Free College Money Increasing, Student Loans Tightening

Have you seen Pell Grants or free college money in the news recently? The White House and Congress have played ping pong lately with higher education programs. Some changes may affect you...

Good Changes in Pell Grant Program
The Pell Grant program stands to gain about $2.6 billion to help lower income students. This will allow the total grant to increase, though the cap may not go as high as you'd like for the max award. Increasing the award will help keep pace with inflation, thought most people would like more. Obviously, more free money helps more people go to college, right?

Bad Changes in Other Financial Aid Programs
Actually, the term changes doesn't quite cover it. One proposal shows 47 programs ending. By ending these programs, including the Perkins Loan program, the government can redirect that money to the Pell Grant program. All 47 of these other programs total $3.3 billion per year. That's a lot of student loans. Of course, many aren't loan programs. One was a program to help teachers of public schools teach certain subjects. It started out at $276 million. It wasn't eliminated, but now the program has only $2 million. Ouch.

Student Loan Subsidies Cut
Congress also has cut the subsidy rate for federally guaranteed loans. The government pays lenders who loan according to their program. This subsidy keeps the program working, and keeps the lenders loaning to students that need the funds. When the rate drops, lenders have to reevaluate their budget. By dropping the subsidy rate, smaller lenders get squeezed out of the market. And that limits choice.

Sallie Mae, the main student lender, has tightened their lending standards based on the subsidy change. By changing their lending strategy, you will probably see fewer students receiving student loans through the lenders that stay in the federal programs like Stafford and Perkins. I haven't see anything that

Your Financial Aid
Do these changes affect you? Depends. If you get a Pell Grant this year, the changes may not have any affect. Also, more needy students may receive a grant. If you plan to get a Perkins Loan or another student loan, you may have challenges. By lowering the subsidy on these loans, the banks lose income and may loan less, or to fewer students.

Banks that choose to leave the market for student loans due to changes in their income structure can still loan to students by way of private loans. These types of loans don't have the federal guarantee, and have a higher interest rate. They may also have similar payment plans to the Stafford or Perkins loans. Consider them another option for your college money, and shop around to get the best deal. While not the same as a federally backed student loan, they still can help you finish if you have problems with your other sources.

Other Ideas that can help
Do your best to keep your credit clean as well, to prevent any problems getting a private loan. Don't miss payments, and don't over borrow. As an added idea, consider a tuition assistance program from an employer. If you have a job with access to a tuition assistance program, or tuition reimbursement, use it. That kind of program can see you through financial difficulties.

Keep your book expenses low with used books, shared books, and even selecting classes that don't require the $150 book. I know of one personal finance professor who teaches his class using just the book The Millionaire Next Door, a cheap book you can buy for under $10 used any day on Amazon.

The Shakeout
The net affect appears to decrease the number of students that will receive aid. That can lower students entering or finishing a degree. Higher education provides researchers in universities to study all kinds of subjects. Graduating students provide new ideas and start new businesses across the country.

Due to problems in the lending market from the mortgage crisis and new laws, things may be tight for a while. The mortgage crisis may take up to a couple of years to work out. Student loans could be a haven for lenders to shore up their balance sheets in the meantime. Ideally, the changes will be short lived, and won't affect many.