The student loan reform that Congress just approved as part of the budget reconciliation bill has been overshadowed by the health insurance reform process, but it’s very good news for future college students. Senator Tom Harkin’s office summarized some benefits in a March 18 press release, which I’ve posted after the jump. The most important change is that the government will stop subsidizing banks that currently make big profits on student lending. Instead, the federal government will expand its direct student loans, saving $61 billion over 10 years. Most of the savings will go to increase Pell grants.

Just a couple of months ago, student loan reform appeared endangered because of Republican obstruction and corporate-friendly Democrats who didn’t want to cut student loan companies like Sallie Mae out of the equation. In early February, the New York Times reported on the extensive lobbying campaign against this bill. (One of the key lobbyists for the banks was Jamie Gorelick, a familiar name from Bill Clinton’s administration.)

Scott Brown’s victory in the Massachusetts Senate election made it even less likely that Democrats could round up 60 votes to overcome a filibuster of student loan reform.

Fortunately, Senator Tom Harkin and other strong supporters of this reform were able to get the measure included in the budget reconciliation bill that was primarily a vehicle for passing “fixes” to health insurance reform. Not only is student loan reform a good idea in itself, I agree with Jon Walker that adding it to the health reform improved the political prospects for getting the reconciliation bill through the Senate. Democrats from several states were said to be balking on the student loan reforms, but only three senators who caucus with Democrats were willing to vote no on yesterday’s reconciliation bill.

This reform is scaled back somewhat from the original proposal, which would have saved $87 billion over 10 years and passed the House of Representatives last September on a mostly party-line vote. The original proposal would have provided larger increases in Pell grant funding, because it was budget neutral. In order to be included in the budget reconciliation measure (and therefore not subject to a Republican filibuster in the Senate), the student loan reform had to reduce the deficit. But that compromise was well worth making in order to move to direct lending by the government.

Regarding health insurance reform, financial regulation and many other issues, I’m one of those “cynics and naysayers” President Obama decried in yesterday’s speech in Iowa City. But this student loan reform is a big step in the right direction, and the Democrats in the White House and Congress who kept pushing for it deserve credit.

Excerpt from a March 18 press release by Senator Tom Harkin’s office:

Currently, the federal student loan program provides subsidies to banks to make student loans, or makes them directly to students at a much reduced cost to the government.  The education reconciliation bill saves $61 billion over the next ten years by ending the subsidies to banks, and reinvests most of that savings into Pell Grants.  It also preserves a role for non-profit lenders to service student loans and continue their student outreach and support activities.

Specifically, the education reconciliation measure will:

Provide increases in the maximum Pell Grant award to keep up with inflation.  The bill increases the maximum award to $5,550 next year and to almost $6,000 by 2017, by indexing the award to the Consumer Price Index starting in 2013 to match rising costs-of-living.  The Bureau of Labor Statistics projects that by the year 2018 nearly 75 percent of all new jobs will require at least an associate’s degree.  In the 2008-2009 award year, 6.2 million Americans relied on Pell Grants to help pay for college and career training.  Eighty-nine percent of those students came from families making less than $40,000.  A strong Pell Grant program is essential to help a new generation of Americans enter college or workers return for training to gain the education and skills needed for jobs in the 21st century economy.

Make college more affordable and accessible. Under the current maximum award, 8.7 million students would receive Pell Grants in 2011-2012.  If the FY 2011 Pell Grant program shortfall of over $19 billion is not addressed, the maximum award could decrease to $2,150 and nearly 600,000 students could lose the benefit entirely.  The education reconciliation bill offers an opportunity to put Pell grants on a more solid footing by addressing most of the FY 2011 Pell Grant shortfall.  Shoring up the program by passing the education reconciliation measure would help Congress avoid massive cuts to education and other critical domestic spending priorities.

Reduce the deficit.  This bill provides more than $10 billion in deficit reduction to exceed the reconciliation instruction issued to the HELP Committee.  

Provide funding for Minority-serving Institutions. The bill continues funding provided in the 2007 education reconciliation bill for Historically Black Colleges and Universities, Hispanic-serving Institutions, Tribal Colleges and Universities and other MSIs.  It provides $2.5 billion to support the critical role these institutions play in educating our country’s low-income and minority students.

Support non-profit lenders.  The bill entitles qualified non-profit lenders to service Direct Loans and provides about $1.5 billion in additional funding to pay for these efforts.  The bill also more than doubles the 2007 reconciliation bill’s investment in the College Access Challenge Grant  program.  These formula grants to states help organizations provide services that increase the number of low-income students who are prepared to enter and succeed in college and manage their student loans, such as financial literacy and debt management skills.

Make Loan Repayment More Manageable. Starting in 2014, the bill lowers the burden of student debt by capping a new borrower’s loan payment at 10 percent of their net income, after adjustments for basic living costs, and forgiving any remaining debt after 20 years.