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.