Low-income students won a victory Thursday as the U.S. House of Representatives approved an expansion of the popular Pell Grant program.
They might also see the transformation of the federal student aid landscape if a version of that bill survives the Senate and lands on President Barack Obama's desk.
Under the Student Aid and Fiscal Responsibility Act approved in the House on a mostly party-line vote, lenders like Sallie Mae and Bank of America would be cast to the sidelines in the federal loan process, ending a 40-year partnership with the private sector. Students would apply directly for aid under the federal government's alternative Direct Loan Program rather than weighing competing offers with banks as middlemen.
Supporters of the change say it would save $87 billion over the next decade by eliminating federal subsidies to private lenders. Nearly half the savings would be used to expand Pell Grants, tying them to the cost-of-living index and lowering the income threshold needed to qualify.
The bill would also expand aid to community colleges, expand the Perkins Loan program and simplify aid forms.
"This will save us money," said Rep. Kathy Castor, D-Tampa, a co-sponsor of the bill. "We're going to plow a lot of money back into making college more affordable. And we're also going to plow $10 billion back into the U.S. Treasury to help pay down the federal deficit."
The changes would also mark a final chapter in the student loan scandal that began in 2007 after state and federal investigators uncovered a string of kickback schemes involving college financial aid offices and private lenders.
Castor said private lenders "made a mockery" of their claim that competition would bring lower interest rates, with students often paying higher-than-market-value rates and lenders wasting federal money on efforts to win business at colleges. She said the expanded Pell benefits would bring more than $106 million in additional aid money to students who live in her Tampa Bay district, adding new recipients and potentially pushing the maximum grant from $5,350 to nearly $7,000 a year by 2019.
"Those dollars will circulate throughout the economy of the entire region," Castor said. "And we need that shot in the arm now more than ever."
Opponents of the bill said the federal government wouldn't be able to keep costs low without competition from lenders and might not be able to handle the flood of loans if the Federal Family Education Loan Program is abolished.
"I still, along with many of my colleagues, feel that when 100 percent of schools go into Direct Lending, there's an accident waiting to happen," said Bill Spiers, a spokesman for the Florida Association of Student Financial Aid Administrators.
He said some of the largest private lending companies like Sallie Mae and Nelnet would likely win contracts to manage those loans for the government but still might be forced to lay off employees. And he predicted an uphill fight for the bill, as senators weigh voters' discomfort with "nationalizing" another industry.
But at the University of South Florida, financial aid director Billie Jo Hamilton said she was thrilled with the expansion of the Pell Grant program. And she said her school would likely switch to the Direct Lending program, even if the bill founders, in order to avoid the crisis that faced students a year ago when credit markets collapsed.
"We can't find ourselves in a position where our lender partners can't get capital," Hamilton said. "We did have some of that in the start of 2008, and it was frightening."
The University of Florida has used Direct Lending since the program was created in the early 1990s, and officials have said it makes applying for loans much less complicated for students.
Still, these haven't been easy times for students trying to pay for college, said junior Rafael Yaniz, chief of staff for the student government.
"I've seen students complaining about difficulty in finding jobs, just because there are too many of them and not enough positions available," he said. "By all means I'm in favor of students having more access to student aid, with less hoops to jump through."
Low-income students who need Pell Grants have lost ground for years compared with inflation, said Lauren Asher, president of the California-based Institute for College Access & Success.
"This is really major progress for students and borrowers," she said, describing the crunch facing families. "A lot of people who thought they could handle it are finding they can't. Their homes are worth less; their investments have taken a hit."
Chris Lindstrom, higher education director for the U.S. Public Interest Research Group, said families would benefit from expansion of the Pell Grants.
But she said her organization would closely monitor the new legislation to ensure that borrowers are protected against unfair repayment terms and that private companies managing federal loans don't take advantage of students.
"We're concerned about the safeguards that are in place for borrowers with this new regime," she said. "We need to stay on top of that."
Tom Marshall can be reached at email@example.com or (813) 226-3400.