Washington The Bush administration is suggesting a $1.3 billion cut in a federal student loan program that millions of college students and graduates use to lock in low interest rates on their education debt, administration and congressional officials say.
Unveiled to Republican leaders last week by Mitch Daniels, director of the Office of Management and Budget, the proposal was expected to trigger Democratic objections that the administration was unfairly targeting students to deal with a growing deficit while cutting taxes for the wealthy.
Now, college students and grads can consolidate all their education loans and pay a fixed interest rate for up to 30 years on the single loan. Under the new plan, consolidated loans would have variable interest rates, linked to the rise and fall in market rates, a change the administration told congressional leaders would reduce government costs on subsidized federal loans under the Pell Grant program, which is aimed at low-income students.
Critics of the existing consolidation program said the government in effect is subsidizing many graduates, including well-off doctors and lawyers, and using money that could otherwise be directed to needy students.
A change in the program would not have an immediate effect on those seeking to consolidate loans because interest rates have declined sharply as a result of Federal Reserve interest-rate reductions. But Democratic congressional officials said that as the economy recovers and interest rates rise, those who consolidate loans could see their payments rise sharply.
This prospect made Republican leaders skittish about the administration plan.
"It is unlikely that we will be using this idea," said a House GOP leadership aide. "It is on the list of options that the administration sent to us. It might make sense in a perfect world, but this is not a perfect world."
Democrats left little doubt the proposal could be used as a political weapon.
"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," said David Sirota, spokesman for Democrats on the House Appropriations Committee.
The program has been extremely popular. The fixed rate to be charged new applicants is changed each July, based on market rates. The maximum interest rate is 8.25 percent.
Kathleen deLaski, chief spokesman for Sallie Mae, the quasi-government lender of student loans, said the agency was aware of the overhaul proposal made on Capitol Hill, "but I don't think we have a strong read on where it stands right now."
"This is a legitimate debate about when students should receive a limited pool of taxpayer dollars, when they are trying to get into college or when they are in the workplace," she said.