Federal funding for the Perkins loan program, which gave $17 million in loans to 6,750 University students last year, would be phased out over 10 years in the new federal budget President Bush submitted yesterday to Congress.

But Bush’s 2006 proposed budget would use the money saved from the cut to partially fund increases to the Pell Grant program, raising the maximum grant from $4,050 to $4,550 over the next five years and eliminating its current $4.3 billion shortfall.

University Director of Financial Aid Pamela Fowler said the changes would be a net loss for University students.

“The University of Michigan is either number one or two in Perkins loans universities in the nation,” Pamela Fowler said. “We won’t get an additional $17 million in Pell Grant funds if he takes away Perkins.”

Perkins loans are given to 673,000 college students yearly, or 3 percent of all college students nationwide. The federal government and universities currently fund the Perkins loans program together, at a cost of $7 billion annually to the federal government and $2 billion to universities collectively. It is unclear whether or not schools will decide to continue giving Perkins loans with their own money should Congress revoke federal funding.

Bush also plans to pay for Pell Grant increases by cutting federal subsidies for banks and lenders who provide loans to some students. The Department of Education expects the cuts to pay for half of Bush’s higher education plan. Bank subsidies are given by the federal government to pay the difference between the market price of a loan for college and the amount the bank is willing to offer that loan for.

The expected result of the proposed budget changes is a decrease in loans and an increase in grants for students with financial need, allowing more students to attend college overall.

The lack of subsidies would result in fewer loans, said Donald Heller, a former education professor at the University who now works at Pennsylvania State University.

“Without the government subsidy, banks would charge a lot more money for the loans,” he said.

Heller said he expects banking associations to raise the prospect of ending such loans if the government cuts subsidies.

“I think the philosophy of the federal government is that these are very lucrative loans for the banks — they can afford to take a smaller subsidy and still make money on these loans. Ultimately it will be up to the banks to decide whether they want to stay in the student loan business or not,” Heller said.

Sen. John Kerry, Bush’s opponent in the November presidential election, had planned to fund his education proposals by eliminating the same subsidies as well. During the campaign, Kerry cited the “windfall profits” banks make when the interest rate of a student loan exceeds the rate that the government guarantees to lenders.

Assistant Secretary of Education Sally Stroup has called the Perkins program “ineffective,” according to the Chronicle of Higher Education. The administration has said the $7 billion spent on loans would be put to better use on Pell Grants.