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.