Changes to Medicare, prescription coverage – and student loans? The health-care legislation approved by the House on Sunday does more than just revamp the health-care system. It also shakes up federal student loans and Pell grants.

The most crucial part of federal student aid reforms includes a transition to 100% federal student loan funding from the direct loan program – directly from the government – while eliminating banks and private lenders as the middle man. According to the Congressional Budget Office (CBO), this decision will help the government save $61 billion over 10 years – savings that are included as part of the health-care overhaul. Of that, at least $10 billion will go toward reducing the national deficit over 10 years, says Edie Irons, a spokeswoman for The Project on Student Debt, an independent nonprofit that tracks college student debt. “The huge savings generated by streamlining the student-loan program are part of what made health care possible,” she says.

Students can also expect to see increases in the maximum amount of the Pell grant, but those increases will be small compared to President Obama’s proposals in his State of the Union address in late January. And changes to income-based repayment plans – in which a borrower repays their federal student loans based on their discretionary income (not debt) – are now years away from being implemented and will help a fraction of borrowers than what was initially intended.

Here are three changes college students can expect.

Federal loans will be distributed by direct lending only

There used to be two ways to get federal student loans, like Stafford and PLUS loans. One way involved getting these loans through the direct loan program, which is run by the Department of Education; the department sends money to colleges and the colleges then issue loans to the students. Another was getting federal loans through the Federal Family Education Loan Program (FFELP) where loans are subsidized by the Education Department and are provided by private lenders and banks to students and their families.

The new legislation replaces FFELP with 100% direct lending effective July 1, 2010. Students could see few – but favorable – changes as a result. While the two loan programs are nearly identical, the direct loan program offers more favorable terms for PLUS loans (these loans are available to graduate students and parents of undergraduate students). The interest rate today is lower at 7.9% vs. an interest rate of 8.5% through FFELP. Also, the approval rate for PLUS loans given to parents through the direct loan program is higher than through FFELP; in 2007-08, parent PLUS loan denial rates were 42% in FFELP and 21% in the direct loan program in part because of the stricter terms with which private lenders review applicants’ credit history, says Mark Kantrowitz, publisher of FinAid.org, which tracks federal student loans.

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