LOS ANGELES — The federal government is moving toward the most sweeping overhaul of college financial aid in decades.
The House of Representatives voted for the measure as part of its passage of health care legislation Sunday.
Under the proposal, private lenders would no longer make federally subsidized student loans. Instead, the government would make all such loans itself, instead of only some as it does now.
Eliminating the middleman would save the government an estimated $61 billion over the next decade. About $36 billion of that would be used to increase so-called Pell grants for lower-income students. The legislation also allocates $2.5 billion to historically black colleges, $2 billion to community colleges and at least $10 billion to reduce the federal deficit.
The Senate is expected to take up the measure as early as this week.
Backers of the move hailed it as a boon for students struggling to pay for college in a tough economy.
“This is incredibly good news for students and families and taxpayers,” said Lauren Asher, president of the Project on Student Debt, a nonprofit advocacy group in Berkeley, Calif. “Taxpayer dollars that were being used to guarantee private lenders’ profits are now being redirected to student aid and other important reforms to help keep college more affordable.”
The bill would boost annual Pell grants, which go to about 6 million students, to a maximum of $5,975 by 2017 from $5,550 this year.
Without the legislation, the grants could be cut in coming years to offset a funding shortfall.
But other advocates said the bill wouldn’t do enough to ensure cash-strapped families access to college.
An earlier version would have boosted the maximum Pell grant to $6,900. And even though the grants would be indexed to inflation for the first time, that provision would be in effect for only five of the next 10 years, said Mark Kantrowitz, publisher of Finaid.org, a college-aid Web site.
“It’s falling far short of tuition inflation,” he said. “It could have been a lot better.”
Thirty years ago, Pell grants covered 77 percent of the average tuition at a public university, Asher said. That’s down to 35 percent today.
The financial industry has lobbied hard against the bill, arguing it would cost jobs at student-loan companies, which would still have contracts to service some student loans.
Kevin Bruns, executive director of America’s Student Loan Providers, a trade group, predicted the legislation would reduce the quality of service to borrowers because private operators would make lower profits.
“The margins on service contracts are pretty narrow,” he said.
Sarah Bana, 21, an economics major and student government activist at University of California at Irvine, was in Washington this week to lobby for the bill.
“It was beautiful to see legislators finally speaking up for students and students’ rights,” she said.
Bana, a senior, said she received a $3,400 Pell grant this year and about $12,400 in other financial aid.
Pell grants “are definitely a big factor for me being able to come to college,” she said.
Nancy Coolidge, the UC system’s coordinator of student financial support, said she was very pleased about the bill, especially its protection of the Pell grants. More than 55,000 UC students receive Pells, totaling about $200 million a year and averaging about $3,500 per UC recipient, she said.
If the bill had failed, the maximum Pell grant would have dropped to about $2,150, less than half the $5,500 maximum projected for next year, she said. “So this is a very good outcome. It’s a big relief,” she said.
The legislation’s provisions on loans wouldn’t affect UC students much because all 10 UC campuses have already opted to offer loans directly from the federal government, avoiding private lenders.
One benefit would be a slightly lower interest rate for parents who take out federal Plus loans, Coolidge said. And students who started out with private bank loans would be able to consolidate those with direct government loans when they graduate, she said.
Whittier College and Stanford University also were among the schools planning to switch to direct loans by fall, whether the bill passed or not.
Whittier’s vice president for enrollment, Lisa Meyer, said she hopes the loan application will be “simpler for families” than the one involving private banks issuing federally guaranteed loans.
If direct loans become mandatory nationwide, she said, “there may be some bumps along the way as colleges figure out what we need to do and the government figures out the level of support colleges need. But I anticipate in the long run, it will be a positive thing.”
Jack Scott, the chancellor of California’s community colleges, said he was “thrilled” the bill included funding for community colleges to develop and improve career and trade training and programs that help students stay in school at historically black and minority-serving colleges.
The funds would be awarded through competitive grants, so it’s too soon to say what the effect would be in California, he said.