Student Loans

WASHINGTON — President Obama’s budget proposal on education would for the first time index student-aid Pell Grant to inflation, guaranteeing low-income college students a stable grant amount, and pay for that expensive shift by eliminating $4 billion in annual subsidies to private banks who make student loans

“The president has proposed the biggest change in the federal programs that help students finance a college education since the main higher education law was written in 1965,” said Terry Hartle, a vice president at the American Council on Education, which represents hundreds of colleges and universities.

Under the current system, college students in families with incomes low enough to qualify receive a Pell Grant, but the amount of the grant depends on how much Congress votes for the program, and in recent years that amount has not kept pace with inflation. The administration now proposes to guarantee not only that students will receive grants, but also that it will keep pace with inflation.

The current maximum grant is about $4,730, but beginning on July 1 that will rise to $5,350 as a result of the largest historical increase in the Pell program, already approved as part of the president’s economic stimulus bill. In 2010, the maximum grant is to rise to $5,550.

The budget blueprint also proposes sweeping changes in the way the federal government provides student loans. For nearly two decades, the government has run two parallel student loan programs, one based on subsidies to private lenders and another as a direct government lending program.

Under the Federal Family Education Loan Program, the government has paid a subsidy to banks and loan companies to make loans to students at a congressionally mandated interest rate. But during the turmoil in the financial markets last year, dozens of lenders withdrew from participation in the program, saying that they could not obtain capital at a cost that would make student lending profitable, forcing intervention by the Bush-era Department of Education to insure that student loans would continue to flow.

Education Secretary Arnie Duncan said on Thursday that the Family Education Loan Program program had for some time been “on life support.”

The Obama administration now proposes to eliminate it.

“That program has not only needlessly cost taxpayers billions of dollars, but has also subjected students to uncertainty because of turmoil in the financial markets,” the administration’s budget proposal says.

In its place, the administration seeks to originate all new loans through its direct lending program, first established in the Clinton adminstration.

Hundreds of private lenders currently receive subsidies under the Family Education Loan Program, and they will vehemently oppose these proposed changes. The largest of the private lenders is Sallie Mae, whose stocks plunged.after the plan was unveiled.