College-loan overhaul moving through Congress

LOS ANGELES — The federal government is moving toward the most sweeping overhaul of college financial aid in decades.

Under the proposal, private lenders would no longer make federally subsidized student loans. Instead, the government would make all such loans itself, instead of only some as it does now.

College students swarmed Capitol Hill on Tuesday to plead for more financial aid as private lenders made a last push to preserve their endangered role in making federal student loans.

The dueling messages sought to influence potential Senate action this week on a proposal that would channel tens of billions of dollars in savings to scholarships for needy students.

The proposal is attached to a bill the House approved Sunday that resolves various differences among congressional Democrats over health-care overhaul. That bill is separate from the comprehensive health legislation President Obama signed into law Tuesday.

If the Senate approves the bill without amendment, it also would go to Obama for his signature. But opponents of the lending overhaul are seeking to revise it in the Senate to force another vote in the House.

Eliminating the middleman would save the government an estimated $61 billion over the next decade. About $36 billion of that would be used to increase so-called Pell grants for lower-income students. The legislation also allocates $2.5 billion to historically black colleges, $2 billion to community colleges and at least $10 billion to reduce the federal deficit.

Backers of the move hailed it as a boon for students struggling to pay for college in a tough economy.

"This is incredibly good news for students and families and taxpayers," said Lauren Asher, president of the Project on Student Debt, a nonprofit advocacy group in Berkeley, Calif. "Taxpayer dollars that were being used to guarantee private lenders' profits are now being redirected to student aid and other important reforms to help keep college more affordable."

The bill would boost annual Pell grants, which go to about 6 million students, to a maximum of $5,975 by 2017 from $5,550 this year.

Without the legislation, the grants could be cut in coming years to offset a funding shortfall.

But other advocates said the bill wouldn't do enough to ensure cash-strapped families access to college.

Thirty years ago, Pell grants covered 77 percent of the average tuition at a public university, Asher said. That's down to 35 percent today.

The financial industry has lobbied hard against the bill, arguing it would cost jobs at student-loan companies, which would still have contracts to service some student loans.

Kevin Bruns, executive director of America's Student Loan Providers, a trade group, predicted the legislation would reduce the quality of service to borrowers because private operators would make lower profits.

"The margins on service contracts are pretty narrow," he said.

The United States Student Association rallied hundreds of members on Capitol Hill for the bill.

They waved signs — "Students NOT Banks!" and "$ Now!" — and chanted slogans that underscored the fiscal straits universities face as they raise tuition.

"They say, 'Cut back!' " students yelled. "We say, 'Fight back!' "

"I'm an independent student," said Sabrina Ford, 19, of Ypsilanti, Mich., a financial-aid recipient in her first year at Eastern Michigan University. "If the Pell grants are cut, I have no idea how I would pay for education. Right now, I rely on myself and the government to assist me."

Lenders say they also favor cutting government subsidies but that an overhaul should preserve a role for their industry in originating loans. SLM Corp., the industry leader known as Sallie Mae, says the bill would force the company to shed 2,500 jobs.

The opponents face a difficult task because overall Democratic support for the bill appears to be solidifying in the Senate, even among senators who have expressed concerns about the lending overhaul, several Democratic aides said.