Education Officials Buoyed By Obama Plan

President Barack Obama this week proposed more funding for recipients of Pell Grants, which help low-income students go to college, and changes to government-backed student-loan programs. Those changes could have a significant impact on how middle- and low-income students pay for college.

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This week, the Obama administration announced major changes to grants and loans for college students. As NPR's Larry Abramson reports, that has higher education officials feeling giddy.

LARRY ABRAMSON: The economic stimulus sent a torrent of new money to recipients of Pell Grants, which help low-income students go to college. Lauren Asher(ph), with the Project on Student Debt, says that was important - but there was even bigger news.

Ms. LAUREN ASHER (Project on Student Debt): The biggest news is that the Pell Grants' value won't erode nearly as quickly, as it has in the past.

ABRAMSON: That's because the administration wants to tie Pell Grants to the rate of inflation. No longer would students and college loan officers wait anxiously every year to hear just how much Congress will appropriate for needy students. But the biggest surprise has to do with the student-loan industry. Basically, it's history - out of here. The administration wants to turn the job over to the government.

Right now, about three quarters of student loans are made through private institutions, even though the government guarantees the loan. This was a lucrative arrangement for industry, but over the past year it became unworkable as banks ran out of cash.

Barmak Nassirian, with the American Association of Collegiate Registrars and Admissions Officers, says the Department of Education had to buy up these loans, so lenders would have cash to make loans.

Mr. BARMAK NASSIRIAN (American Association of Collegiate Registrars and Admissions Officers): It really is a rather post-modern setting, where the taxpayers have to stuff money in the pockets of the lenders so that the lenders can loan the money out.

ABRAMSON: Thursday, in the Obama budget outline, the administration said it was time to cut out the middleman. Under the proposal, the government would handle all student loans directly and save $4 billion in the process. Now, this multibillion-dollar industry has not given up this fight. Kevin Bruns represents America's Student Loan Providers, an industry group. He will try to convince Congress that Americans like working through a private intermediary.

Mr. KEVIN BRUNS (America's Student Loan Provider): You had choice. You could use the credit union down the street. You could've used your parent's credit union, a bank down the street, the same institution where you get an auto loan.

ABRAMSON: But he'll have to shout pretty loudly to get the ear of this Democratic Congress. The lending industry's reputation has taken a hit over the past two years. Lenders admitted they'd actually been providing kickbacks to colleges that steered businesses their way.

The government does still plan to use government contractors for collection and servicing of loans. Mark Kantrowitz, who runs Finaid.org, says that will drive small lenders out of the business.

Mr. MARK KANTROWITZ (Finaid.org): A lot of the lenders - the larger lenders -who currently originate loans under the federally guaranteed student loan program may end up bidding on the servicing contracts of the new, much larger direct loan program.

ABRAMSON: Even with all these reforms, the tough economy will still leave some students short of funds. The Obama administration hopes it can expand other loan programs to fill those gaps.

Larry Abramson, NPR News.

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