President Obama plans reform of student loan system

Last Friday, President Barack Obama announced his plans to make higher education more affordable by reforming the country’s student loan system, decreasing the role of private lenders and placing the responsibility on the federal government.

“In the end, this is not about growing the size of the government or relying on the free market — because it’s not a free market when we have a student loan system that’s rigged to reward private lenders without any risk,” Obama said. “It’s about whether we want to give tens of billions of tax dollars to special interests or whether we want to make college more affordable for eight-and-a-half million more students.”

To make college more affordable for students, Obama said he is calling for a shift from the private Federal Family Education Loans to federal Direct Loans. While the FFEL program currently accounts for the majority of college loans, Obama said the country cannot afford the billions of dollars in premiums that banks receive from taxpayers each year.

“Under the FFEL program, lenders get a big government subsidy with every loan they make,” Obama said. “And these loans are then guaranteed with taxpayer money, which means that if a student defaults, a lender can get back almost all of its money from our government.”

According to Obama, an end to the FFEL program and a transition to Direct Loans would make tax dollars directly responsible for helping students pay for college and ultimately “save tens of billions of tax dollars over the next 10 years.”

During a conference call with media outlets on Friday, Secretary of Education Arne Duncan said he recognizes the controversy surrounding what business the American government is involved in by taking over the loan system.

“I fundamentally think we should not be in the business of propping up banks and investing in banks,” Duncan said. “I would much rather invest in our young people and our country’s young people and help literally millions and millions of additional students have access to tens of billions of dollars in subsidized banks.”

The Obama administration has already taken several steps over the past few months, including the creation of a $2,500 annual tax credit to help cover the cost of tuition, which Obama said millions of working families are now eligible to receive.

“At a time when our children are competing with kids in China and India, the best job qualification you can have is a college degree or advanced training,” Obama said. “And yet, in a paradox of American life, at the very moment it’s never been more important to have a quality higher education, the cost of that kind of education has never been higher.”

Duncan said the federal government will invest tens of billions of dollars over the next 10 years to ensure that a college education is affordable for those students who “have worked hard and really want to go to college.”

Among the other steps being taken, Obama said he is reforming the Pell Grants “that roughly 30 percent of students rely on to put themselves through college.”

Obama said he plans to add $500 to Pell Grants for the 2009-10 academic year and raise the maximum Pell Grant from $5,350 to $5,500 next year.

In addition to increasing the maximum amounts, Obama is also planning to give Pell Grants a fixed rate above inflation to ensure that grants increase as costs continue to rise for American families.

“And this will help prevent a projected shortfall in Pell Grant funding in a few years that could rob many of our poorest students of their dream of attending college,” Obama said. “It will help ensure that Pell Grants are a source of funding that students can count on each and every year.”

Obama said by transitioning from the FFEL program to the Direct Loans, the money saved would pay for 95 percent of his plan to guarantee Pell Grant growth.

In addition to the billions of dollars to be spent on making higher education more affordable, Duncan said the federal government will be investing $2.5 billion over the next five years in an attempt to increase retention rates.

“Obviously getting students into college and the front door is very important, but if they’re not coming out the back end with a diploma, we’re really not changing any long term prospects that much,” Duncan said.

Some university community members are concerned that as the focus and demand for retention rates increases, there is the potential result for a decreased quality of education due to such factors as professors inflating grades in order to meet retention rate goals. Duncan said while this concern is legitimate, his experiences have proven the opposite result occurs.

“When you raise the bar, when you raise the expectation, people rise to meet that bar,” Duncan said. “I think people work really hard, and I think the way you increase attainment is not by grade inflation, it’s by creating a culture and climate where students that might be at risk of dropping out get that support and have those mentors, those counselors, those folks working with them.”

While Obama said the federal government has the responsibility to make college more affordable, institutions of higher education must also control “spiraling costs” of tuition — a responsibility that will require “hard choices” on budget matters.

“So I challenge state, college and university leaders to put affordability front and center as they chart a path forward,” Obama said.

To cut the cost of implementing his education proposals, Obama said the government is “going to eliminate waste, reduce inefficiency and cut what we don’t need to pay for what we do.”