By Alina Selyukh

July 11 (Reuters) - The U.S. Federal Communications Commission will vote on Friday on a proposal intended to modernize the subsidy program that helps fund Internet access in public schools and libraries, which has faced criticism from Republicans and Democrats.

FCC Chairman Tom Wheeler's proposal calls for changes in how money is spent by E-Rate, the largest U.S. education technology program, which is funded by fees Americans pay on their phone bills.

The subsidy, created in 1996, has helped connect most U.S. classrooms and public libraries to the Internet, but rules have limited how much money could fund broadband and Wi-Fi.

Wheeler's plan, among other things, would transition spending away from older technologies such as pagers to devote more funds to Wi-Fi and eventually focus entirely on high-speed Internet services.

"The new plan will make E-Rate dollars go farther by creating processes to drive down prices and increase transparency on how program dollars are spent," Wheeler wrote in a blog in June.

The FCC chairman's proposal does not seek a budget increase for the $2.4 billion program.

The standstill budget has drawn fire from labor unions such as the National Education Association and the American Federation of Teachers, which said demand far outstrips available funding.

Republican FCC commissioners and lawmakers have raised questions about Wheeler's proposal to redistribute current funding, and reject any suggestion of a budget increase.

Wheeler plans to use $1 billion from the program's unused funds in 2015 and another $1 billion in 2016 for Wi-Fi, allocated to schools and libraries based on their size. After that, streamlined bureaucracy, better management and other changes would produce new savings, according to his proposal.

More than 40 CEOs of large U.S. technology companies, including Mark Zuckerberg of Facebook Inc and Meg Whitman of Hewlett-Packard Co, backed Wheeler's plan in a letter to the FCC, calling it "a significant, fiscally responsible step forward."

A similar letter came from 10 education groups, including the State Educational Technology Directors Association.

But Democrats and Republicans have raised concerns about how the FCC plans to meet the new funding promises.

"It would be ill-advised to guarantee a permanent set-aside for Wi-Fi, if that set-aside could end up cannibalizing funding for basic Internet connectivity," wrote Senate Commerce Committee Chairman Jay Rockefeller and Senator Edward Markey, the Democrats who helped create the E-Rate program.

Top technology lawmakers in the U.S. House of Representatives, Republicans Fred Upton and Greg Walden, worried in turn about the pledges to increase Wi-Fi spending in future years being grounded not in savings but in plans to later increase E-Rate's budget.

Democratic FCC Commissioner Jessica Rosenworcel, a former Rockefeller aide who had called for growth in E-Rate's budget, could be the swing vote on Friday. The two Republicans on the five-member FCC have said they do not agree with Wheeler's plan. Her office did not respond to requests for comment.

(Reporting by Alina Selyukh in Toronto; Editing by Ros Krasny and Jan Paschal)