A bill in the U.S. Senate could increase the amount of financial aid provided to students by requiring lender s and banks to compete over setting lower interest rates.

Supporters of the legislation introduced by Sen. Edward Kennedy (D-Mass.) – the Student Aid Reward Act of 2007 – emphasize that it would save taxpayers as much as $13 billion a year by forcing all lenders and banks with government subsidies to reduce interest rates, currently regulated by the government at 6.8 percent, in order to win over colleges’ business and retain capital.

The nation’s two main student loan programs – the Direct Loan program and the Family Federal Education Loan program – have varying foundations for the distribution of student loans. The Direct Loan program issues loans from U.S. Treasury funds and is serviced by private industries contracted to distribute and gather student loan fees under one loan; the FFEL program allows multiple private lenders to participate in student loans, which are governmentally subsidized.

“”It’s taking out the middle man – the lenders – so that the subsidies aren’t going to the banks, and there’s more aid funding for the students,”” said Melissa Wagoner, Kennedy’s press secretary.

Proponents maintain that the proposal will reduce the whopping federal deficit while offering a more affordable opportunity for college-bound students searching to take out loans through the Direct Loan program. Opponents argue that the college loan industry is an inherently competitive market environment that utilizes the FFEL program, and the elimination of a national interest rate standard will lead lenders to view colleges and their students as commodities rather than customers with deadlines and personal accommodations.

While student loan auctions have the potential to save the federal government money by limiting subsidies to student loan companies, they would be detrimental for quality of service for students, America’s Student Loan Providers Executive Director Kevin Bruns stated in an e-mail.

The bill was introduced in 2005 but never left the Senate Education Committee. The new Democratic-controlled Congress, however, has rallied immense bipartisan support on Capitol Hill for the S.T.A.R. Act. According to the Congressional Budget Office, the bill encourages colleges nationwide to choose the Direct Loan program over the currently preferred FFEL program.

Students may see an interference – if not elimination – of some loan services if the S.T.A.R. Act passes, Brun said, such as some of the numerous free programs and counseling benefits provided by loan suppliers in the FFEL program.

Deregulating government control on student loan interest rates will catalyze new incentives to lower rates below 6.8 percent in order for lenders and banks to keep customers. The appealing aspect of minimizing student loan payments clashes with the fear of eliminating smaller businesses.

According to UCSD Financial Aid Director Vincent De Anda, proponents of the S.T.A.R. Act are unaware that offering both the Direct Loan and FFEL programs creates a multiplier effect; having two student loan programs creates an industry in itself, encouraging business, providing numerous jobs and drawing students to colleges – all imperative factors in keeping an industrious economy.

“”Right now we already get reductions in student loan payments because there’s naturally competition between hundreds of banks and lenders,”” De Anda said. “”This natural competition drives the loan costs down for the student, and we like that; private companies also produce responses quickly and offer benefits that can’t be found through the Direct Loan program.””

The S.T.A.R. Act states that at least $10 billion in saved revenue would be applied toward other student aid programs such as the recently increased Pell Grant, all with virtually no cost to the taxpayer.

Millions in unnecessary subsidies would be cut in order to lower private capital for student loan companies, allowing the government to funnel more money into scholarship aid and allow the Direct Loan program to thrive with government assistance.

“”It’s presumptuous to assume that the actual savings – if they occur – will go into student aid programs,”” De Anda said. “”Since we’re in a national deficit situation, [monetary savings] may just disappear, and that’s a fear a lot of us have.””