$20.2b boost in student aid approved

WASHINGTON - Congress approved a $20.2 billion boost in financial aid for college students yesterday, a package that backers said would be the single largest increase in federal tuition funding since World War II.

The bill, which President Bush is expected to sign, raises the maximum Pell grant for low-income students from $4,050 to $5,400, and temporarily slashes interest rates on student loans by half.

It also establishes debt-forgiveness programs for graduates who enter certain poorly paid fields such as law enforcement, firefighting, and teaching. According to the Department of Education, the average student now graduates with $19,000 in debt.

The new aid would be funded by a massive cut in subsidies to the scandal-plagued private student loan industry. Lenders said the cutbacks would cause some banks to stop offering student loans.

The president had threatened to veto an earlier version, but the White House indicated Thursday that Bush would sign the legislation.

With the first major increase in tuition grants in years seemingly assured, Massachusetts higher education officials were pleased.

"The increase in the Pell Grants is unprecedented in terms of its size," said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. Roughly 75,000 students in Massachusetts received $198 million in Pell Grants in the current school year. They will become eligible for another $28.7 million in September 2008.

Under the legislation, Pell Grants will be increased gradually over the next five years. The cut in the interest rate for student loans from 6.8 percent to 3.4 percent will also be phased in, and will only apply to new loans. Republicans were quick to point out yesterday that the rate will revert to the higher percentage after four years.

Senators approved the bill by a vote of 79 to 12. The final tally in the House was 292 to 97.

Some education analysts downplayed the changes. Shelley Steinbach, the former general counsel of the American Council on Education, rejected the comparison drawn by many Democrats yesterday to the 1944 GI Bill, which is credited with opening the doors of universities to millions of veterans after World War II.

"Increasing the Pell Grant from four-thousand something to five-thousand something by the year 2012 will not have a really significant impact, given the likelihood of inflationary costs in everything that goes into providing higher education," he said.

The subsidy cut means companies such as Sallie Mae and Citigroup that lend to students will get a smaller "special allowance payment" from the federal government in exchange for offering the loans. But the government will continue to guarantee those loans against default, which virtually guarantees a profit and which has been criticized by some Democrats as too generous.

Lenders said that Democrats were unfairly targeting the entire student loan industry after revelations that some companies gave kickbacks to school officials who touted their loans to students.

Peter Warren, vice president for government relations at the Education Finance Council, which represents private lenders, said that the subsidy cut would force some lenders to scale back.

"The stories that have been running in the media lately obviously have contributed to an environment that has been used politically to sort of cast a very broad net and indict all lenders," he said

One Nebraska-based lender, Nelnet Inc., announced Thursday that it would lay off 400 employees in anticipation of the new rules. Nelnet was one of the loan companies snared in a corruption investigation by New York Attorney General Andrew Cuomo. It paid a $2 million settlement to the state of New York for making improper arrangements with college alumni associations to promote its loans.

In an interview Thursday, Senator Edward M. Kennedy, one of the authors of the legislation, dismissed the lenders' concerns and said that the student loan business would remain profitable. Kennedy pointed out that the $25 billion acquisition by a group of investors of Sallie Mae, the nation's biggest private student loan provider, was going ahead despite the impending passage of the legislation.

"If this took so much from the lender, why would this be such a profitable deal?" he said. "There's more than ample incentives for these lenders at the present time."

Still, there was criticism from some Democrats that the legislation did not go far enough. Democratic presidential candidate John Edwards released a statement calling for an end to subsidies to private lenders and said that all loans should be handled directly through the Department of Education.

Congressional Republicans expressed frustration with President Bush for endorsing the measure. Representative Howard P. McKeon of California, the ranking Republican on the House Education Committee, said the bill amounted to an "entitlement program spending spree."

Michael Dannenberg, director of the Education Policy Program at the New America Foundation, a think tank in Washington, said that by proposing his own cuts in lender subsidies in his February budget, Bush had undercut members of Congress in his own party.

"President Bush triangulated conservative Republicans. He made common cause with the Democratic majority and proposed his own lender subsidy reduction as part of his budget," Dannenberg said. When the lending scandal exploded, he said, "congressional inaction became publicly unacceptable."