It would be the first major overhaul of the government's student loan programs since they were created nearly 40 years ago.
The so-called Student Aid and Fiscal Responsibility Act takes banks out of the business of making student loans and puts the government in charge.
Currently the U.S. Treasury subsidizes lenders and guarantees them against loss if student's default on their loans.
"This plan would end the billions upon billions of dollars in unwarranted subsidies that we hand out to banks and financial institutions, money that doesn't do anything to make your loans cheaper," said President Barack Obama.
But the head of the consumer bankers association says: "We believe a competition-based student loan program is still the best choice for students, schools and taxpayers."
The core of the plan, $40 billion, would increase the amount of money given out in education grants for needy students. Another chunk, $9 billion would go to the nation's community colleges.
"The nation's community colleges and particularly the ones in California have been hurt by state budget cuts. So, any assistance we can get at all from the federal government is very, very appreciated," said Peter Goldstein from San Francisco City College.
But critics including California Congressman tom McClintock believe the government takeover could end up costing taxpayers.
"I seriously doubt that the government that runs FEMA is going to bring efficiencies to the student loan program," said Rep. McClintock.
Hundreds of students from around the Bay Area attended a recruitment fair in Oakland sponsored by historically black colleges and universities. Those institutions and others serving minorities are scheduled for a 2.5 billion dollar investment under the plan.
"What the government is doing is hopefully giving them more of an opportunity to be able to have what Americans want all children to have, a good education," said Recruitment Fair Founder Alan Rowe.
The bill now moves on to the Senate, where it faces an uphill battle.