In the last year, crises in the credit markets and the economy have dramatically altered the student loan landscape, putting the federally-guaranteed student loan program that private lenders participate in on life support, witnesses told the Committee on Education and Labor yesterday.

The status quo has become impossible to defend. Students and families are not being served as well as they could be and taxpayers are spending billions of dollars annually to finance a broken system. Momentum is building for reforms that will deliver aid to families in a more stable and sustainable way, shielded from any ups and downs in the markets. We can either continue sending billions of dollars to banks and lenders or we can start sending it to students who need more help than ever paying for college in this economy.

The U.S. Department of Education currently operates two programs that provide borrowers with the same federal student loans, and with the same interest rates, terms and conditions. One is the federally guaranteed student loan program -- or FFELP -- under which private companies make loans to students and receive federal subsidies. The other is the Direct Loan program, under which the federal government offers loans directly to students using Treasury capital. It’s the cheaper of the two for taxpayers.

President Obama’s FY 2010 budget proposes increasing the Pell Grant scholarship and other forms of college aid for low- and middle-income students by almost $100 billion over ten years, at no new cost to taxpayers. His plan would be paid for by originating all new federal student loans through the Direct Loan program starting in 2010. According to preliminary estimates by the Congressional Budget Office, this would save $94 billion over the next decade.

Contrary to claims from critics, it would be fairly easy and inexpensive for colleges and universities that participate in FFELP to switch to Direct Loans, partly because schools would be able use the same on-site system currently used to administer Pell Grant scholarships.

Anna M. Griswold, Pennsylvania State University’s Assistant Vice President for Undergraduate Education, told us that Penn State did not have to hire extra staff, or increase its budget resources when it made the switch and that Direct Loans offered better loan repayment and loan forgiveness options for students.

The Obama proposal would also maintain a role for the private sector by allowing companies to compete for contracts to service these loans. This competitive bidding process would result in the best customer service for borrowers by harnessing the private sector’s most innovative and consumer-friendly practices.

Our committee will continue to closely examine proposals to determine the best policy for students, families and taxpayers.