Student-loan overhaul key to Obama's goals

WASHINGTON —

President Obama's health-care goals may be garnering attention, but his higher-education proposals are no less ambitious.

If adopted, they could transform the financial-aid landscape for millions of students while expanding federal authority to a degree that even Democrats concede is controversial.

At stake is a plan to expand the Pell Grant Program, making it an entitlement akin to Medicare and Social Security. Key to the effort is a consolidation of student lending that would give the U.S. Department of Education a near monopoly over the practice — a proposal that has mobilized the private loan industry, which lent $55.3 billion to 6.4 million students in the 2007-08 school year.

Obama outlined his initiatives, which also include incentives for colleges to cut costs and to raise graduation rates, in the fiscal 2010 budget that Congress approved Wednesday, and Democratic leaders said they hope to make them law by October.

The aim is to improve access to postsecondary school for those who need it most: lower-income students for whom college or vocational training can be the decisive factor in their economic future. The president has said he wants the United States to lead the world by 2010 in the proportion of college graduates, a position the country had long held; it now ranks seventh for the 25-34 age group. He has also called for every American to attend a postsecondary institution.

Neither goal will be met if students can't afford the cost.

The administration's plans are "the most fundamental rewriting of federal student-aid policy in 35 years," said Terry Hartle, senior vice president of the American Council on Education. "These are big changes. They are painted with a broad brush. ... It's easy for this to be overshadowed by health-care proposals, but for many families, these discussions will be equally important."

Even critics of the plan say the status quo is unsustainable.

Students are amassing debt on a scale that approximates a home mortgage. The economic downturn has meant rising rates for defaults on loans, as well as for students dropping out. Private schools face shrinking endowments, and public universities face state budget cuts.

Groundwork in place

The tuition crisis has built over many years, however, and until recently Congress did little to address it. The maximum Pell Grant award was frozen at $4,050 from 2003 through 2007. When Democrats came to power that year, they laid the groundwork for many of the changes on the table, including raising Pell Grants to the current amount of $4,731. They also began to curb federally subsidized private loans.

But Obama would go much further. He wants to terminate the private Federal Family Education Loan Program, the primary source of student loans. Advocates say the move is a formality: The government already effectively controls the program by guaranteeing the loans, paying a special allowance to lenders, and in recent months, buying back loans by the billions from struggling firms.

Shifting all lending authority to the government through its Direct Loan program would save $94 billion over 10 years, according to the Congressional Budget Office. Obama would use that windfall to expand the Pell Grant Program, created in 1965 to cover most tuition costs for low-income students.

Obama also is seeking to overhaul federal Perkins loans, administered by schools to bridge gaps between other loans, grants and scholarships. The revamped Perkins program would provide $6 billion in loans a year, compared with the current level of $1 billion, and participation would be expanded beyond the current 1,800 institutions to all 4,400 colleges and universities. An additional 2.7 million students could receive the loans.

In a potentially significant shift, the administration has suggested it wants to change the distribution formula for Perkins loans, to give priority to needier students and to reward schools that control costs.

The private lending industry is fighting to preserve its role, but Obama asserted last month that he saw the choice as stark.

"In the end, this is not about growing the size of government or relying on the free market — because it's not a free market when we have a student-loan system that's rigged to reward private lenders without any risk," he said.

Industry seeks summit

Industry officials contend that private loans provide stronger default protections and better serve smaller schools, and some institutions have suggested that they may be content to play a more limited role.

Industry officials are urging lawmakers to convene a summit of industry leaders to search for middle ground. But they also acknowledge that the prospect of capturing $94 billion and directing it to Pell Grant assistance could prove hard for Congress to resist.

"The only reason they're doing this is the government can make a lot of money," said Kevin Bruns, executive director of the trade group America's Student Loan Providers. "Private-sector lending built this entire industry, and now the federal government has piggybacked off of it."

Rep. George Miller, D-Calif., the education committee chairman, said recent credit-market turmoil "pretty much makes the case" that private lending is an unstable source of aid. But he said lawmakers from both parties are bombarded with complaints about college costs, and they know something must change.

The most vocal naysayer is Sen. Ben Nelson, D-Neb., who voted against the budget in part because of the student-loan proposal. Nelson's state is home to Nelnet, a loan provider that employs 1,000 people and has contributed generously to his political campaigns.

"It's not just thinking about your state," he said. "I have a fundamental difference in opinion thinking that all student aid ought to come from the government."

"The lobbyists are very active on this one," Miller said.