Budget to Raise College Loan Limits

To get larger college grants (search) to poor students, the Bush administration wants to shrink guaranteed aid to banks and end a popular loan program.

President Bush's budget will also propose raising federal loan limits for freshman and sophomore college students, Education Department officials told The Associated Press Friday.

The budget proposal will be released Monday.

The new education details help clarify how Bush would pay for one of the biggest financial aid shake-ups in decades, one mostly built around Pell Grants for poor students. It amounts to a shifting of money that woult from $4,050 to $4,550 over five years — or $100 a year — and end a $4.3 billion deficit fueled by surging demand in recent years. His budget would make the yearly increases mandatory rather than leave them at the discretion of Congress.

Overall, his financial aid plan would cost roughly $28 billion over 10 years, with $19 billion for the Pell Grants alone. The budget would raise loan limits from $2,625 to $3,500 for freshmen and $3,500 to $4,500 for sophomores. Those caps haven't changed since 1986.

To help pay for it all, Bush wants to shrink a range of subsidies that the government pays to banks to encourage them to make low-interest loans, and to the agencies that insure the loans for the lenders. The savings would pay for more than half of the financial aid overhaul, said Sally Stroup, assistant secretary for postsecondary education.

"We found several billions that we believe we can reduce without causing any disruption in the student loan program," she said. "Lenders will make a little less money, it's true."

Most of the Bush proposals are "generally supported," said John E. Dean, special counsel for the Consumer Bankers Association, which represents banks that made federal student loans.

But at least one idea, he said, may be a tougher sell — a plan to make banks assume a higher risk that students will default on loans, lowering the financial exposure for the government. That could prompt some banks to reduce loans to high-risk students, such as community-college students whose post-graduation income is less certain, Dean said.

The budget also would phase out Perkins Loans (search), which provided help to about 673,000 students in 2004. Stroup said the $6 billion saved could be better used as Pell Grants (search).

Stephanie Giesecke, budget director for the National Association of Independent Colleges and Universities, defended Perkins Loans as integral student aid. But she gave Bush credit for wanting to expand Pell Grants and said Congress may seek its own ways to fund the plan.

"The instinct to put more money into grants rather than loans is a good one, and one that would be welcomed by families," said James Boyle, president of College Parents of America. "And it would help close a perception gap, where college is increasingly seen as out of reach for low-income families. ... It would help focus attention that grant money is available."