Obama would spend more to make college affordable

WASHINGTON (AP) — President Obama on Thursday proposed a huge ex-pansion of the government’s role in making college more affordable and putting it within reach of more students.

Even in tough times, and in a budget full of hard choices, Obama called for a significant spending increase on education, particularly higher education. The president was following through on a campaign promise to give every child the chance to go to college or pursue some form of higher education.

In his budget plan, Obama seeks to link growth of the Pell Grant program to inflation for the first time since the program began. It would grow by more than 75 percent over the next decade.

Obama also seeks to overhaul the student loan system by ending a massive program of government-subsidized loans made by private lenders. Instead, he would boost direct lending by the government in an attempt to save money and protect students from turmoil in financial markets.

“Our basic thought is, rather than continue to subsidize banks, we want to help dramatically more students get more access to more aid,” Education Secre-tary Arne Duncan said on a conference call with reporters.

The changes in federal aid, an Obama campaign promise, would transform a long-standing partnership between the government and the private sector.

Last year, private lenders made $56 billion in loans to about 6 million students under the subsidized Federal Family Education Loan, or FFEL, program. The government set the terms of and backed the loans, and supporters say it helped students by giving them private-sector capital and good customer service.

But the public-private partnership has begun to crumble under the weight of the recent credit crisis. Hundreds of private lenders have stopped making feder-ally-backed loans, and hundreds of colleges that had only offered subsidized fed-eral loans have signed up to let their students borrow straight from Washington.

At the same time, the government has bought up tens of billions of dollars’ worth of loans to keep student loans flowing.

Obama’s plan would end subsidized student loans in 2010, though officials said private-sector lenders would still be hired to service direct government loans. Last year, the government made $14 billion in loans to 1.5 million students.

Another $18 billion is borrowed directly from private lenders, usually after students have maxed out on their eligibility for federal loans.

The budget announcement sent shares of student lending companies plummet-ing. Shares of SLM Corp., better known as Sallie Mae, sank 31 percent; Student Loan Corp. fell 22 percent; and Nelnet Inc. dropped 54 percent in trading Thurs-day.

Kevin Bruns, a spokesman for the trade group America’s Student Loan Pro-viders, said the subsidized program has given families uninterrupted access to student loans.

“It has been a rare source of stability,” Bruns said. “Now is not the time to talk about abolishing it.”

The budget plan was embraced by Democrats on Capitol Hill, where House Education and Labor Committee Chairman George Miller of California said the student loan overhaul would save billions of dollars and make student loans more reliable. Massachusetts Sen. Ted Kennedy, D-Mass., chairman of the Senate Health, Education, Labor and Pensions Committee, said, “The doors to college will be far more open.”

Democrats applauded Obama’s effort to keep Pell Grants growing. Lawmakers have frequently failed to do so, even as college costs zoomed.

In the 1980s, the maximum Pell Grant covered half the average cost of a public four-year college; by 2006, it covered less than a third. Pell Grants mostly support students from families earning under $30,000 a year.

Obama proposes to take Pell Grants out of lawmakers’ hands, giving the pro-gram a mandatory stream of dollars like Social Security and Medicare, and to index Pell Grants to the annual inflation rate.

The newly enacted economic stimulus bill will raise the maximum grant, cur-rently $4,731, to $5,350 on July 1 and to $5,550 next year.