The Senate passed a bill early Friday to increase aid to college students.
The bill would give more money to Pell grant recipients, who are among the poorest. They get a maximum award of $4,310 annually now, but that would be bumped up to $5,400 by 2011.
To pay for the proposal, lawmakers would cut roughly $18 billion in federal subsidies to banks that issue government-backed student loans.
Budget rules require that more than $700 million of that savings to go toward reducing the federal deficit, but the rest would go to student benefits.
"This legislation does not cost the taxpayer. It saves the taxpayer because we are taking the money from the banks and providing it for the ... students themselves," said Sen. Edward Kennedy, D-Mass., chair of the Senate education committee.
The bill passed 78-18.
It does not cut interest rates on federally backed student loans to poor and middle-class students, something that is in a House-passed version of the bill. A House-Senate committee will now have to forge compromise legislation.
"I don't think we're going to have much trouble in the conference working through the differences," Kennedy said.
The two bills differ in how much they would give to Pell grant recipients. Other legislation also moving through Congress, including a spending bill that passed the House Thursday, also seeks to increase aid for Pell grant recipients.
Both the House and Senate student loan bills cap annual payments for students at a percentage of their income, which is aimed at preventing people from having to pay back more than they can afford.
Both bills also provide loan forgiveness for those who go into public-service professions after 10 years of making payments.
The bill follows promises Democratic lawmakers made during the last election to help lower- and middle-class college students with tuition.
The legislation is part of a must-pass bill needed to meet spending targets in the federal budget. By linking the student assistance to the budget legislation, Democrats were assured the student loan legislation could not be held up by a minority of Republicans in the Senate.
Sen. Judd Gregg, R-N.H., said doing that made a mockery of the budget process. "That process has been, for all-intensive purposes, run over," Gregg said.
A second Senate bill, expected to be considered next week, would simplify the federal financial aid application process and would address conflicts of interest in the student loan industry. It seeks to sever too-cozy relationships between banks and colleges that have been highlighted by recent federal and state investigations.