A proposal from President Barack Obama’s administration would cut the number of student loan programs from two to one.

Congress continues to discuss options for the competing loan programs as some financial aid gurus worry that having only one loan program would be a disservice to students.

The proposal might also free up money for Pell Grants.

Obama’s proposal would eliminate the Federal Family Education Loan Program through which private and public nonprofit lenders give student loans, said Haley Chitty, director of communications for the National Association of Student Financial Aid Administrators.

He said a lot of people think eliminating FFELP would kill private lenders, such as Sallie Mae. Results are uncertain.

The proposal would make the government-run Federal Direct Loan Program the sole student loan program beginning July 1, 2010, Chitty said. The Department of Education makes and directs loans through the program instead of insuring loans given by other parties.

Now, the government insures the FFELP loans because lenders wouldn’t have incentive to provide student loans without some sort of collateral, he said.

“It’s not a very attractive investment for banks to make student loans,” Chitty said. “There’s no house or car to repossess if the student’s unable to pay.”

Through eliminating FFELP, Obama’s proposal would save money that could be redirected to the need-based Pell Grant program, Chitty said.

The Congressional budget estimates eliminating FFELP would save about $94 billion over 10 years, he said.

Cindy Burnette, Western’s director of student financial assistance, said in an e-mail that eliminating FFELP would force universities to use the direct loan program, keeping them from choosing the best programs to meet student needs.

“Loss of competition between the two programs could potentially result in lack of innovation and less efficient programs,” she said in the e-mail.

Kentucky’s nonprofit lender, the Student Loan People, makes loans through FFELP, said Ted Franzeim, vice president of customer relations for the Student Loan People and the Kentucky Higher Education Assistance Authority.

The Student Loan People Web site urges students, parents and universities to contact legislators to oppose Obama’s proposal.

Franzeim said that, in addition to lending, the Student Loan People gives money to the state’s grant and scholarship programs – support that could be affected by the death of FFELP.

Franzeim said he’s unsure of what Congress will decide.

Various groups continue to work with Congress to find the best options for students, he said.