The disastrous education compromise that marred Obama’s best week in office.

By most accounts, the fourth week of March was a triumph for the Obama administration. After months of wrangling, Congress finally passed health care reform, and the president signed it into law. In the same budget reconciliation bill that sealed the health care deal, Democrats also overcame Republican defenders of corporate welfare and improved the nation's main federal student loan program. Eliminating for-profit banks as the middlemen in the lending process, Congress mandated that all federally subsidized loans now come directly from the Department of Education—saving taxpayers $87 billion over ten years.

But Obama's health care and student loan victories overshadowed the collapse of another key domestic priority: helping more students graduate from college. Because of a last-minute—and maddeningly illogical—political development, the Obama administration allowed negotiators of the reconciliation bill to strip out a smart, progressive package of reforms that could have helped millions of low- and moderate-income students earn college degrees.

The administration now has no plausible agenda to reach its much-lauded goal of having the United States regain the international lead in the proportion of college graduates by 2020. The danger is that, in the flush of success offered by student loan reform, it will pretend otherwise.

American higher education is in trouble. For decades, lawmakers have focused exclusively on helping students enter college by subsidizing tuition, grants, and loans. Yet most poor students who enroll in public university systems fail to graduate within six years. Thirty-four million adults over age 24 report their highest level of education as "some college, no degree." Combined three-year graduation and transfer rates at community colleges hover around 30 percent. Many community colleges are so broke they're turning away students at the door.

To combat these problems,Obama proposed the American Graduation Initiative, which he announced to cheering crowds and unemployed auto workers at a Detroit community college last July. The $12 billion plan, which was built into the reconciliation bill with health care reform, would have been the foundation of a new multi-year effort to work with governors, legislators, universities, and community colleges to help millions more students earn valuable higher-education credentials. It included new support for cash-strapped community colleges and an unprecedented push for states to hold colleges accountable for helping students learn and get degrees. "Time and again, when we have placed our bet for the future on education, we have prospered as a result," Obama said in Detroit.

The reconciliation bill also included $8 billion to improve early childhood education for poor students, which would help them get on a college or career track from the get-go, and tens of billions to increase funding for Pell grants, which go to low-income students. But the administration allowed Congress to either abandon or water down the parts of this education package in mid-March, as the tumultuous, intertwined health care and student loan debates were coming down to the wire.

Much of the blame lies with one man: Senate Budget Committee chairman Kent Conrad, Democrat of North Dakota. (Read Senator Kent Conrad's response to this article here.) Despite being a self-styled budget hawk, Conrad had always been lukewarm on kicking banks out of the student loan process; last year, he negotiated a provision exempting the Bank of North Dakota (which sold $159 million in loans in 2009) from loan reform. When Ben Nelson's so-called "Cornhusker Kickback" for Nebraska's Medicaid program provoked widespread outrage over congressional sausage-making during the health care debate, the student loan provisions of the reconciliation bill left Conrad vulnerable to similar accusations. (Some Republicans called the Bank of North Dakota exemption Conrad had finagled the "Bismarck Bank Job.")

To protect himself politically, Conrad latched onto a new Congressional Budget Office (CBO) estimate of savings that loan reform would guarantee. In the March 5 report, the CBO had dutifully downgraded its estimate of "future" savings from $87 billion over ten years to $67 billion when it found that, anticipating reform and encouraged by the Department of Education, hundreds of colleges had already switched to using government instead of bank loans. Conrad argued that Congress had to disregard the $20 billion in upfront savings. (In 2008, he had argued the opposite, insisting on using an older CBO estimate for pending legislation. But that was for a massive farm bill that sent generous subsidies to North Dakota.)

Meanwhile, loan reform was being attacked by lobbyists working for lending giants like Sallie Mae and by Republicans who argued that streamlining a decades-old federal loan program constituted "another government takeover." Conrad also told his congressional colleagues that killing lender subsidies imperiled the whole reconciliation bill—and thus health care reform. Skittish about any risk to the health care plan on which it had wagered the president's future, the Obama administration wouldn't call Conrad's bluff on the CBO estimate.

For a few days, it looked like loan reform was dead. Then, the chairmen of the Senate and House education committees, Senator Tom Harkin of Iowa and Representative George Miller of California, fought back, rallying their colleagues around the cause of making college more financially accessible for students. Senate Majority Leader Harry Reid even gave Harkin and Conrad each five minutes to make their cases at a special Democratic caucus meeting.

Eventually, loan reform was walked back from the brink. But Congress allowed the lower CBO estimate to prevail—and so, $20 billion in estimated savings disappeared. Scrambling to cut costs in the bill, negotiators killed the American Graduation Initiative and the early childhood plan. (The administration did little to stop the bloodbath.) Of the $67 billion in estimated loan-reform savings Congress had left to work with, $19 billion was diverted to underwrite health care and reduce the deficit, while $1.5 billion was preserved for non-profit loan servicers responsible for some of the worst abuses of the old system, including kickbacks to college officials, fat executive salaries, and hundreds of millions of dollars in federal overpayments on loans. Another $2.5 billion in no-strings-attached grants went to colleges that serve minority students. Community colleges, meanwhile, got $2 billion from the Department of Labor budget in consolation.

A big chunk ($36 billion) went to increase spending on Pell grants. In theory, this should help more students enter—and thus graduate from—college. But the recession pushed legions of unemployed workers back to college while simultaneously making more students poor. Consequently, the cost of newly increased Pell grants skyrocketing from $18 billion in 2008 to a staggering $32 billion in 2010. The administration was forced to use loan reform savings to shore up the 2010 Pell budget, while scaling back future Pell increases. The grants are now scheduled to stay flat for three years, then grow with inflation from 2014 to 2018. Unfortunately, tuition routinely grows at double or triple inflation, and the administration has announced no plan to rein in college costs. Without one, costs will quickly surpass the increased value of Pell grants, and college will be less affordable than it is today.

Listening to the administration, you wouldthink none of these failures had occurred. The White House has focused media attention on student loan reform and how it transferred billions of dollars from rich bankers to poor college students. And this is an unquestionably great accomplishment. But the bill-signing ceremony for loan reform was staged at a community college, and Organizing for America's website declared that the legislation would help 5 million more students earn degrees by revitalizing community colleges—which is true in the alternate universe where the graduation initiative didn't implode. Obama has also promised a White House "community college summit," which is what you get in Washington in lieu of actual resources and reform.

By allowing Congress to slash higher-education goals from the reconciliation bill, the administration is left with no backup plan to help more students graduate—and no money with which to build one. Just pretending to tackle the graduation problem will undermine this presidency in the long run. Above all, the United States needs strong economic growth and jobs to match. Recession-driven unemployment has brutally discriminated against people without college degrees. Economists across the political spectrum see well-educated workers as the lynchpin of American competitiveness—and note with alarm our declining position relative to other nations. If the administration doesn't redouble its efforts to help more students graduate, it will look back on the collateral damage of the reconciliation bill with far more regret than anyone imagines today.

Kevin Carey is the policy director at Education Sector, a Washington, D.C.-based think tank.

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