Obama Seeks To Change Federal Student Loans

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President Obama's higher education agenda includes major changes to the federal student loan program and a push to make Pell grants for lower income students an entitlement. Similar proposals were pushed by Presidents Bush and Clinton. But they went nowhere on Capitol Hill. So is this the year they will finally pass?

STEVE INSKEEP, Host:

To pay for college, many students will need loans from the federal government, and the Obama administration plans major changes to that process. NPR's Claudio Sanchez reports.

CLAUDIO SANCHEZ: The total federal financial aid available to college students on any given year is about $85 billion. Of that, roughly $65 billion is in loans subsidized by the government, but issued through banks and other private lenders. It's been that way for decades. The Obama administration, though, wants to phase out the role of private lenders by the fall of 2010. Private banks would still get paid for administering and collecting on federal loans, but they would no longer make the loans themselves. Education Secretary Arne Duncan says all new student loans would come directly from his agency.

Secretary ARNE DUNCAN (Department of Education): This is a chance for us to increase, literally, by billions of dollars the amount of money going out to students around the country, and to serve, literally, millions of additional students.

SANCHEZ: The timing of this proposal is crucial, says Duncan. A college education has never been more important.

Secretary DUNCAN: It's also never been more expensive, and families have never been under greater financial duress.

SANCHEZ: Big drops in home equity have prevented families from using that as a source of money for college. Tuition is going up and up. Credit is tight, and family savings for college is way down. Under the circumstances, says Duncan, the government's decades-old partnership with private lenders is inadequate. Not so, says John Dean, special counsel to the Consumer Bankers Association. He says the administration's direct-lending plan would be a big mistake.

Mr. JOHN DEAN (Special Counsel to the Consumer Banker's Association): This program would deny students the opportunity to choose between lenders, and we are projecting that there will be more delinquencies and defaults.

SANCHEZ: Dean says eliminating all competition from the program would mean inferior service. Dean also questions the administration's claims that direct lending will save billions of dollars, $94 billion over the next 10 years, according to one estimate.

Mr. DEAN: We won't know whether that estimate is correct for approximately 20 or 25 years. It's bad fiscal policy. This is going to have over $100 billion a year added to federal Treasury debt.

SANCHEZ: But Secretary Duncan says it's the stability of the program that's most important. What's riskier these days, he asks, relying on banks or on the federal government?

Secretary DUNCAN: And what I want is children and families around the country to know that regardless of how tough things are in the economy, regardless how tough things are at home, that money is going to be there. They're going to have the opportunity to go to college.

SANCHEZ: It's not clear, meanwhile, whether banks and private lenders will mount a vigorous fight to block the administration's plans. They haven't yet for a very simple reason, says Dean.

Mr. DEAN: Banks are not the most popular institutions these days.

SANCHEZ: Lawmakers, says Dean, don't want to be seen as defending banks, and that seems to have emboldened the Obama administration as it pushes for what it calls the biggest change in federal higher education policy since the GI Bill.

Claudio Sanchez, NPR News.

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INSKEEP: We're going to be talking all week about what the recession means for colleges. And tomorrow, the economy changes the college plans of two families.

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INSKEEP: This is NPR News.

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