The National Commission on Fiscal Responsibility and Reform has issued a report that recommends the elimination of subsidized federal student loans in order to reduce federal spending. The recommendation is one of 50 that the bipartisan panel, which was created by President Obama and charged with finding ways to reduce the federal deficit, brought forward.

Federal subsidized student loans are government-issued student loans on which the government pays --subsidizes -- the interest while a student is in school or in an approved deferment period. During deferment periods, which are granted on a case-by-case basis when a student loan borrower is experiencing financial hardship or other extenuating circumstances, the borrower isn’t required to make principal or interest payments on his or her federal college loans.

Subsidized student loans, awarded on the basis of financial need, are available to low-income students and students from low-income families. The President’s fiscal commission estimates that eliminating the federal interest payments on these subsidized college loans would save about $5 billion annually.

The proposal to eliminate subsidized federal student loans isn’t a recommendation to shutter the federal student loan program altogether. Federally funded student loans are also available in an unsubsidized form, and these unsubsidized student loans are awarded to eligible students, regardless of income bracket, who qualify for federal college financial aid to help them pay for college.

Do Student Loan Subsidies Benefit Students?

A growing number of policy groups support dispensing with federally subsidized student loans. The College Board recommended the same move in 2008, and some Democratic lawmakers also included the elimination of subsidized student loans in the initial draft of the student loan reforms that were enacted in 2009. The provision was dropped after student advocates and higher education lobbyists successfully persuaded House Democrats to retain the student loan subsidies.

Supporters of dropping the subsidized interest benefit say that subsidized student loans don’t do anything to make college more accessible to the low-income students to whom the loans are awarded, since borrowers don’t reap the benefit of the subsidy until after they’ve graduated.

Others who support the move to do away with subsidized student loans argue that student borrowers shouldn’t receive a benefit designed to reduce student loan debt that’s based on what the borrower’s family income was 10 or 20 years earlier.

Instead, proponents contend, already-available flexible student loan repayment plans like income-dependent payments, graduated payments, and repayment term extensions are more effective and fairer.

A new income-based repayment plan, instituted last year, is based on the student loan borrower’s post-graduation income, a better measure of a borrower’s long-term financial outlook.

Graduated repayment, in which a student loan borrower’s monthly payments start out low and gradually increase every two years -- designed for borrowers who expect their income to increase steadily over time -- is available to all borrowers of federal college loans, regardless of their family income at the time they attended college.

More Proposed Changes to Federal College Financial Aid

Eliminating federal student loan interest subsidies isn’t the only change the fiscal commission recommends. The commission’s deficit-reduction proposal would also put an end to payments to colleges and universities for the administration of campus-based federal financial aid programs.

Colleges and universities administer certain federal financial aid awards locally --Supplemental Educational Opportunity Grants, Perkins loans, and federally funded work-study programs. A school may retain as much as 5 percent of the federal financial aid funds provided for these programs to cover the cost of administration. Institutions that distribute federal Pell Grants also receive a small fixed payment to cover administrative costs.

Under the proposed deficit-reduction plan, the 5-percent administrative fee would be eliminated, and all federal funds would be delivered in the form of student financial aid, with no portion of those funds being siphoned away any longer in the form of administrative costs.

The commission’s rationale for eliminating these administrative fees is that colleges and universities benefit from federal grant programs because, unlike college loans, the federal grant dollars effectively increase enrollment by making college more affordable for students.

From Policy Proposal to National Law

The fiscal commission doesn’t have the final say on which recommended reforms are enacted. Currently, the commission’s report is in draft form. The commission must prepare a final recommendation no later than Dec. 1, 2010, and the final draft must have the approval of at least 14 of the commission’s 18 members.

Once the report is finalized and presented to the White House, legislators are expected to take up the recommendations and convert them into legislative mandates.

The commission’s recommendations are designed to balance the federal budget by 2015. If adopted, the recommendations would involve a broad set of austerity measures, including both spending cuts and tax reforms.