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Sen. Edward Kennedy, D-Mass., shown here at a March 7 rally for minimum wage increase, unveiled a

A bipartisan group of senators and house representatives, most notably Sen. Ted Kennedy, D-Mass., have unveiled a proposal to increase federal student aid by overhauling the way in which student loans are distributed.

If passed, the legislation, which is being proposed by Sen. Gordon Smith, R-Ore., Congressman Tom Petri, R-Wisc., and Congressman George Miller, D-Calif., along with Kennedy, would all but eliminate the role of lenders in student loan distribution, instead drawing funds directly from the U.S. Treasury to issue loans.

The proposal, dubbed the Student Aid Reward Act or the STAR Act, comes as a response to “the explosion of cost for higher education.” Its passage “would be a win for students, colleges and tax payers and this is obviously a critical time,” Kennedy said Tuesday to a group of student reporters over the phone.

Under the current system, students receive funds from major lenders that are guaranteed a minimum rate of return regardless of the interest rate paid by the student. The federal government is then responsible for making up any difference between the students’ interest rates and the lenders’ minimum rates of return, said Jason Delisle, a Petri office legislative assistant.

The STAR Act, if passed, would weaken the role of major lenders such as Sallie Mae, instead providing students with loans directly from the U.S. Treasury, leaving students to pay back loans directly to the federal government. The responsibilities of loan administration would be contracted out to major lenders.

“There’s an opportunity to help by taking a really hard look at these programs and eliminating waste,” Petri said.

Distributing loans with the help of lenders is an outdated approach, as advances in technology have made data processing simple and cheap, Petri said.

According to the Congressional Budget Office, the proposal would generate more than $17 billion in additional college scholarship aid over the next 10 years.

“You could save the whole social security system with that much money,” Petri said.

The likelihood for the proposal to pass, however, has been met with skepticism.

“The federal government has just historically not favored direct loan programs over loan guarantees because the U.S. government just doesn’t compete to any significant degree with the banking industry,” said Thomas Schwartz, a political science professor. “We don’t take over the banking business.”

“Republicans especially loathe to create new bureaucracies that create new programs, they’d rather have private sectors to do it,” Schwartz said.

Kennedy said that the proposal’s passage depends heavily on student support.

“What the students have to do on campuses is to develop activities that will persuade colleges to go with it,” Kennedy said, referring to an increase in campus activism focused on student aid. “You can let the president down at the White House know that this is something you guys are interested in.”

Universities have, for the most part, opted against direct loan programs in the past because major lenders provide financial incentives to these institutions of higher learning for their business, Petri said.

The prospect of a direct student loan program is expected to be met with heavy opposition from major lenders.

“The banks and Sallie Mae are a very formidable group,” Kennedy said. “We can’t underestimate the power of the other side.”

The proposal will be a major part of a larger higher education act that will be introduced to Congress in the coming months.