The U.S. Senate voted on Friday to cut federal subsidies to college student loan firms, such as Sallie Mae, by $18.3 billion, redirect savings to student grants and ease some student loan repayment terms.

The bill, approved by a 78-18 vote, would cut interest rates for student borrowers, provide loan forgiveness for graduates pursuing certain public-service careers, and cap loan repayment installments at 15 percent of monthly income. It also would make more students eligible for loans.

The annual maximum level for Pell grants, a key part of America's complex student financial aid system, would go up in stages to more than $5,000 a year from $4,310 under the bill.

At its present level, a Pell grant covers only about a third of the roughly $13,000 annual total cost of attending a public university full-time as an undergraduate, and even less of the $30,000 annual cost of going to a private school.

College expenses have soared in recent years, with the result that two-thirds of students today get some form of financial aid, such as grants, scholarships and loans.

Democrats promised in the 2006 election campaigns to address voter anxieties about college costs and are now pushing hard for a revamp of the $85-billion student loan industry.

Arguing that the for-profit loan market sometimes serves banks better than students and is riddled with conflicts of interest, Democrats won a victory last week when the House of Representatives passed a reform bill containing lender subsidy cuts even deeper than the Senate bill proposes.

Education has always been the engine of the American dream. But rising college costs will make that dream fade away unless we act, said Sen. Edward Kennedy, chief sponsor of the Senate bill, during a bitter floor debate that lasted from early Thursday until the wee hours of Friday morning.

Our legislation ... takes the fat from the banks and lenders and gives it back to students, said the Massachusetts Democrat, chairman of the Senate education committee.

The Senate was expected to take up next week a related bill that would crack down on lender misconduct, shorten the standard financial aid application form and set up a pilot program in which lenders would compete for loan business.

After that, the Senate and House would have to agree on a single bill before sending anything to the White House.

The Bush administration has proposed cutting subsidies at levels closer to the Senate bill than the House bill. The White House has said it will work with Congress on the issue.

The industry, led by financial giants such as Sallie Mae and Citigroup, is fighting change, saying the federally guaranteed student loans they handle are efficient and offer students and schools valuable services.

On the Senate bill, Eric Solomon, a spokesman for lending group Nelnet Inc. said, This legislation will force significant portions of the private sector away from the student loan market ... This will limit choice.

The industry was thrown onto the defensive earlier this year by a scandal in which government investigators, led by New York Attorney General Andrew Cuomo, uncovered kickback schemes and conflicts of interest among many lenders and some schools and student financial aid officers.

Several major lenders and universities have since agreed to adopt a new code of conduct drawn up by Cuomo.