The proposal would increase grants to the neediest students and allow those grants to rise slightly above the inflation rate, an effort to keep pace with tuition increases.

The size of existing federal loan programs would grow, and more families would be eligible to participate. And in perhaps the most controversial provision, the administration would lend directly to students and end its support of federally guaranteed student loans made by banks and other private companies.

“Rather than continuing to subsidize banks,” said the education secretary, Arne Duncan, “we want to help more students.”

Opposition to some of these proposals will be fierce, especially from lenders that for years have received a government subsidy on student loans. The potential impact drove down the stock of the biggest student loan company, Sallie Mae, by nearly 31 percent; it closed at $5.80 on Thursday.

“It’s the biggest proposed change in federal student aid programs since the Higher Education Act was created in 1965,” said Terry Hartle, senior vice president at the American Council on Education, whose members are colleges and universities. “It is big, bold, comprehensive and controversial.”

Lenders were quick to denounce the effort and to question the ability of the Education Department to handle more than $60 billion a year in federal loans to students and families. Last year, according to the College Board, the department made only $13 billion in loans directly to students.

“Direct loans are simply not subject to the same quality of service,” especially when it comes to helping borrowers avoid default, Marcia Sullivan, director of government relations at the Consumer Bankers Association, a banking trade group, said in a statement.

But in a conference call with reporters, Mr. Duncan said eliminating federal loans through banks would save $4 billion a year. (Congress also sets the maximum interest rate that lenders can charge students on the loans.)

Eliminating the subsidies, Mr. Duncan said, will save money that can be used to help pay for the expanded aid in the form of grants to students.

The guaranteed student loan program through banks “is on life support,” Mr. Duncan said. In part because of the credit crisis, lenders are now relying on federal programs or the Education Department to buy the student loans and finance more lending.

The proposed changes would not take effect until 2010, giving the Education Department time to prepare for a much bigger program of lending directly to students. Officials at the department also emphasized that it would hire private companies to service the loans, and that it had already put out a request for bids.

The political battle over the guaranteed loan program involves a philosophical debate over how involved private lenders should be in a program to make college affordable. Banks and other lenders, though, are in a weaker position politically because of the financial crisis.

George Miller, the California Democrat who is chairman of the House education committee, hailed President Obama’s proposal as a “solid plan to make federal student loans more reliable.”

Republicans sounded a different note. Howard P. McKeon, of California, known as Buck, and the ranking minority member of Mr. Miller’s committee, said in a statement that ending the guaranteed loan program was a “government takeover of the private sector-based student loan program, taking away options and benefits from students while adding tens of billions to the government’s balance sheet.”