choose to charge after cuts.

Most students have a lot to cheer about. The biggest perk of the Higher Education Access Act is its proposal to increase government grant offers. Free money is the best kind. Like scholarships, college grants provide students with aid that need not be repaid. If the bill is enacted, the government would increase the Pell Grant limit to a maximum $5,100. It would also alter the formula used to determine grant eligibility in a way that would lessen restrictions on the gravity of financial circumstances required for grant reception.

Additional bill provisions include loan forgiveness options for borrowers who work in areas of public service for ten years, a cap on monthly loan payments required of students, and the establishment of a program that would increase competition between lenders. If the bill passes, the enactment may be expected within the next few months.

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