For students, a healthy dose of loan reform

No longer will private lenders be middlemen in federal student loan transactions. As of July, all new federal loans will come directly from the US Department of Education.

This doesn’t mean private-sector student loans go away. Many students use the higher-priced loans to bridge the gap between the annual limits for federal loans and the cost of college.

But I doubt many students care who issues the loans. Whether they borrow from Uncle Sam or from private lenders, they will still be stuck in debt bondage for decades.

Still, there is something to trumpet.

The federal Pell Grant program will get a badly needed boost. The Obama administration says the new law pumps more than $40 billion into this program, which provides need-based grants to low-income undergraduates and to certain post-baccalaureate students.

Starting in 2013, the award will be tied to the consumer price index, adding on a cost-of-living increase. That will raise the maximum to $5,975, according to CBO estimates.

Here’s what really excites me: Community colleges are expected to get $2 billion over four years. Minority and historically black colleges and universities will get $2.55 billion.

It’s about time. Maybe now many such colleges will shed the reputation that they exist for the academically challenged. Maybe now they won’t be seen as Grade 13.

“I have seen firsthand the power of community colleges to change lives and serve as a gateway to opportunity for students at all stages of their lives and careers,’’ said Jill Biden, wife of Vice President Joe Biden and a community college English instructor.

Students and parents should not rule out community college. It’s an affordable way to get two years of study under your belt.

I want to take a little sidetrack here to note another news event. The Supreme Court recently handed down a decision that some might see as a way to get rid of student loan debt by filing for bankruptcy protection.

Under the Bankruptcy Code, a student loan cannot be discharged unless paying the debt would impose an undue hardship. It’s a high hurdle. However, one borrower was able to discharge some of his student loan debt under a Chapter 13 filing without showing hardship. He got away with it because the creditor failed to object. Did this open a window?

Not at all, bankruptcy experts say. In this particular case, the creditor snoozed and lost.

It would be very risky and still unlikely for someone to get a student loan discharged without proving hardship, said Juliet M. Moringiello, resident scholar for the American Bankruptcy Institute.

Oh well, at least if you’re stuck with the debt, provisions in the health care law will lower the cap on monthly payments for some.

Beginning in 2014, student loan payments under the income-based repayment plan will be capped at no more than 10 percent of a borrower’s discretionary income (the amount of adjusted gross income that exceeds 150 percent of the poverty line). Currently, payments are capped at 15 percent.

If people keep up their payments, any borrowed amount not paid after 20 years will be forgiven (down from the current 25 years). For public service workers (teachers, nurses, military personnel), debt is forgiven after 10 years.

Michelle Singletary writes The Color of Money for The Washington Post.