What’s in the New Student Loan Proposal

Higher-education experts say the Obama administration has proposed the broadest overhaul of federal college aid programs in decades. But for all the focus on the size of the budget, it has been hard to tell just what this means for students and their families.

One problem is that whatever the president proposes, Congress actually holds the purse strings. So there is no way to know just what aid will really be available down the road. But based on what administration officials have said, here is a summary of how the budget as proposed would affect funds available to help pay for college.

The first important thing to understand is that the proposed benefits will not be available until July 1, 2010 — more than a year from now.

Here are the major administration proposals:

PELL GRANTS In years past, the size of Pell grants, which go to the neediest students, depended on the budget in a particular year. The administration’s proposal would end that.

Also, beginning in the 2010-11 academic year, the maximum Pell grant would rise with inflation; the grant would be indexed to the Consumer Price Index plus 1 percent. Over all, the maximum Pell grant in 2010-11 would be $5,550, up from $4,731 in the current year (note that the size of the grant awarded to an individual student depends on that student’s financial circumstances).

More information about Pell grants is available on the Education Department’s Web site.

LENDERS Probably the most controversial part of the proposed budget involves an issue that most students do not care about: where their loans come from. The administration wants to get rid of the federally guaranteed student loan program, called the Federal Family Education Loan Program. Under that program, banks and other companies (like Sallie Mae) have provided loans to students for years at rates set by Congress. The loans are guaranteed by the government. (A list of the rates for the popular Stafford loans in the coming years is here.)

Under the Obama proposal, students would borrow directly from the government. Students could still borrow from banks, but the loans would not be guaranteed and the interest rate would not be set by the government.

LOAN AMOUNTS This is actually the more important question for students and families. The administration aims to provide borrowing options for students to make it easier to pay for college without turning to private lenders, primarily by expanding the Perkins loan program.

The administration wants to make the loans available at all colleges and universities in the country — more than 4,000 institutions, up from just 1,800 now. It also wants to sharply raise the total amount of money available, to $6 billion, from $1 billion a year.

In addition, the administration wants to increase the amount individual students can borrow through the Perkins program to match what is available through the Stafford loan program. The Stafford program provides up to a total of $31,000 ($5,500 a year in loans to first-year students, $6,500 to second-year students and $7,500 to upperclassmen).

Currently, undergraduate students can borrow up to $4,000 a year and up to $20,000 over all through Perkins. The bad news is that interest on Perkins loans would accrue while a student was in college. That is one of the ways that the government envisions paying for those Pell grant increases.

Perkins loans are available based on financial need, so you have to fill out the federal financial aid form, the Free Application for Federal Student Aid, or Fafsa, to get one.