It appears now that the student loan bill could possibly maybe potentially* be paired with some health care legislation in such a way that it could pass the Senate with 51 votes and no risk of a filibuster.

But there’s a small hangup. As part of an agreement to include the student loan package in the final bill, Sen. Kent Conrad (D-N.D.), the chair of the Senate Finance Committee, is requiring that the bill’s price tag reflect the new, lower savings estimate of $67 billion released by the Congressional Budget Office earlier this week. That’s $20 billion less the original cost estimate, both of which reflect savings over a 10-year period.

Because the final package needs to reduce the deficit in order to qualify for the 51-vote reconciliation strategy, Congressional leaders now need to trim the spending down to about $66 billion. (Part of this process requires that at least $1 billion go to deficit reduction.)

Fortunately, the original bill, which passed the U.S. House of Representatives in September, includes spending in a wide variety of areas, meaning that there are multiple places to make cuts without wiping out whole programs. But what’s likely to get the axe and what can we expect to be spared?

With that in mind, here’s a look at where the student aid bill generates savings, what it spends those savings on, and the price tag associated with those programs.

Savings: Elimination of Lender Subsidies

The original score predicted that Congress would save $86.8 billion over 10-years by eliminating subsidies for lenders under the bank-based Federal Family Education Loan (FFEL) Program. Now, the savings are projected to be about $67 billion.

Part of this reduction in savings could be attributed to a “success penalty.” When the bill was first scored, very few schools had switched into direct lending. As a result, CBO projected that about 70 percent of overall federal student loan volume would switch into the direct loan program. Since that time, however, many schools have switched voluntarily. FFEL thus now represents only about 60 percent of all federal student loan volume, the majority of which is already purchased by the government under a separate program to ensure loan availability. Because the CBO cost estimate reflects the state of the world at the time it is conducted, the $67 billion in savings now reflect moving less loan volume over. In other words, some of those savings have already been achieved and thus do not show up in the new score.

But, there could be one advantage from this. The original score noted that it would cost about $7 billion in additional administrative costs for the government to administer a larger direct loan program. Presumably that number should now be lower since it already had to oversee greater loan volume.

Costs

Pell Grants

The largest piece of spending in the bill is on a proposal to tie increases in the Pell Grant to the consumer price index plus 1 percentage point. The actual mechanics of this are somewhat complicated, but the result is that there should be steady increases in the award. There are significant costs associated with this move. According to Higher Ed Watch, the January 2010 CBO estimate says the Pell Grant change would cost about $56 billion in additional money.

Reducing the costs of Pell Grants are not easy, especially because bad economic times have depressed family incomes, leading more people to qualify for the grant. Expansions of the maximum award also increase who is eligible to get a grant, further driving up costs. This part of the cost growth could be addressed by calculating Pell eligibility on a fixed award level, say $4,500, instead of recalculating it each year based upon a new maximum award.

Capped Variable Rates

Currently,  subsidized Stafford loans are offered at a fixed rate that steadily decreases to 3.4 percent until June 30, 2012 when they go back up to 6.8 percent. The House bill would switch these loans to a variable rate with a cap of 6.8 percent. This is estimated to cost $3.2 billion over 10 years.

Perkins Loan Program

The bill would also change the way Perkins loans are funded and administered by treating them more like direct loans that carry a lower interest rate. This would entail recalling funds for this program that are currently held by colleges and then redistributing matching loan funds through a new three-part formula. This has been one of the harder provisions to understand. The administration originally scored it as saving money, CBO says it would save money at first, but then end up costing $1.3 billion over 10 years. Schools aren’t crazy about the proposal, largely because they are concerned about having to pay a matching fee.

College Access and Completion Innovation Fund

This fund would provide $3 billion over five years to help colleges and states improve their efforts at not graduating students. This seems like the most sensible thing to keep since it is targeted at making sure that greater investments in students are not wasted because they drop out or fail to graduate in a reasonable amount of time.

Early Learning Challenge Fund

This new program would get $8 billion total over eight years to fund new programs focused on quality in pre-kindergarten.

School Facilities

The bill includes $6.6 billion for facilities at both the K-12 and community college level. While this money could certainly fund much-needed projects, if the experience from the stimulus is any indicator, this money could very well be among the first things to go.

Community College Reform

This includes $7 billion for the American Graduation Initiative, which provides funding for community colleges in a variety of ways, such as improving graduation rates, making it easier to transfer to a four-year college, better linkages to the workforce, and the development of high-quality online courses.

Increased Veterans Benefits

The bill also expands veterans benefits under the newest G.I. Bill. CBO expects this will cost about $1.9 billion over the next 10 years.

Minority Serving Institutions

Extends the annual $255 million appropriation for Historically Black Colleges and Universities and other Minority Serving Institutions. Over 10 years, this $255 million appropriation would cost about $2.5 billion.

Do the Math

So let’s run the figures. The student loan change produces cost savings of $67 billion. The Pell Grant change is expected to cost $56 billion. Congress also needs to set aside around $1 billion for deficit reduction. That leaves $10 billion to allocate for other purposes.

Personally, given the options described above, I would fund the full amounts for the College Access and Completion Innovation Fund and the American Graduation Initiative. That puts you at $10 billion right there, which would preclude adding in anything for early childhood, school facilities, etc. That’s certainly a loss, but the excluded items are also not directly tied to the issue of college completion that simply must be addressed if the Pell Grant money is going to have its desired effect. This also makes sense because the amount of available spending is simply too low to justify giving all the programs a haircut. In my opinion, it’s better to preserve a few programs entirely than fund a quarter of several different inititiaves.

Now there is one other issue to address—administrative costs. Under the initial estimate, this represented another $7 billion in spending. Let’s assume that some of these costs are now lowered because some loan volume has already moved over to direct lending. Moreover, let’s assume that the decrease in costs is proportional to the decrease in overall savings. In that case, administrative costs would be about $5.4 billion over 10 years. Under those assumptions, there would only be $4.6 billion in leftover spending after Pell Grants and administrative costs.

I see two options under this scenario. One would be to fully fund the College Access and completion Innovation Fund and the Perkins loan changes. The additional $300 million could then be put to other desired uses. Alternatively, one could devote all the funding to the College Access and Completion Innovation Fund and then add a new section as a set aside the tries to target some of the most important parts of the American Graduation Initiative.

The loss of $20 billion in savings is certainly disappointing. More so given the fact that at least some portion of it is the result of schools that acted quickly and responsibly and switched loan programs to ensure continued loan availability. But that said, $67 billion is still a great deal of savings and has the opportunity to do a lot of good. And if that is the option, there’s still a lot that can be done.

*As of 10:19 a.m. this looked likely. Who knows what it will be by the time I finish this post.