WASHINGTON -- Backed by Sen. Ted Kennedy (D-MA), Sen. Gordon Smith (R-OR), George Miller (D-CA) and a room full of college students, Wisconsin Rep. Tom Petri (R-Fond du Lac) unveiled legislation at a press conference Tuesday to cut waste in federal student loans and use much of the savings to increase Pell Grants for low-income students.

Petri explained that the older guaranteed student loan program costs the taxpayers considerably more than the newer direct student loan program. The older program, also known as the Federal Family Education Loan Program (FFEL), subsidizes and guarantees student loans made by private banks while the direct loan program provides loans directly from the U.S. Treasury.

"The Congressional Budget Office and the President in his budget this year estimated that the guaranteed student loan program costs the taxpayers $8 for every $100 of loans made whereas the direct student loan program actually makes $2," Petri said. "That $8 per $100 cost translates into billions of dollars for the American taxpayer for no particular return."

"We have a tight budget year here in Washington. People are going to be looking around for offsets - for ways of trying to reduce the deficit. This is one area where it's possible to make some real savings without hurting the students, and helping the taxpayers."

Rep. Tom Petri comments on the introduction of his student loan legislation which was unveiled at a Capitol Hill press conference on March 15, 2005.

Petri said his bill would encourage colleges and universities to use the direct loan program by promising them most of the federal government's savings in the form of increased Pell Grants for low-income students - potentially increasing Pell Grants by $1,000 per eligible student.

Petri said that the loans provided by both programs are identical to students, but that the banks' subsidies in the guaranteed student loan program amount to several billion dollars.

He said that if his Direct Loan Reward Act were enacted, some $17 billion could be "transferred" from bank subsidies to lower-income students receiving Pell Grants over the next 10 years. According to the Congressional Budget Office, he said, if all schools switched to direct loans, the increase in student aid would be at least $60 billion over 10 years at no cost to the taxpayers.