Student loan program targeted for huge cut

Bush has asked Congress to trim $1.3 billion to reduce budget deficit


WASHINGTON - The Bush administration is seeking to ease its budget shortfalls by squeezing $1.3 billion from a huge federal student loan program, say administration and congressional officials.

The proposal would prevent millions of college students and graduates from consolidating their education loans to lock in low interest rates. It was made last week to Republican budget negotiators by the White House budget director, Mitchell E. Daniels Jr., as a way to deal with shortfalls throughout the budget that are expected to push the federal deficit for this year to more than $100 billion.

Democratic congressional leaders are expected to fiercely oppose the move as unfair to the millions of Americans who depend on federal student loans to help pay for their education.

Officials said the White House proposal would end a program that has allowed college and university students and graduates to consolidate their student loans at a federally subsidized, fixed interest rate and take up to 30 years to pay them back.

Under the proposal, the consolidated loans would be offered only at variable rates. This is expected to make the consolidation loans far less appealing and save the government billions in subsidies for the program. The change would not affect students and graduates who have already consolidated their loans.

Trent Duffy, a spokesman for Daniels, confirmed that the proposal had been forwarded to Congress in discussing the administration's request for a $27 billion supplemental spending bill for the rest of the year, much of it directed at spending for counterterrorism programs.

Duffy said the loan proposal was "very preliminary" and was offered as an option to make room in the budget for spending elsewhere. Officials said Daniels noted to the House Republicans that the proposal would offset a $1.3 billion shortfall this year in the budget for Pell Grants, the federal education grant program aimed at low-income students.

David Sirota, a spokesman for Democrats on the House appropriations committee, which must pass judgment on the supplemental spending bill, said Democrats would oppose the change because it would raise the interest rate paid on education loans by millions of middle-class Americans.

"The president and his budget director are finally being honest about their misguided priorities - more tax cuts for Enron paid for by effectively raising taxes on middle-class students and their families," Sirota said.

The federal government began the loan consolidation program in 1986. Under the program, the interest rate is capped at 8.25 percent a year.

But critics of the consolidation program, including some private lenders, say it has allowed high-income college and university graduates - including doctors, lawyers and other professionals - to consolidate their education debts at the federal government's expense. Government officials said the program has cost the government billions of dollars since it began.

The program's appeal to borrowers is obvious from promotional material distributed by Sallie Mae, the quasi-governmental educational lender, which refers to the debt consolidation plans with the brand name "Smart Loan."

Unlike other loans, the consolidation loans are offered without any credit checks, service fees or prepayment penalties.

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