Washington to run student loans

WASHINGTON (CNNMoney.com) -- Congress passed a bill Thursday to make Washington the one-stop shop for cheap student loans and to boost need-based scholarships.

Starting July 1 nearly all federally backed student loans, like Stafford loans, will come directly from the federal government. The measure prevents private student lenders, including Sallie Mae (SLM, Fortune 500) and Nelnet (NNI), from making federally backed loans, although both have federal contracts to service government loans to students.

The bill passed 56-43 in the Senate and 220-207 in the House. It was a part of a budgetary "reconciliation" package that also included changes to the health care overhaul bill President Obama signed into law on Tuesday.

The student loan legislation has been a major priority for President Obama, especially since loans backed by the federal government are the single most common way students finance higher education.

The legislation, which has been the subject of a bitter lobbying battle between the administration and the industry, would save the federal budget $61 billion over 10 years.

Of that amount, $10 billion is earmarked to pay down the federal deficit and $36 billion would be directed to the Pell grant scholarships for lower-income students. That program is currently facing a historic shortfall due to record numbers of Americans who went back to school.

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"These reforms will end a sweetheart deal that banks have enjoyed for decades, at the expense of students and families," said Rep. George Miller, D-Calif., who runs the House education panel. "These savings will be used to help students and families pay for college and reduce our deficit."

The move saves money by ending subsidies banks get to make the loans and by 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. The proposal would increase maximum Pell grant awards to $5,900 by 2017, up from $5,500 this fall.

But as a practical matter, most students seeking federal loans won't notice much of a difference. College financial aid offices would continue to work as intermediaries and many already administer direct government loans.

Republicans and the private student loan industry have opposed the legislation, arguing that the government shouldn't cut banks out of the business. They say that thousands of jobs at private lenders are at stake, including 2,500 at Sallie Mae (SLM, Fortune 500).

The foes of the legislation have said that the change will cause delays and disruptions in processing loans. They argued that the government doesn't have the manpower to take over the high volume of loans now originated by the private sector.