Obama's Real Reform

On health care, Barack Obama's trademark pragmatism appears to be dooming any chance for fundamental reform: The president has not only refused to fight for a government-run, single-payer system, he's even waffling about a public option to compete with corporate insurers. But when it comes to student loans, the president has shaken off his tendency to compromise — and is on the verge of reining in the loan sharks who prey on college students.

Since 1965, government has helped students finance college through the Federal Family Education Loan program. The system essentially operates as a lucrative form of corporate welfare, offering a guaranteed rate of return for banks and other middlemen who provide capital for student loans. The government not only makes all the decisions — who is eligible for loans, for what amount and at what rate — but it protects private lenders from virtually any risk: When college students are unable to repay their debts, taxpayers are required by law to reimburse the banks for 97 percent of the losses. "The government is doing all the work and taking all the risk," says Education Secretary Arne Duncan.

For a president who relishes in shades of gray, Obama has framed the battle over student lending in black and white. Instead of issuing his usual paeans to bipartisanship, the president wants to terminate FFEL (pronounced fell) — replacing private lending with direct government loans to students. "This is not a debate between growing the size of government and relying on the free market," Obama said in outlining his plan in April. "Because it's not a free market when we have a student-loan system that's rigged to reward private lenders without any risk." The real question, he concluded, is "whether we want to give tens of billions of tax dollars to special interests or whether we want to make college more affordable for 8.5 million more students."

Obama's proposal represents the educational equivalent of moving to a single-payer system of health care, shutting down the private insurers who are responsible for driving up costs. "It's a polar shift of everything we've seen since 1965," says Jeff Noordhoek, who has fought the plan as president of the student-lending giant Nelnet. And like single-payer health care, the potential savings are massive: Obama's proposal would eliminate $87 billion in subsidies to private lenders over the next decade, much of which would then be reinvested to boost federal scholarships known as Pell Grants by $1,400 and to put another 5 million students through community college. Under Obama's plan, Pell Grants would also become an entitlement program like Medicare and Social Security, replete with guaranteed annual increases pegged to inflation. "The Obama administration has stepped in, in a very bold way, to fix aid programs and make them more effective," says Christine Lindstrom, director of higher-education programs for the U.S. Public Interest Research Group. "This is game-changing."