College students seeking federal financial aid would borrow directly from the federal government and private banks could be removed from federal lending programs altogether, under legislation approved by the U.S. House.
Supporters say it would be a government investment in making higher education affordable, and it would keep interest rates low and protect students from fluctuations in the market.
Critics of the proposal say it would deny students their choice of borrowers and they say it is another example of the government overstepping its bounds.
As the plan is proposed, Pell grants, which are currently distributed to more than 7 million students, would increase to $6,900 by 2019 from $5,350 today. And the process for applying for federal aid may be simplified since the federal government would be the sole provider.
"I am pleased to support this legislation so that more students are able to receive career training and obtain college degrees," U.S. Rep. Bill Foster, a Geneva Democrat, said after voting for the proposal. It cleared the U.S. House by a vote of 253-171.
But officials from college loan offices said the legislation's impact might not be that noticeable.
"Not much will change for the way students and their parents will finance their studies," said Emily Osborn, financial aid director at Northwestern University, which has not participated in the direct loan program yet.
Osborn said most lenders in the existing federal loan programs offer the same benefits to students as the federal direct loan program. "The interest rates were fixed on both programs several years ago," she said.
And critics say it will do more harm than good.
"Thanks to another big government consolidation of power, the graduate students in our area that need assistance the most will have to struggle even more to attend school and pay their bills," said U.S. Rep. Peter Roskam, a Wheaton Republican, in explaining his opposition.
Roskam's concern is that it could end a local grant program at the Midwestern University. The health care graduate school in Downers Grove is in Roskam's suburban district.
The university offers grants to low-income students through a nonprofit foundation. Roskam and school officials say the legislation threatens Midwestern's ability to be a lender.
"The current bill would eliminate our ability to provide our students a personalized financial assistance," said Gregory Gaus, the school's senior vice-president and chief financial officer.
"We believe that the service we are providing is excellent," added Kimberly A. Brown, the school's director of financial services. "When a university can handle students' aid, why to change it?"
Supporters, however, say there may still be a role for such nonprofit organizations in the lending process to be determined by the Department of Education based on service to borrowers.
If approved by the Senate, the changes to financial aid would likely take effect for the 2010-11 academic year.