Student loans: Will Congress's remedy favor middle class over poor?

Student loans subsidized by the federal government will become more expensive soon unless Congress acts to keep interest rates low. But Pell grants, which benefit low-income students, also face cuts, analysts note.

The surging student loan burden has the attention of President Obama and Congress. A jaw-dropping fact has become widely publicized: that student debt for the first time totals more than $1 trillion, well over the amount Americans owe on credit cards.

But even as politicians consider fixes – especially how to avert an interest-rate hike affecting students come July 1 – the grant-style aid that's most important to lower-income students is already experiencing a budget squeeze.

Is this election-year politics as usual, in which the interests of middle-class families who are more likely to vote take priority over those of poorer households, which are less likely to vote?

That's the way some analysts of education policy see it, as Mr. Obama makes an all-out pitch this week to prevent a doubling of interest rates, to 6.8 percent, on federal student loans.

Obama appealed for congressional action in appearances Tuesday at the University of North Carolina and the University of Colorado, and on Wednesday took his case to the University of Iowa.

Mark Kantrowitz, a financial aid expert who founded a popular website on the subject, FinAid.org, says providing relief for college-loan borrowers is a good idea, but that policymakers appear to be forgetting about the grants that widen access for more Americans to enter college. 

"The Pell grant [can determine] whether a student can enroll or graduate from college," Mr. Kantrowitz says. "To the extent that we're trading off one form of student aid for another ... I think we have things a little bit backwards."

He says it will cost about $6 billion over the next year to prevent the interest-rate jump, for college students who take out Stafford loans after July 1. 

The interest rates will affect the cost of college for a wide range of borrowers, middle- and low-income alike. The Pell grants, in addition to determining whether many low-income students can enter college at all, leave recipients with a lower debt load upon graduation.

Budget legislation last year in effect tightened Pell grant budgets, by narrowing eligibility rules. The grants are now capped at 12 semesters per student, down from 18 semesters, and income-based qualifying standards have been tightened.

This comes after years in which Pell grant disbursements expanded, in part because the recession prompted more young Americans to seek college degrees. At the same time, however, rising tuition and fees mean the grants cover a much smaller share of college costs than they used to.

The squeeze on Pell grants reflects tight budgetary times. Large federal budget deficits, with no end in view, are causing Congress to focus more intently on fiscal restraint. But many finance experts say the long-term fiscal threat lies in the instability of mammoth programs such as Medicare and Social Security, much more than in smaller items like student aid.

Moreover, economists often call education spending an investment that pays dividends back to the nation by boosting the quality of the work force, generating economic growth, and raising individual incomes. In turn, all that helps to make the US more competitive in the global economy and means higher tax revenue for the government over time.

Obama has echoed those themes in recent speeches.

"In America, higher education cannot be a luxury. It’s an economic imperative that every family must be able to afford," he said in his weekly address to the nation from the White House Saturday.

In North Carolina on Tuesday, the president stuck up for Pell grants. 

"Congress needs to safeguard aid for low-income students, like Pell grants, so that today’s freshmen and sophomores know that they’ll be able to count on it," Obama said. He also called on lawmakers to double the number of work-study jobs, so students can earn more of their way through school.

But the president made his hardest sell on the student-loan front, urging that the low interest rates set by Congress in legislation five years ago be extended. He has also called for extending his American Opportunity tax credit, which eases college costs primarily for middle-class families. 

Some Republicans, including presumptive presidential nominee Mitt Romney, have embraced the cause of extending the interest rate on federal student loans. 

A sticking point between the two parties, as Congress considers student-loan legislation, could be the question of how to pay the $6 billion price tag.

In his effort to turn up heat on Congress and to solidify his support among young voters, Obama is blasting Republicans as out of touch on the debt issue.

"The Republicans who run Congress right now have not yet said whether or not they’ll stop your rates from doubling.... Some have hinted that they’d only do it if we cut things like aid for low-income students instead."

For their part, Republicans say Obama's economic policies are to blame for today's weak job market – a key reason many recent graduates are having trouble paying back their loans.

Economists generally say the payoff is high from investing in education, but that not every young person should aim to get a four-year degree.