WASHINGTON – A proposal by the Obama administration to help lower the cost of college has rekindled the debate over how to repair the nation’s broken student loan system.

President Barack’s Obama’s 2010 budget included a proposal that would increase the federal need-based scholarships – called Pell Grants – by $94 billion over 10 years. The plan would be funded by scrapping the Federal Family Education Loan Program, under which the government backs student loans made by private lenders.

By ending the subsidies given to private lenders, the plan would redirect those savings to students at no cost to taxpayers and also turn Pell Grants into an entitlement program, similar to Social Security and Medicaid.

At the center of the debate is the issue of replacing a public-private student aid partnership with a public-only loan program. By eliminating the FFEL program, the. Department of Education’s only operating student loan program would be its Direct Loan program.

On Thursday at a congressional hearing, Robert Shireman, the deputy undersecretary of Education, said the FFEL program came close to collapse in the financial crisis last year as schools scrambled to find new lenders in a tight credit market. Obama’s program would essentially “cut out the middle man, make those direct loans to students,” he said.

All loans would originate from federal funding, raising concerns over how the federal government would be the sole authority and risk-bearer in the student loan marketplace.

Richard Vedder, a professor of economics at Ohio University, claimed Pell Grants have historically pushed the cost of higher education upwards. Expanding Pell Grants into an entitlement program would only spur colleges to raise tuition costs.

“Tuitions have gone up because they can,” he said.

Vedder believes eliminating FFEL would be “a step backward.” The program accounts for about 72 percent of all federal student loans. About 4,500 schools participate in the program.

Nearly 50 percent of student borrowers fail to exhaust their low-cost federal loans before turning to more expensive private loans to pay for college, according to the Consumers Union. While federal loans have fixed interest rates of 6.8 percent, private college loan interest rates can reach up to 19 percent.

Anna Griswold, assistant vice president for undergraduate education at the Pennsylvania State University, recounted the experience of Penn State entering the Direct Loan program last year during the financial crisis. Direct loans account for about 28 percent of total student loan volume, and almost 1,700 schools participate in the program.

Critics say ending the private-public loan partnership would make lending more risky and reduce the number of options for students.

“People like to have choices, and private loan providers do not follow the one-size-fits-all model implicit in the federal direct loan program,” Vedder said.

Chris Chapman, president of the non-profit student loan provider, Access Group, argued there was more to college aid than just the dollars. “What’s best” is not necessarily “what’s cheapest,” he said. Competition in the student loan marketplace ensured a “full package,” which can include quality service, outreach and education programs to students and parents.

Critics of Obama’s plan also point to the enormous costs that would result from 4,500 schools converting to Direct Loan program. Griswold, however, stated at the hearing that Penn State did not need to hire additional staff when they switched to the direct lending program last year and that the cost was within normal budgets costs.

“We believe that by entering the Direct Loan program, we have shielded our students from the impact of turmoil in the financial markets,” she said.

Congress passed a law last year that temporarily made lending more flexible to ensure that the turmoil in the credit markets did not affect student aid. But the financial crisis exposed deeper problems in the student loan industry, prompting policymakers to seek long-lasting, more extensive solutions.

“Students shouldn’t have to worry whether the roller coast fluctuations of the financial markets will hurt their college opportunities,” said Rep. George Miller, D-Calif., the House education committee chairman.