Student loan reform shares health care fate

WASHINGTON (CNNMoney.com) -- When the House votes on a health care package this weekend, it will also consider a proposal to make the federal government the one-stop-shop to get cheap student loans.

A review by Congress' budget arm found that the latest proposal will generate less in new savings on student loans over 10 years -- $61 billion vs. the original $87 billion -- primarily because so many schools have already adopted the program.

About $10 billion of those savings would go to offsetting the federal deficit -- including the cost of extending health care to millions of uninsured Americans.

The student loan proposal, which cuts out bank middlemen who now collect a subsidy to make federally backed student loans, would still provide $51 billion in new funding to invest in higher education, proponents said.

"What we have is a miraculous opportunity," said Secretary of Education Arne Duncan. "Simply by stopping the subsidy to banks, we can plow those savings into our students."

The original House legislation also directed $10 billion in savings to deficit reduction. But that was when the total savings tab was forecast as much as $87 billion, before the Congressional Budget Office's revision.

The private student loan industry, which has opposed the legislation, is crying foul, saying the government shouldn't redirect money from education loans to extend health care to the uninsured.

"They're using student loan borrowers to fund health care reform, and that certainly was never intended," said Kevin Bruns, executive director for America's Student Loan Providers.

If the proposal passes, private banking companies such as Sallie Mae will no longer be able to make federally backed loans, such as Stafford loans, which offer the lowest interest rates because the government assumes the default risk.

The move would save money by ending bank subsidies and allowing the government to keep the difference between what it costs to make the loan and what borrowers are charged.

Low-income students would benefit the most, as the government would have more dollars available to make more need-based Pell grants in the future.

The proposal would increase maximum Pell grant awards to $5,900 by 2020, up from $5,300 now. Yet, the new maximum is $1,000 less than the $6,900 originally proposed by the House last fall.

Additionally, the federal government is facing a shortfall next year in funding for the Pell grant program, as more students with unemployed or underemployed parents have been qualifying for the need-based aid. If nothing is done, students could face a 60% cut in need-based grants, Democrats said.

Under this legislation, the Pell grant program would get $13.6 billion more next year but still face a $5.5 billion funding gap. The shortfall means that the maximum Pell grant award is set to dip to $5,100 next year to meet the increased demand.

Sen. Tom Harkin, D-Iowa, pledged that Congress would continue working on how to plug Pell grants shortfalls.

"This bill is not as good as it originally was," said Mark Kantrowitz, a financial aid expert and publisher of FinAid.org and FastWeb.com. "It is difficult to see how President Obama will be able to meet his college graduation goals by 2020."

Consumer advocates say most students that seek federally backed student loans won't notice a difference in getting loans, since financial aid offices would continue to work as the intermediary and many offices already administer direct federal government loans.

But banks and some Republican lawmakers predict the legislation will cause delays and disruptions in processing loans. They argue that the government doesn't have the manpower to take over the high volume of loans now originated by the private sector.

The banks also predict that thousands of jobs will be lost in the private student banking industry, including 2,500 at Sallie Mae (SLM, Fortune 500), said company spokesman Conwey Casillas.

The stakes are high, because federally backed student loans are the single most common way students finance higher education. It's a core product for Sallie Mae, which also sells students its own private loans at higher interest rates.

--CNN's Ted Barrett and Jennifer Haley contributed to this report.