03/18/2010 05:12 am ET | Updated May 25, 2011

Canary in the Coal Mine: Student Loans

The Democrats are caught between the need to set up structures that will prevent future meltdowns and the pressures they face from well-heeled Wall Street-based interest groups. They are under cross-pressure to act in the public interest and to survive in the political system: those who displease groups with deep pockets face tough re-election campaigns, as their opponents will get the large amounts of funds needed these days to run for office. Hence, despite all the talk about new regulations, surprisingly little is happening.

Student loans serve as a sort of a canary in the dark recesses of Washington politics. If the Democrats cannot stand up to private sectors here, they are extremely unlikely to persevere elsewhere. The issue is very simple. If the Democrats cannot show the public that the existing arrangement constitutes an out-and-out raid of the public treasury by a few investment houses and banks -- and that anybody who opposes reform should be booed out of office -- do not expect them to be able to do so on the much more complicated issues of credit swap controls and regulations of derivatives.

Since 1965, the federal government has provided funds to private lenders through the federal Family Education Loan Program. The government gives loan money to private lenders and guarantees 97% of the loans, ensuring that the private lenders loan virtually without risk. Last year, these private lenders made $56 billion in loans to students. They pocketed huge profits without providing any service.

On February 26, President Obama proposed that instead of going through private lenders to borrow money, students should borrow money directly from the U.S. Department of Education, eliminating the role of the private lenders. By early July, the chairman of the House Education Committee had endorsed President Obama's plan, which, projects the Congressional Budget Office, would save up to $87 billion in the next ten years. On September 17, the House of Representatives voted 253 to 171 to put this plan into effect. It is eight months later but the Senate has not acted, while all the time it has been shedding tears about the mushrooming deficits.

As I said, if this bill cannot fly through a Democrat-controlled Congress, do not be surprised if little else opposed by large and well-endowed private interests will see the light of day. Even if the bill passes, it will be so diluted and further watered down after it is enacted that it will end up basically as a reform in name only. Watch the canary and see whether the toxic clouds are lifting or closing in.

Amitai Etzioni is a University Professor at The George Washington University and author of The Moral Dimension (Free Press, 1988). To contact him, write

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