The Canary Lives

Finally, some good news. President Barack Obama may have found his backbone and the Democrats can stand up to business lobbies -- sometimes. Several months ago, I suggested that the way they handle student loans is a telling test case for all who seek change.

I elaborated: 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 Feb. 26, 2009, 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. The Congressional Budget Office projected that the change, would save the tax payers up to $87 billion in the next ten years. But Congress did not act.

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.

Well, it is a year later. The canary lives and is singing his heart out. On March 21, the House voted 220-211 to overhaul student loans. On March 23, the Senate passed the bill 56-43, and President Obama signed it into law on March 30. According to the bill, students will be able to borrow money directly from the federal government, eliminating private banks' role as middlemen and saving the taxpayers an estimated $68 billion over 11 years.

Onward and forward.

 

Follow Amitai Etzioni on Twitter: www.twitter.com/AmitaiEtzioni

Comments

[realitytrumpsbull]

12:36 AM on 04/18/2010

Why doesn't the government cut out ALL the middlemen, and just pay the faculty and staff directly, make them government employees, in essence? If the government is going to be involved in education, then every effort must be made to make the process of education as economical and effective as possible. I think they should re-arrange education thusly: If you're a US citizen, or an eligible visa-holder from a foreign country, then you should be able to attend college, provided you can pass the entrance exams, which should be standardized nationwide. Each year, you ensure your eligiblity to attend the following year by passing all your subjects. If you fail any of your subjects, you get to re-apply to attend college after a 1-year waiting period. If you want the education process to be as short and painless as possible, you will apply yourself. Very simple, in theory very economical, and a scalable concept that can be extended to the online world. I think the future of education is largely digital, simply because there aren't enough classrooms and campuses anymore.

[Ashley14]

10:12 AM on 04/15/2010

Peter Wood at the National Association of Scholars argues that while the federally-backed private loan system was flawed and bred corruption, a system owned entirely by the government could be worse: http://www.nas.org/polArticles.cfm?doctype_code=Article&doc_id=1201.

[BlackRabbit]

10:19 PM on 04/14/2010

"Last year, these private lenders made $56 billion in loans to students. They pocketed huge profits without providing any service."

Well, actually they did. The lenders had to attract students, ensure they were legitimate candidates for the loans, negotiate and complete the loan contracts, administer the loans, take action upon default, and so forth. In other words, all the paper shuffling that goes into these things. And they were well positioned to do this since they already had loans departments.

I suppose the government could do that more efficiently, but I'm not holding my breath.