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President Bush is proposing a $500 increase in the maximum Pell Grant during the next five years, part of a long-range plan to restore the struggling financial-aid program to a sounder financial base to serve needy students.

Unveiling the plan in mid-January, Bush said he will recommend $100 annual increases for the next five years, adding to the current maximum grant of $4,050. In what may be just as important a move, the president called for a major new federal effort to address the Pell Grant shortfall, which has grown to $4.3 billion due to heavier-than-expected demand by needy students during the recent recession.

To address the shortfall, the president will propose changes in the student loan system to promote efficiency. "That saved money from administration of the student loan program will be plowed into the Pell Grant program," he says.

All proposals will be part of the president's 2006 education budget, which the White House will unveil this month.

Education groups welcomed the two-part plan to improve the nation's main college grant program. Dr. David Ward, president of the American Council on Education, calls it "extraordinary news" because of the combination of new Pell funding and a plan to address the shortfall. "While we still must learn the specific details of the president's proposal, I applaud the president for his strong commitment to our nation's neediest students."

While Pell is not an entitlement program, students generally are not turned away if they qualify for aid. As a result, in recent years actual expenses in the program have far outstripped the money Congress and the White House set aside to fund it, creating the massive shortfall.

The president's plan is to recognize that Pell needs to be funded as an entitlement, according to Ward. "This represents a tremendous step forward," he said, "and if approved by Congress, will dispel the financial uncertainty that has surrounded the program from year to year."

Bush also reiterated a goal to provide higher Pell Grants to students who take a rigorous high school curriculum. Students who take these courses could receive an extra $1,000 above their regular grant. "We want to raise the standards and provide incentives for people to aim high in life," he says.

Another White House plan will encourage flexibility by authorizing year-round Pell Grants to students who want to attend school in the summer as well as during the spring and fall.

"All of these proposals have merit," ACE's Ward says.

But enthusiasm was not unanimous on Capitol Hill, where at least one Democratic leader wants to see more details. Rep. George Miller, D-Calif., says he welcomes the move but not if the White House funds it by cutting access to student loans or other aid programs.

"President Bush and the Republican Congress have lost so much credibility on education issues that I am not alone in feeling very cautious about this new promise for increasing Pell Grants by $500," he says.

"My first instinct is to say 'show me the money' because this administration has a track record of broken promises on education funding."

Last year, student-aid advocates wanted a hefty Pell increase just for 2005, and Miller says the president in 2000 pledged an increase larger than the $500 he is proposing now.

"But $500, if it is real, would be a start in the right direction," Miller adds.

The president did not elaborate on his plan to find savings in student-loan programs, but Republicans in Congress already are targeting the Direct Student Loan program, a federally administered competitor to privately run student-loan programs. The House Education and the Workforce Committee in January cited growing questions about "hidden costs" in direct lending that do not show up on accounting balance sheets. According to committee staff, a U.S. Education Department analysis shows that the government has underestimated direct loan costs by $4.1 billion since the program began.

"As Congress prepares to reauthorize the Higher Education Act, it is absolutely vital that my colleagues and I have accurate and reliable data about the hidden costs of the Federal Direct Loan Program," says Rep. Howard "Buck" McKeon, R-Calif., a senior Republican on the education panel.

But supporters of direct lending say their program actually saves costs. While direct loans are a federal program, the private sector programs still rely on government subsidies and guarantees. Direct lending saves money by eliminating the middleman--the private company, say program advocates, which include many Democrats and at least one senior Republican.

"If we stop subsidizing banks and just provide the loans directly from the U.S. Treasury, we could free up billions of dollars to be used for Pell scholarships," says Rep. Thomas Petri, R-Wis.

In addition to his new Pell Grant plan, Bush in January also said he plans to spend $1.5 billion for a new high school initiative to better prepare students for jobs or higher education. The plan would "hold high schools accountable for teaching all students" and for providing help to those who need it, a White House summary states.

Of the new money, $1.2 billion would go toward direct intervention in high schools. Another $250 million would support state assessments "to ensure that high school diplomas are truly meaningful" for students' long-term success, the White House says.