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Obama wants to increase federal role in lending

President Obama last week proposed a huge expansion of the government’s role in making college more affordable and putting it within reach of more students. The move — which aims to convert all student lending to direct federal loans — will require colleges and universities to update software designed to aid the landmark transition, Education Department officials said.

Even in tough times, and in a budget full of hard choices, Obama called for a significant spending increase on education, particularly higher education. The president was following through on a campaign promise to give every child the chance to go to college or pursue some form of higher education.

In his budget plan, Obama seeks to link growth of the Pell Grant program to inflation for the first time since the program began. It would grow by more than 75 percent over the next decade.

Obama also seeks to overhaul the student loan system by ending a massive program of government-subsidized loans made by private lenders. Instead, he would boost direct lending by the government in an attempt to save money and protect students from turmoil in financial markets.

"Our basic thought is, rather than continue to subsidize banks, we want to help dramatically more students get more access to more aid," Education Secretary Arne Duncan said on a conference call with reporters.

The changes in federal aid, an Obama campaign promise, would transform a long-standing partnership between the government and the private sector.

The higher education software change will be finished before the start of the fall 2009 semester, officials said.

Stephanie Babyak, a spokeswoman for the Education Department, said "software is updated annually" for colleges and universities that participate in the federal government’s Direct Loan Program. Since Obama’s plans will move "all loans to direct loans," the software will be updated once again, Babyak said.

Higher education has seen a marked up-tick in the number of direct federal loans since last year. Through February 2008, almost 3 million student loans at 1,072 colleges were doled out, totaling $13.1 billion, according to ED statistics. As of last month, the 2009 numbers were 4.5 million loans at 1,620 schools. Loans have totaled $20 billion so far during the 2008-09 academic year.

Last year, lenders made $56 billion in loans to more than 6 million students and parents under the subsidized Federal Family Education Loan, or FFEL, program. The government set the terms of and backed the loans, and supporters say it helped students by giving them private-sector capital and good customer service.

But the public-private partnership has begun to crumble under the weight of the recent credit crisis. Hundreds of lenders have stopped making federally backed loans, and hundreds of colleges that had only offered subsidized federal loans have signed up to let their students borrow straight from Washington.

At the same time, the government has bought up tens of billions of dollars’ worth of loans to keep student loans flowing.

Obama’s plan would end subsidized student loans in 2010, though officials said private-sector lenders would still be hired to service direct government loans. Last year, the government made $14 billion in loans to 1.5 million students.

Another $18 billion is borrowed directly from private lenders, usually after students have maxed out on their eligibility for federal loans.

The budget announcement sent shares of student lending companies plummeting. Shares of SLM Corp., better known as Sallie Mae, sank 31 percent; Student Loan Corp. fell 22 percent; and Nelnet Inc. dropped 54 percent in trading Thursday.

Kevin Bruns, a spokesman for the trade group America’s Student Loan Providers, said the subsidized program has given families uninterrupted access to student loans.

"It has been a rare source of stability," Bruns said. "Now is not the time to talk about abolishing it."

The budget plan was embraced by Democrats on Capitol Hill, where House Education and Labor Committee Chairman George Miller of California said the student loan overhaul would save billions of dollars and make student loans more reliable. Massachusetts Sen. Ted Kennedy, D-Mass., chairman of the Senate Health, Education, Labor and Pensions Committee, said, "The doors to college will be far more open."

Democrats applauded Obama’s effort to keep Pell Grants growing. Lawmakers have frequently failed to do so, even as college costs zoomed.

In the 1980s, the maximum Pell Grant covered half the average cost of a public four-year college; by 2006, it covered less than a third. Pell Grants mostly support students from families earning under $30,000 a year.

Obama proposes to take Pell Grants out of lawmakers’ hands, giving the program a mandatory stream of dollars like Social Security and Medicare, and to index Pell Grants to the annual inflation rate.

The newly enacted economic stimulus bill will raise the maximum grant, currently $4,731, to $5,350 on July 1 and to $5,550 next year.


Education Department

Federal student aid web site

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