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By Stephen Eisenhammer
RIO DE JANEIRO, Jan 17 (Reuters) - About 3 million aspiring students in Brazil will find out this month whether they got one of just 230,000 places at a free public university. For many, this year there is no plan B.
Sunk in its worst recession in decades and with its budget under strain, Brazil's government has more than halved the number of low-interest loans it offers for poorer students to attend more numerous fee-paying private universities.
With most public university places going to wealthier students trained for the entrance exam at private schools, the cutbacks place at risk one of the leftist Workers Party's proudest achievements in its 13 years of rule - social mobility.
During a commodities-led economic boom last decade, former President Luiz Inácio Lula da Silva increased education and welfare spending to help 35 million people escape poverty.
For poor Brazilians who miss out on the small number of free university places, a cheap loan from the Fund of Student Financing (FIES) is the best hope of funding a college education and joining the middle-class.
Brazilians who receive tertiary education earn on average 2.5 times more than those who do not, a bigger gap than any other country in the OECD, according to a 2011 study by the group of mostly developed nations.
Now, the reduction in FIES loans to 300,000 has left many struggling students in despair, and exposed the government's failure to undertake deep-rooted education reform.
"It's a really unfair system. Only the rich get the free places," Larissa Roriz, 18, said at a careers fair in a poor neighborhood of Rio de Janeiro, Brazil's second-largest city.
State-school educated, and unable to afford a crash course for the university entrance exam, Roriz was pessimistic about her chances: "That's why I'm here, to try to get an internship in case I don't make it."
Roriz is part of a younger generation for whom the promise of a resurgent Brazil has been pulled from under their feet. Growing at a rapid 7.6 percent pace as recently as 2010, the economy is now mired in its worst recession in over a century.
Their growing frustration with job losses and spending cutbacks could breath greater energy into anti-government protests, so far dominated by wealthier Brazilians.
While the number of loans available is still above that offered just a few years ago, it marks a step backwards and alarms education experts who say Brazil - a nation of more than 200 million people - desperately needs to keep increasing the number of people going to university.
"The changes (to FIES) are really bad for equality in Brazil," said Naercio Menezes Filho, a professor in education and employment at Sao Paulo-based business school Insper.
"It's really serious for the future, because one of the main mechanisms to rise socially in Brazil is access to university."
Between 2010 and 2014, during the first term of Lula's successor President Dilma Rousseff, the number of new FIES loans rose nearly 10 times to 732,000. By then, the program's cost had jumped to 14 billion reais ($3.5 billion) and accounted for 15 percent of federal education spending.
Rousseff loosened public purse strings in an attempt to spend her way out of a slowdown. As the economy failed to rebound, the deficit widened to a gaping 10 percent of GDP and forced her to make steep cuts, including to FIES.
Even after Workers Party increases, Brazil's spending on tertiary education at 0.9 percent of gross domestic product (GDP) is in line with emerging nations like Russia and Colombia -- and significantly below the OECD average of 1.2 percent.
For education experts, the real problem is the government's failure to undertake long-lasting reforms during the boom years, such as means testing for public university places.
As a result, it continues to pay for wealthy students to go to elite public universities but has cut loans for the poor to go to private institutions.
The interest rates on the loans has also jumped to 6.5 percent from 3.4 percent and the repayment time shortened.
"The fundamental problem is the government spends most of its education budget paying for people who don't need to be paid for," said Ricardo Paes de Barros, an economist at the Ayrton Senna Institute which works to improve education services.
De Barros says students at public universities should pay what they can afford and the money brought in by charging wealthier students be used to expand the public university system as well as offer more FIES loans.
The cut to FIES has also hit once-booming private education companies because the loans effectively serve as a government subsidy. With roughly three-quarters of universities in Brazil privately owned, it is a multi-billion dollar business.
Shares in major education companies Kroton Educacional and Estacio SA fell 35 percent and 40 percent respectively last year. International companies such as U.K.-based Pearson have also been affected by the downturn in Brazil.
Kroton and Estacio have begun to offer loans to try to cover the shortfall, but worse rates than the FIES has stoked fears of rising student debts. Both companies declined to comment.
Rousseff and her Workers' Party are adamant the social gains achieved over the past decade will not be erased by recession.
But development experts insist education is key for further growth as Brazil languishes in a middle income trap, in which rising wages erode competitiveness and poor education and infrastructure are unable to make up for it.
For De Barros, the results of the changes are clear.
"It will result in a less educated generation." ($1 = 4 Brazilian reais)
Additional reporting by Juliana Schincariol; Editing by Daniel Flynn and Kieran Murray