Student loan reform: Obama to take on banks and their 'army of lobbyists'

On a major education reform offensive this week, President Obama met with working families struggling to pay college expenses for their children. During that meeting at the White House Friday, April 24th, the president announced a number of measures his administration has already taken and will propose this year to make college more affordable and to save taxpayer dollars in the process.

First, the president's economic recovery act provided a new $2,500 tax credit for families with children in college and set aside $17 billion to boost the number and size of Pell Grants awarded to college students in 2009 and 2010.

The new Pell Grant funds are set to expire in 2011 along with the economic recovery act, however. To make the new program permanent, the president has proposed 'to make Pell an entitlement,' according to a White House press statement. The administration wants to tie the Pell Grant to the rate of inflation and to invest up to $116 billion in the program over the next 10 years to ensure its financial strength.

The next piece of the president's package will help pay for the new Pell Grant system. The administration plans to expand the Department of Education's Direct Loan program. This move is expected to eliminate the current dominant system of paying taxpayer dollars to subsidize banks who make student loans. The White House estimated this move alone could save taxpayers almost $100 billion over the next decade.

On this piece of the reform package, Education Secretary Arne Duncan told reporters on Friday, April 24th, 'There's some controversy on what business we should be in. I fundamentally think we should not be in the business of propping up banks.'

'I'd much rather be investing in our country's young people,' Duncan said.

The current subsidy program pays banks and other lenders a guaranteed rate of return and reimburses them for defaults, giving them large profits set by the political process rather than won in a competitive marketplace, the White House press statement said.

The president's proposal earned swift opposition from major banks who have profited enormously from the subsidy program, especially Sallie Mae.

President Obama offered a sharp response. “The banks and lenders who have reaped a windfall from these subsidies have mobilized an army of lobbyists to try and keep things the way they are,' he pointed out.

'They are gearing up for a battle. And so am I,' the president told the families he met with. 'They will fight for their special interests. I will fight for America’s students and their families.”

As part of its PR campaign to counter the Obama administration's momentum on the issue, Sallie Mae claimed that the measure would cost thousands of jobs. Ironically, this claim comes after several years of Sallie Mae outsourcing thousands of jobs overseas.

Secretary Duncan countered on the jobs issue by noting that expanding the Direct Loan program would likely offset any job losses that might occur as a result of the shrinking subsidized loan market dominated by Sallie Mae.

The Direct Loan program has a much lower rate of default and expense than the subsidized loan market. And interest earned on the loans would be returned to taxpayers not to boosting the profit margins of banks like Sallie Mae.

Another piece of the president's reform package included a $2.5 billion investment in programs to help students stay in and finish college. 'Obviously getting students into college in the front door is very important,' Duncan stated, 'but when they're not coming out the back end with their diploma, we're not changing the prospects for their future that much.'

Duncan also stated that the Education Department plans this year to revise the Free Application for Federal Student Aid (FAFSA), the application students use to get Pell Grants, student loans and other forms of college payment assistance. The complexity and length of the form discourages many students from applying for assistance and even keeps some people from applying to college at all.

Student groups made a major push this month in support of President Obama's education budget priorities. As , groups like the United States Student Association organized nationwide visits by college students to their members of Congress earlier this month in support of the president's reform proposals. Other youth and student groups affiliated with the joined a nationwide call-in day in support of President Obama's budget on April 21st. Similar efforts are planned for the future.

President Obama's education reform proposals received a huge boost Friday, April 24th, when Democratic lawmakers announced they would include them along with health care reform in the appropriations process under rules that would prevent a Senate Republican filibuster. Instead of requiring 60 votes for passage in the Senate, the reform packages could be passed by a simple majority.