Although all federal loan funds come from the government, it has been obligated to cover as much as 97% of any defaulted loan, effectively eliminating risk for private lenders. In 1993, Congress created the Direct Loan program, in which funds go from the Education Department to students — assuming that money could be saved by cutting out middlemen. The FFEL and Direct Loan programs had been in competition with one another since then. This July 1, all new student loans will come through the Direct Loan program. The savings, estimated at $61 billion over 10 years, would be used to increase the need-based Pell Grant program by $36 billion and invest in community colleges.

How will these changes affect students and their parents? Under the new legislation, students will take out their loans through their college’s financial aid office, instead of using a private bank. Because this does not take effect until mid-year, check with your school’s financial aid office to see how this will affect loans you may be awarded for the 2010-2011 academic year.

Customer service is said to be somewhat better during the loan origination process in the Direct Loan program, and a bit worse during repayment. But the biggest difference may be that students in repayment will no longer have to put up with the unnerving practice of their FFEL loans frequently being sold from lender to lender, which has added to students’ confusion as to who holds their loan at a given time. Under the Direct Loan program, the U.S. Department of Education holds your loan, no one else.

The new student loan legislation will make it easier to pay back student loans, by reducing the share of income a college graduate must devote to loan payments and accelerating loan forgiveness — but not immediately. Those who take out new loans after July 1, 2014 will have to devote only 10 percent of their income to payments, down from the present 15 percent. Those who maintain their payments will have their loans forgiven after 20 years, reduced from the current 25.

The bill also includes automatic increases, tied to inflation, in the maximum Pell Grant. But the grant increase — to $5,900 in 2019-2020 from $5,550 for the 2010-2011 school year — is tiny compared with the constant rise in tuition for public and private colleges. Because college costs are rising so quickly, the maximum Pell Grant today covers only about a third of the average cost of attending a public university, compared with three-quarters in the 1970s. Each year, more students graduate owing over $20,000.