Will Obama's New Plan Help You Pay for College? - Commentary on Obama's Student Loan Proposals

Will Obama's New Plan Help You Pay for College?

TALK OF PRESIDENT OBAMA’S economic stimulus package tends to focus on the economy’s most ailing parts — housing and employment — but if the president gets his way, families may see some relief in paying college bills, as well.

The stimulus package, which Congress is slated to vote on Wednesday, aims to spend $125 billion on education over the next two years. Should it pass, billions will be spent on education at every level, from early education and Head Start programs for underprivileged kids, to universities and college students seeking loans and grants.

If Congress and the House of Representatives pass the bill (the House is expected to vote in the next couple of weeks), a reconciled version of it will be presented to Obama for him to sign into law.

For families with children heading off to college, the fate of the bill could make a big difference in how they fund next fall’s tuition bill. Here are answers to some key questions about the president's proposal.

Where is all the money going?

The major recipients will be public schools and colleges, which will receive billions to help fend off fiscal shortfalls and cuts to education programs. More than $40 billion will be spent on school improvement and special education programs. Teachers will receive $200 million in financial incentives to raise student achievement in high-need schools and another $100 million will be spent on filling teacher shortages.

The real goal, however, is for this money to benefit consumers. “This isn’t going to bail out banks so that they can shore up their bottom line without actually lending money,” says Mark Kantrowitz, the publisher of FinAid.org, a web site that provides advice on funding college. Individuals will benefit directly from increases in grants, student loans and education tax credits, and indirectly from renovated or newly-constructed classrooms and other education facilities.

Will college students, or their parents, be able to qualify for more financial aid?

Yes. Students will see increases in the Pell Grant, work-study, unsubsidized Stafford loan eligibility and the Hope Scholarship tax credit. The details:

* The Pell Grant (these are typically for families with income of $50,000 or less) will increase by $500 per recipient. The number of students who qualify will increase by about 800,000 to a total of seven million recipients.

* Federal work-study programs will receive a funding boost of $490 million, enough to add 200,000 work-study jobs.

* Unsubsidized Stafford loan limits will increase by $2,000 per year, to a total of $8,000 over four years.

* The Hope Scholarship tax credit would increase to $2,500 from the current $1,800. Until now the tax credit could only be used to offset any tax liability, meaning low-income families who don’t owe taxes couldn’t take advantage of it. Should the bill pass, the credit will be 40% tax-refundable, putting up to $1,000 directly into families’ pockets. Eligibility will be greatly expanded as well: Phase-out starts at $80,000 to $90,000 in annual income for individual tax filers and $160,000 to $180,000 for families, nearly double the current phase-out limits.

Will it be easier to get federal student loans?

That depends on the type of loan you seek. Luckily, the credit crunch has not affected students’ ability to get federally-guaranteed Stafford loans. (In May 2008 the Insuring Continued Access to Student Loans Act of 2008 was passed, providing liquidity to lenders so they could continue offering Stafford loans). However, PLUS loans, which are federally-subsidized loans for parents, have become a lot more difficult to obtain since eligibility is partly determined by the applicant's creditworthiness. Any applicant who experienced a foreclosure, bankruptcy, repossession, tax lien or wage garnishment in the past five years, or a delinquency on any debt of 90 or more days is no longer eligible. “There has been a sharp decrease in PLUS loan volume [among parents],” says Kantrowitz. Unfortunately, the stimulus package does not address that problem.

Will it be easier to get private student loans? Will the terms get better?

Thanks to the credit crunch, private loans have become extremely difficult to obtain and more expensive as well. Interest rate hikes of between 2% and 4% have become common, Kantrowitz says. There are fewer lenders -- 39 of 60 lenders have stopped making private student loans -- and the remaining lenders have adopted more stringent credit-writing criteria.

Would more financial aid mean that I could put less money in investments like my 529 savings plan?

Absolutely not. Keep in mind that despite the impressive size of the overall package, we’re only talking about a $500 increase in the Pell Grant and a $2,000 increase in unsubsidized Stafford loan limits. If your child is headed to college in five or more years, chances are tuition inflation will far outpace the relief your family will receive through the economic stimulus package. In addition to that, high-income families (those earning $180,000 a year or more) will only see relief in the form of increased loan limits. Families earning less than $180,000 may qualify for a higher Hope Scholarship credit. Low-income families will benefit most, from Pell Grants and the ability to claim the tax credit.

(This story was corrected on Feb. 2, 2009, to clarify information regarding PLUS loans and to remove a statement that incorrectly characterized a provision to enhance liquidity among lenders.)