Private lenders would die under plan to give government bigger role, some say.

    With the Obama administration proposing to overhaul the programs a majority of American students use to finance their college education, the student loan industry is fighting back.

    The administration is calling for sweeping changes to the decades-old approach of providing federal subsides to private loan companies, arguing that the revamp will save $94 billion that can be redirected to needy borrowers and help even more people go to college. But the industry and its congressional allies are countering that it would add billions to the national debt, put thousands of industry employees out of work and provide shoddy service for borrowers.

    The result of the growing confrontation will determine the way students across the country pay for college and, potentially, the fate of dozens of student lending firms.

    "The Obama plan would mean that many lenders would lose 100 percent of their business," said Mark Kantrowitz, an industry analyst and publisher of FinAid.org. "It would be a dramatic shift for the way this industry works."

    The administration's proposal would end the 16-year period in which two government programs have provided federal loans to students. One of the programs involves the Education Department making the loans directly to students, while the other involves private companies originating the loans with congressionally imposed subsidies.

    President Obama's budget seeks to eliminate the subsidized program - known as the Federal Family Education Loan program - and proposes that all the loans come directly from the government. It would then redirect the enormous savings it forecasts to Pell grants for needy students.

    Reston-based Sallie Mae, the nation's largest provider of student loans, recently launched a lobbying blitz on Capitol Hill and the White House, proposing a hybrid approach that combines aspects of both federal loan programs. It has hired two well-connected Democratic lobbyists: Tony Podesta, whose brother headed the Obama transition team, and Jamie S. Gorelick, a senior Justice Department official in the Clinton administration. The company has circulated draft legislation around Washington and pressed Democrats whose districts include Sallie Mae employees. The company recently announced the return of 2,000 jobs that had been sent overseas.

    "We agree that it's time to remake the loan programs," said Martha Holler, a Sallie Mae spokeswoman. "We support the president, and we want to help him reach his objectives by proposing a constructive alternative that would pull the best of both programs."

    The Salle Mae proposal would involve private loan companies originating the loans and then immediately turning them over to the Education Department for a fee. The federal government, which borrows money at a much lower rate than it charges students, would then still generate revenue, which it could channel to needy students.

    Robert Shireman, a senior adviser to Education Secretary Arne Duncan, said the administration is open to hearing new ideas. But he added, "Our presumption at this point is the plan that we have laid out is the best plan, and that is what we are moving forward with."

    Administration officials said that the Sallie Mae proposal was still not fully developed and did not make clear how the department would decide how much to charge lending companies.

    Senior Democratic lawmakers said they were strongly in favor of the president's plan.

    "The Direct Loan Program has proven to be the most cost-effective, successful, and as we've learned in the current economic crisis, the most stable and dependable way to deliver loans to students," said Melissa Wagoner, a spokeswoman for Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate education committee. "Senator Kennedy supports the president's proposal, which saves nearly $100 billion that can be used to make college more affordable for students."

    Rachel Racusen, a spokeswoman for Rep. George Miller (D-Calif.), chairman of the House education committee, said: "The Obama administration has made a compelling case that their plan would lead to a more efficient, effective and reliable federal student loan program for families and taxpayers, and people who have other proposals have the burden of demonstrating that their proposal is superior to President Obama's plan."

    But many Republicans have long been wary of the government taking on the entire burden of the lending program. Sen. Lamar Alexander (R-Tenn.), a former secretary of education, said he did not want to eliminate the choice that students have long had between the programs. He added that the money would increase the federal deficit and give too much control to the government.

    "I don't see the wisdom in creating a new half-trillion national bank for student loans," he said. "I know how the bureaucracy at the education department works, and you probably are going to get long lines of dissatisfied customers. Those lines could be very long because there are 12 million students."

    Some Democrats in states that have strong private lending companies have also opposed the president's plan, and the Senate budget did not cut out the subsidized federal program, a sign that the Obama plan faces a tougher time in that chamber.

    Education Department officials emphasized, however, that it was not correct to view their proposal as an attempt to shut down the subsidized program. They said the only reason the program survives is because of legislation passed last year, after the credit crunch hit the lending industry, that temporarily provided increased support to loan companies.

    "The guaranteed-loan program as it existed in the past no longer exists," Shireman said. "It's on life support, and that's why it's so critical that we act now to fix the system."

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    Staff researcher Madonna Lebling contributed to this report.