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Moe Tkacik: Student Debt – The Unconstitutional 40 Year War on Students

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Yves here. I’m featuring this post not simply because the student debt issue is coming to serve as a form of debt servitude, but also because the backstory is so ugly. Student debt is the only form of consumer lending where the obligation cannot be discharged in bankruptcy. This story chronicles how persistent bank lobbying, including disinformation portraying student borrowers as likely deadbeats, led to increasingly draconian treatment of student loans. A second reason for posting it is that due to technical difficulties at Reuters, the original ran without the hyperlinks, which are of interest to serious readers.

By Moe Tkacik, a Brooklyn-based journalist who writes at Das Krapital. First published at Reuters.

Lobbyists' trillion dollar revenge on nerds  

You have probably mentally catalogued the student loan crisis alongside all the other looming trillion dollar crises busy imperiling civilization for the purpose of enriching the already rich. But it is different from those crises in a few significant ways, starting with the fact that the entire student loan business is arguably unconstitutional.

You don’t have to take it from me: a preeminent bankruptcy scholar made precisely this argument under oath before Congress. In December 1975, when Congress was debating the first law that made student loans non-dischargeable in bankruptcy, University of Connecticut law professor Philip Shuchman testified that students “should not be singled out for special and discriminatory treatment,” adding that the idea gave him “the further very literal feeling that this is almost a denial of their right to equal protection of the laws.”

The thing was, discrimination was kinda the whole idea. Stagflation was sending an unprecedented number of Silent Majority members into bankruptcy, and the bank lobby was fighting back with a propaganda assault that scapegoated counterculture student delinquents who were allegedly taking loans with no goal of paying them. As Shuchman and others explained in hearings, only about 4% of people who filed for bankruptcy protection in 1975 had student loans on their balance sheets, and of those fewer than one fifth did not have substantial other debts motivating them to file.

But try telling that to anyone who'd been reading the papers! A typical syndicated dispatch on the surge in student deadbeats was the August 27, 1972 expose of Los Angeles Times reporter Linda Mathews, which began with the personal anecdote of an anonymous “Washington banker” who purported to have once “handed a $1500 check” for the year’s tuition to a nameless “18-year-old college freshman” only to be insouciantly told, “Oh, I never intend to repay this loan.” The kid was merely acting on the advice of “underground newspapers,” the anonymous banker—who had since joined the staff of the American Banking[sic]Association”—helpfully explained.

Elitist cheaters” and “professional deadbeats” had driven default rates “as high as 40 percent in some cases,” the Chicago Tribune fumed. “Sometimes when I see someone come out before me with a job and no other debt but a college loan—and not even a big one at that—I feel like saying, 'Why you little stinker,'” a judge told the New York Times. A Wall Street Journal editorial on “the educational subculture” blamed the “crisis” on “an attitude of unconcern—that default really isn't like ripping off anybody, just the large, impersonal government that wastes plenty of money on other things” that was apparently pervasive throughout the entire education profession.

But to the credit of the American legislature of the day, the majority of its members were still capable of distinguishing between PR and reality. It concluded its round of hearings in February 1976 bypostponing the vote on the non-dischargeability amendment pending a formal Government Accounting Office study on the matter, which in turn confirmed earlier findings that deliberate student deadbeats comprised a virtually infinitesimal proportion of bankruptcies. In the meantime, mainstream journalists who spent more time in reality than their trend-setting contemporaries uncovered some troubling (and real) trends while scouring bankruptcy filings. Of the small population of twentysomethings who did seek to use bankruptcy protection primarily to discharge student loans, many had been defrauded by fly-by-night "correspondence schools” that had forged the students’ signatures and saddled them with staggering loans. They hadn't even known about them until they started getting hounded by collection agencies.

By 1977 even the American Bankers Association had joined the conference of bankruptcy judges in lobbying—formally, anyway—against the cruel and unusual punishment of making student debt non-dischargeable. As James O’Hara, the congressman who had commissioned the GAO study, pointed out in his testimony, to enact such a law would be tantamount to “treating students, all students, as though they were suspected frauds and felons” while according arbitrary second-class creditor status to “the grocery store, the tailor or the doctor to whom the same student may also owe money.” In 1978 the House of Representatives voted to pass a bankruptcy reform bill that specifically restored student loans to their original status as equivalent to any other form of unsecured debt.

But then the bill went to conference committee with the Senate, and the clause came back. Like the loans themselves, it could not be gotten rid of. At first this provision applied only during the first five years of the life of the loan; then it was seven, then eternity. Until 2005 it only applied to federally guaranteed loans; now it applies to all.

And as they became more steadily impervious to the usual laws of credit and debt, they became bigger and more profitable. In the years since the Bankruptcy Reform Act passed, the nominal price of college tuition has risen more than 900%. Over the same period the median male income—again, nominally—has risen 165%. And since the percentage of the workforce boasting a bachelor’s degree has expanded from less than 20% to nearly a third, I don’t have to convince you that the median de facto ROI on those diplomas has diminished greatly over the same years. Which brings us to the second way in which the student debt bubble differs from all the others you’ve seen. It is legally impossible to pop. By law it can only grow very fast or even faster.

The profits in this racket are downright hallucinogenic: a military veteran sharing his story with Occupy Student Debt has paid $18,000 on a $2,500 loan and Sallie Mae claims he still owes $5,000; the husband of a social worker bankrupt and bedridden after a botched surgery tells Student Loan Justice of a $13,000 college loan balance from the 1980s balloon to $70,000. A grandmother subsisting on Social Security has her payments garnished to pay off a $20,000 loan balance resulting from a $3,500 loan she took out ten years ago before she underwent brain surgery.

The human toll exacted by this immortal justice-resistant debt fills websites and Student Loan Justice founder Alan Collinge’s horrifying book Student Loan Scam: The Most Oppressive Debt In U.S. History—And How We Can Fight Back. And yet I didn’t even really know about it—not the brutality or the scope of it, anyway—until I volunteered to research “fighting back” possibilities for an Occupy Wall Street affiliated group. Neither did any of the other predatory lending buffs I polled; we’d been preoccupied by mortgages, and the government’s alarming indifference to the foreclosure epidemic.

We weren’t ultimately aware of the student loan crisis because there is no legal way of fighting back—or by extension, posing any sort of immediate threat to the solvency of the financial system. Under the current regime, the most effective means of sticking it to the proverbial man would in theory be for all students to simply pay off all their debts at once. But even if they could scrounge together a trillion dollars out of their collective couches just like that, there is little doubt in my mind that Sallie Mae and its student loan-sharking brethren would simply see it as an opportunity to levy a massive prepayment penalty. (The internet is a rich trove of surreal personal accounts of being penalized for over-paying their student loan bills.) But no one notices, because student borrowers are so utterly powerless they can borrow a trillion dollars and never pose a threat to the financial system.

Naturally, this story has its brighter side of enterprising corporate leadership generating shareholder value. The finances of Sallie Mae, the former government sponsored enterprise formally called SLM Corp. are a bit difficult to divine, but the operating profit margin is over 50%. It will surely surge higher if CEO Albert Lord executes on his current strategy of turning the $700 million “sweet spot” that is its “fee income” division into a billion dollar business. “Fee income” means collections, but student loan collectors “do things that no other industry could get away with,” a veteran debt collector named Joseph Leal told Student Loan Justice. They stalk, threaten family members, and jack up loan balances by thousands of dollars at whim, and they do it all with impunity because they are legally entitled to garnish your wages.

Fee income is not just a sweet spot for Sallie. Premiere credit, formerly the collections subsidiary of its fiercest rival Nelnet, is so flush it keeps a 3,800-gallon saltwater shark tank in its main lobby, as explained above. The margins on college loan sharking are so grotesquely fat that the government even rakes in a juicy cut: in 2010 the Department of Education reported collecting $1.22 for every dollar in defaulted student loans it had guaranteed—and that’s after the sharks and their shareholders and the obligatory outright fraud had taken their first round of cuts. Between a quarter and a third of about $850 billion worth of federally guaranteed loans are already in default, so this is real money we are talking about. Given the $23 trillion worth of other securities the federal government has pledged to guarantee over the past few years, we can only expect the default rate to surge higher.

The elephant that seems to have been missing from this particular boiler room was, improbably, Wall Street. Sallie Mae maintained dominance of the industry through various stages of quasi-privatization without ever entering the VIP Hamilton Project circuit or the Triple-A ratings club. Unlike its financial counterparts that went bust in 2008, Sallie didn't even need a great credit rating to rake in obscene returns making zero-risk loans.

Leveraged buyout titan J.C. Flowers made a $25 billion bid to buy Sallie Mae in 2007 only to back out of the deal in the wake of a confluence of negative headlinesrating agencies threatened to downgrade the company’s debt to junk status if it went through, Sallie’s dealings with the Department of Education and the financial aid authorities at various universities was the subject of an assortment of investigations, and the SEC was sniffing around an $18.3 million stock sale Lord had made in anticipation of the takeover announcement. (Lord sued Flowers for a $900 million breakup fee for walking away from the deal, but dropped the suit as a condition of obtaining a line of credit in early 2008.)

Maybe the student loan shark scam was too fishy even for Wall Street, even in 2007, to want to get too close to the action. And if Lord has been spreading the no-risk wealth around Wall Street in the aftermath of the credit crisis it is not apparent from securitization volume, which has slowed to a trickle even as student borrowing keeps setting new records. In 2010 students borrowed $100 billion, but Student Loan Asset Backed Securities (SLABS) issuance was a meager $13.6 billion, down from a peak of $78.7 billion in 2006. 

Perhaps this lack of Wall Street skin in the game is partially to credit for the fact that such reliable business lobby organs as Forbes have demonstrated refreshing equanimity to the cause of restoring students’ financial rights. The student loan shark bubble will, after all, ultimately prove far worse for business than the subprime mortgage bubble. But it also demonstrates that the shadowy ruling elite’s overwhelming contempt towards its citizenry runs deeper and dates back farther than full time chroniclers of American decline ever believed.

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62 comments

  1. LeonovaBalletRusse

    YVES, crunch this with “For-Profit University” Student Loan guarantee and profits is a “sure thing” for WaPoKaplan rentiers et al. Sweet, n’est-ce pas? A two-fer fix.

  2. Mark P.

    Thanks for this. Excellent journalism — with the additional fillip of Premiere Credit’s shark tank being so good that I wondered whether it really couldn’t be true.

    But unfortunately it is. Plenty of substantiation out there.

  3. Middle Seaman

    I teach at decent and honest university with excellent standing. We are also hugely expensive. The students don’t get a return, e.g. job prospects, proportional to the cost of the get from us. The cost is the result of parameters most of which shouldn’t affect cost. President and VPs with gargantuan income proportional to the market. The lack of support from the government. Ballooning health cost.

    We ignore all that and demand huge pay; the students don’t have a choice unless they attend community colleges. We created the huge burden but society demands complete repayment of unjustified loans.

    The deadbeats are our politicians and society. Continuing this way we guarantee ignorance, lack of skilled worker and a feudal system.

  4. jim3981

    Seems like the idea is to bury everybody in debt.

    Get a $100k student loan. Then get married and buy a large 1960′s money pit house in a neighborhood with nice trees and schools. Spend the rest of clothes and food. The american dream.

    Done deal, every penny one makes goes straight to the banksters and corporations…

    No freedom or time to do anything but just slave away.

    The problems is everything is going in the wrong direction. Inflation, dropping wages, less job security….etc…

    1. psychohistorian

      I think it is a built in feature, not a bug. The key is to acquire enough control of the youth so that they can’t be independent nor fight back.

      As this Shock Doctrine event unfolds throughout the world the swath of youth without jobs and in debt will be kept in check by the military, if necessary, as they become the first victims of debt austerity and wage race to the bottom genocide.

      Laugh the global inherited rich out of control of our world. Humanity deserves a better future than the one the global inherited rich have created for the 99%.

    2. digi_owl

      Funny thing is that inflation may be a boon to the debt saddled, if the wages keep up with inflation that is. This because it will make the debt easier to pay as it is usually not inflation adjusted. disconnect inflation and wages however and the whole thing becomes a double whammy as inflation makes living expenses higher at the same time as the debt cut into spending capacity.

      1. stevo67

        You do realize that wages for the non-CEO sector of the labor market have been stagnent since the 1970′s?

  5. kxmoore

    it is crazy in this age of the internet and astounding computing/memory technology that the bloated u.s. universities are continually back-door stuffed with government funds. the ivory towers are now gilded with gold as gov. money makes college more expensive when technology should make it much cheaper. of course the liberal dopes will call for more federal funding.

    1. YankeeFrank

      No, the liberal dopes will call for debt jubilees/complete erasure of outstanding debt. Debts that can’t be paid won’t. Its just a matter of time now until the whole system keels over and collapses. If it were a ship, the nation would be listing at 45 degrees right now, taking on water fast. It could be this fall when it reaches the tipping point (oh, and Malcolm “the corrupt” Gladwell can bite me for trying to hijack a commonly used term for his own pseudo-scientific mumbo jumbo). Those who sell their integrity for a corporate paycheck will be first against the wall when the ship finally sinks, as well as the whores who gleefully throw their bodies in front of the corporate fascists in defense of the indefensible.

      Oh, and we wouldn’t be in this mess if all of those conservative dopes had a shred of integrity and didn’t vote for the Reagans, Bush’s and Romneys who bankrupted and stole our national wealth. Conservative my ass. Just a bunch of nihilistic blowhards who don’t care what damage they do as long as they get to swagger around with smug grins on their faces while their country falls apart. Its funny how they think their money will protect them, the few who actually do have any.

      Conservative scum more like it. Our country was most certainly not bankrupted by the poor, the working class and the middle class. And our country can’t even actually be bankrupted but for the clueless meddling of conservative scum who steal and cheat and create artificial scarcity to protect their ill-gotten gains while people starve and die of treatable illness. The day is coming when a tidal wave of angry citizens overrun the houses of the moneychangers and exact justice for the treason and theft committed by the corporate whores and their lackeys. Good luck when that day comes, conservative scum.

    2. Yves Smith Post author

      Boy, do you have this wrong. The increase in higher ed costs are not the result of academic pay but extractive management. Lots more administrators paying themselves handsomely, plus overinvestment in plant (all those donors like buildings so they can put their names on them). Way too many glamorous gyms, for instance.

      1. Klassy!

        This describes the local university here. Also, they expect all faculty to be revenue producers– gotta bring in those grants– and seek to eliminate those that aren’t. They hire the spouses of political figures, making up new positions for them at great cost while making cuttbacks in those non revenue producing departments.
        And they build and build.
        Cuts in state aid are not the only reason that tuition is increasing and has become untethered from the rate of inflation.

      2. vlade

        The increase in ed costs in micro econ 101.

        Higher education was signaling to employers, cutting employers hiring costs, thus willingness to pay more. That in turn increases income of the graduates. That in turns means that educators should increase their cost up to the point where they capture most of that (of course, none of this happens overnight, but I doubt many people will argue that unis that charge will NOT increase their costs when their graduates have better employement opportunities).

        Of course, what also happened was that the signalling was confused with cause – i.e. the argument become that graduates get better paid jobs, ergo we should get more graduates which in turn make more money. The problem is that the value of the signal goes down with the number of signals as proportion of the population, i.e. companies willing to pay graudates less (and the signal moves to something else).

        It’s fairly predictable.

        What I find funny on this is that it’s in effect using the good-ole-right-wing-micro to say that if we genuinely want to improve knowledge levels via education it has to be public good, not private, and that private, unlesss it’s also very elitists (and the elitist can be meritocracy, not that I’d bet on that), will ultimately colapse the system due to its ponzi nature.

        But when you try this argument with a proper right-wing ideologue, even if he takes every part of the argument separately (where he will violently agree with you), he will still insist that private education is the only way to go and see no inconsistency. Yes, I know, consistency is a mark of a small mind.

        1. Capo Regime

          Lets not forget the sleazy on line and for profit universities.

          Though they do not have the overhead of actual universities they charge comprable and often more tuition. Some are owned by hedge funds and goldman sachs. Kaplan is owned by the washington post and donald grahm has personally lobbied congress to make sure the onlines and for profits get treated the same as “regular universites”. No gyms or named buildings just cash. In a regular university a professor teaching 6 courses per year as a full time will cast 60k plus fringes. In a for profit or on line you get the same for 1,500 per course no fringes. You can do the math. On top of that the for profits recruit disadvnataged students aggressively and even fill out the loan paper work. They even operate boiler rooms which make the guys in Glen Gary Glen Ross look ethical.

          1. vlade

            Typical for the last stage of minsky’s cycle (just a special case of ponzi).

            What I find particularly offending on all this is that mass paid-for tertiary education is a extremely clever way of the state to get those who might have been on unemployment support for longer (if they were to enter workforce earlier) to in effect borrow their unemployment benefits privately (aka student debt).

            Compare – in normal situation, at least some of them would be unemployed (potentially quite a few, as can now be seen in some European countries), and drawing on state benefits.

            This way they pay their way – via borrowing, and will end up costing the state less (not to mention being more mouldable with the spectre of the debt over them).

      3. Jim Haygood

        It’s axiomatic that financing drives up the price buyers can afford to pay.

        Easy mortgage financing drove up house prices to bubble levels in 2006. Then Fannie and Freddie, the Congressionally-chartered lenders, both went bust.

        In the same manner, easy (on the front end) student loan financing drives up tuition costs. Stir in a revolving door between politics and academia, and a conspicuous lack of antitrust enforcement against the academic cartel, and you’ve got a recipe for tuition price increases that consistently outpace inflation — at least till the bubble pops.

        Technology (e.g. Coursera) WILL make quality education cheaper, and provoke a popping of the academic boil.

        LET IT BLEED!!

        1. F. Beard

          It’s axiomatic that financing drives up the price buyers can afford to pay. Jim Haygood

          Is that what you call counterfeiting, “financing”?

          LET IT BLEED!! Jim Haygood

          I got no problem with that but there is still the problem of existing debt that students were driven into by the counterfeiting cartel.

          Dang! Theft causes so many problems that “Thou shall not steal” should be in the Ten Commandments. Oh wait! It is.

      4. citalopram

        Books are another sore subject for many students. Unnecessary additions being brought out year after year with enormous profits attached to them adds to the bill as well.

        1. Carla

          Their profs often write those texts, and then require their students to purchase them. No conflict of interest there.

          Textbook publishers charge a huge mark-up, but the profs profit very well from this racket, too.

      5. Tim

        Exactly, once something is financialized then the ability to pay for services rendered get’s warped into an almost parallel universe.

        Notice the quality of any newer schools and colleges. Notice the quality of new Hospitals and clinics. They are trending towards gold plated palaces. Why? because as long as the question from the student or patient is “can I afford it?” instead of “am I getting taken advantage of?” it will keep getting worse.

        As long as there is a sucker there will always be supply…

      6. bob

        Director of a large state’s building department-

        “we stopped building for students years ago, we build now to put a name on it”

        The “smarter” universities are now not allowing new buildings unless there is enough money to cover the ongoing cost of maintenance.

        Maintaining a building, over the long term, is likely to add up to be more than the building cost to begin with.

  6. Bruce Post

    A couple of points from someone who was a professional staff member of the U.S. Senate Education Subcommittee back in the 1980s and had some responsibility for the Higher Education Act, which authorizes the loan program:

    1. These are not solely “student” loans; they include “parent” loans, as well. Many parents have taken out PLUS loans (Parent Loans to Undergraduate Students), and if they have several kids in college, the parents can be saddled with high debt as well. Take a look at “Student Loans Sink Mom and Dad” http://blogs.smartmoney.com/advice/2012/07/18/student-loans-sink-mom-and-dad/?link=SM_hp_ls4e. By the way, the interest rate on many of these PLUS loans is a fixed rate of 8.5 percent!

    2. Yves made a point about extractive management with which I agree. Back when I worked for Sen. Stafford, who chaired the Education Subcommittee, one of Stafford’s aides in his Senate office complained about us hanging around too much with college presidents. His point: “All they care about is money, and to them, students are nothing more than the transient population.” He meant that students were raw material from which postsecondary institutions could extract resources — money — to feed the beast.

    1. Mark Lloyd

      Thanks for the useful insight. Too many make bold claims about “greedy bankers” without the benefit of knowing how the program works.

      First, the author misses a *few* details in his vilification of Sallie Mae. One is that Congress substantially cut the margin that lenders earned in 2008, contributing to a substantial decrease in future earnings to service the large amounts of new debt Flowers needed to buy the company. BTW it was that large amount of new debt that caused the rating agencies to reduce their ratings of Sallie to near junk level. Second, the financial crisis hit and everyone started hoarding cash until the mortgage business sorted itself out. Suddenly, there was no $20 billion available to purchase Sallie.

      Another overlooked piece is the large amount of money paid to “guarantee agencies” whose role was to work with delinquent borrowers and collect on defaulted loans. These were either non-profits or state agencies and there was a single agency designated for each state. No one ever looks at the profits they made because they were relatively small and they used those monies to also administer grants. Yes, those fat fees on defaults went to non-profits, not banks. The average fee paid to collection agencies was relatively modest, but they liked the business because the federal government would withhold tax refunds and garnish wages, which made this debt easier to collect than, say, credit cards. BTW, the non-profits and the federal government are the legal owners of ALL defaulted student loans. If you don’t like the rules they set or what they charge students, don’t blame Sallie or Premierre, they have nothing to do with it. period.

      Finally, the reason there are no SLABS in 2010? Private lenders were cut out of federal student lending when Obama was elected. The federal government now makes all federal student loans.

      My point is everyone should stop whining about the “evil lenders” and collectors when every single thing about the program is set by law. Bankruptcy protection never had anything to do with lenders, ever, since the federal government took over the loans after the borrower defaulted.

      1. Bruce Post

        Mark, you make some excellent points, particularly reminding people how the basis and framework for the federal education loan program is set by congressional authorization. Still, I would never defend Sallie Mae. I had experiences with Sallie Mae when it was a GSE and then I observed it after it successfully sought privatization. Sallie Mae knew how to manipulate the political process, and it did so much to its own advantage.

        Of course, one could create a pantheon of lending agencies that massaged the federal education loan program to their advantage. For instance, Nelnet is right up there with the best or worst. And, you are correct, the state-based agencies are not necessarily heroes either. I worked for one for 12 years, and while I continue to believe that there were virtues in the state-agency approach, not all state agencies were alike or laudable. I remember coming out of one meeting in my agency where I purposefully remarked, “Thank God for Direct Lending”, which was the federal program that made loan money available to borrowers without the middle men. Some state agencies themselves learned to milk the loan program, but certainly not on the scale of Sallie Mae or Nelnet.

        Nor do I absolve Congress of blame. Those 8.5% interest rates for PLUS loans are set by Congress, not by private lenders and banks. All in all, what was a laudable goal back in 1965, when the guaranteed student loan program was created, has become an absolute and indefensible mess.

        1. Mark Lloyd

          The other thing people forget is that these loans do not have risk based pricing, meaning everyone pays the same rate. This is cross-subsidation. In exchange for having federal loans available, the middle class pays the freight for the riskier borrowers (think disadvantaged, however you define it) even at that the CBO says these loans are money losers. These loans are a boon and a choice for aspiring students that are paid for by every taxpayer. The benefits of education, if there are any, accrue to the borrower, but the costs of the program are borne by society. Many may have missed it, but the move to Direct Lending justified the first major increase in Pell Grant funding in decades, opening access and reducing debt for millions of disadvantaged students. How many of Yves readers I suppose think that it is unfair for the middle class help fund financial aid for the poor?

        2. TA

          I’ve said the same thing about Direct Lending – but I’ve always used much harsher language about Sallie Mae, because Sallie Mae is evil.

          And the lending may now be direct, but the servicing no longer is. ALL federal loans (which used to be serviced by DoE) are now in the hands of private servicers. Surprise!

          What bothers me about Mark’s statement is this: loan servicers have tools such as forbearance to reduce default – some of which were part of original loan contracts. Sallie Mae, in early 2008, changed policy to decrease the forbearances it approved for the purpose of INCREASING DEFAULTS. It worked. Sallie Mae therefore got indemnified for more loans, which was easier than actually servicing them over many years.

          Moody’s noted that they did “not expect the policy change to have a material effect on the cumulative losses of the Sallie Mae transactions. The changes will therefore have had no impact on their ratings.” This was October 2009. I am citing SLM’s 10-Q for the period ended 9-30-09 and a Moody’s report cited in structuredfinancenews.com.

          Where else can you unilaterally change contracts to increase defaults AND make more money AND not see a change to your credit rating? AND ultimately get the best bit of the business (servicing, not lending). I mean, mortgages, obviously – but those are at least dischargeable in bankruptcy.

          1. Mark Lloyd

            You obviously have no idea what you are talking about. The Department of Education has NEVER serviced loans. They contracted with ACS until a few years ago when they put the contracts out for bid. The winning bidders included four major servicers and a number of small non-profits.

            The change in forbearance policies had NOTHING to do with Federal loans at all. It applied to reclassifying non-paying private loans and taking earnings hits by recognizing that a significant proportion of the forbearance were simply bad debt.

            Gee, I guess if you’ve misunderstood the facts, perhaps your opinion is unfounded?

      2. Carla

        “Finally, the reason there are no SLABS in 2010? Private lenders were cut out of federal student lending when Obama was elected.”

        It was not when he was elected, it was quite sometime after, and he had to be really SHAMED into it.

        1. Mark Lloyd

          BS, Ted Kennedy endorsed Obama over Hillary and Direct Lending was a key legislative victory everyone lined up behind Obama to deliver to Ted before he left us. Obama promised the move on the campaign trail and he delivered. I respect him for it and think he deserves better than to claim it was otherwise.

    2. Richard Kline

      So Bruce: “He meant that students were raw material from which postsecondary institutions could extract resources — money — to feed the beast.” Yes, this exactly the key point. Those managaing, and funding, post-secondary educational institutions realized that ‘students’ were effectively ‘funding units.’ Rather like little electical wall plugs that said extractors could plug their toasters in to one at a time. Whether the students got anything out of it was tertiary where not actually irrelevant: what mattered was keeping the supply of wall sockets coming.

      I conceptualized a long rant on this in comments on NC sometime earlier this year. I regret I don’t recall the date; I’ll look around. But the massive distortions in student ‘loans’ go back well into the 1960s, when massive government monetary flows became available for universities and loan intermediaries to _really_ extract rents from in a long-term fashion.

    3. Walter Wit Man

      Good points.

      And parents are more often being put on the hook nowadays. Huge numbers of students are now required to come up with a coborrower.

      A 50 year old person co-signing on 6 figures of debt is dangerous and many are doing it without thinking. It’s a time bomb too as it could take up to 10 years before it blows up. Then they could face garnishment of their Social Security check.

    4. Benedict@Large

      Another point on parents co-signing for student loans. If the student dies before the loan is paid, the parents are stuck with the non-dischargable debt. The kid is gone, the education is gone, and the loan payment comes around once every month to remind the parents of the tragedy.

  7. bmeisen

    These guys thought they didn’t need college:

    http://www.inc.com/jillian-donfro/peter-thiels-college-dropouts-one-year-checkup.html

    I teach at a German university with about 40,000 students. The university does not charge tuition. Students pay a modest registration fee (Euro 200?) each semester. Some German universities charge token tuition, say Euro 1000 per year. Many students live with mom and dad, many work part-time, many get state grants and loans to cover living expenses. My university has no official sports teams and no coaches, no stadiums, no riding stables (that I know of). Since the Bologna Reforms students are completing their degrees in 3 to 4 years and the booming economy is trying hard to deny it’s ravenous appetite for these talented, qualified minds and bodies.

    An important issue in my opinion is that many students do not seem to appreciate what they’re getting. The program I teach in is not a disaster from the students’ standpoint. They get qualified, competent instructors, largely transparent processes and sufficient access to the necessary equipment. They could get more if they asked politely. The cost of a year of education at a German university depends on the major but averages something around Euro 10,000.

    1. Susan the other

      Oh Heaven forbid! Why should we bother to coordinate a higher education with a job and a future for our young people – what commie nonsense. We have proud appalachian-pig-farm for a nation. Who needs skills? Anybody can buy a flat bed trailer and go from town to town like the peddlers of old buying up everyone’s surplus belongings, set up a website and sell the stuff. Liquidation is going to be a booming independent-contractor business. So is demolition of subdivisions and shopping malls. So is warehousing all the demolished stuff. Oh, God, the future is bright. It will be an adventurous vagabond world! The only social structure left will be chatting on your i-phone using an ever more meaningless vocabulary. We won’t even notice the disappearance of bubble capitalism as the roof caves in on the old investment houses. They will run out of ideas within this generation of neglected minds and the only exchange left twisting in the wind will be for CDOs squared containing all sorts of unsecured debt which will be traded without enthusiasm merely for the write off.

  8. Walter Wit Man

    Thanks for the post!

    Seems like a crazy enough argument to try! I would like to see the legal argument expanded a bit.

    What level of scrutiny? Would a court be limited to what the 1970s Congresses found? What other evidence would they consider?

  9. Klassy!

    Correct me if I’m wrong, but it sounds like the banker’s lobby was agianst non-dischargeability when it was simply government loans, but changed their tune when it was private loans. Am I missing something?

  10. taunger

    Deadbeat student borrower here. Going for a law degree, I could tell that there was no conceivable way to pay off the loans. There are now multiple manners to discharge loans after making reasonable payments for significant periods of time – provided you never make good money. Which is fine by me, the only thing worse than a huge debt load is a huge income with which to pay one.

  11. kevinearick

    and we begin to see the heart of the matter, in making education an economic activity, quantity, center, the least of all free markets in the cult ponzi pyramid.

  12. ep3

    i think the student loan debt problem is great. it divides our society between old and young. heck, maybe we could swing a deal where if old ppl get a guarantee that THEIR social security and medicare will be there for them (not young ppl) maybe they will forgive the young ppl’s student debt. So instead of paying student debt, we pay for SS and Medicare. then, when that is paid for, because we still will pay SS and medicare taxes, but those funds will pay for oil wars, no more SS and medicare (but still the taxes). It will be like a trade.

  13. Tim

    Well if something’s arguably unconstitutional, then it’s arguably constitutional, and if somebody can profit enough from it to pay us off, then it will be decreed as constitutional. That’s just the way it works.
    - SCOTUS

  14. Erik

    I have a private law school loan from a few years back fixed at 8.5% interest (a good rate for the time). Meanwhile, just last week, I was approved for an unsecured personal loan from a bank at 8.0%. Either the “free market” is saying that handing me straight cash is less risky than a student loan, or private student lenders are making an absolute killing on all of these non-dischargeable loans.

    If the U.S. government, Sallie Mae, and private lenders truly believe that these loans will be paid, why aren’t unsubsidized student loans offered at a much lower interest rate (for instance, something like Prime plus 0.25-0.5%)?

    1. Ms G

      ‘Tis called a monopoly.

      Same q could be posed to Banks — “since you’re borrowing from the Fed Facility at zero, and making a killing by buying Treasuries, why can’t you pay 4% on savings accounts?”

  15. Ms G

    It occurs to me that here would be a beautiful opportunity for a well-endowed non-profit to open a student loan facility at very low rates with a dischargeability provision — say 1% interest over 30 years, dischargeable upon demonstration of hardship, which would include inability to find a job, or a job that pays enough to pay rent/food/utilities/transportation/health care (cough) insurance while leaving enough to pay the debt.

    Calling the Gates Foundation, Soros Foundation, Carnegie, Pew, Bloomberg Philanthropies!

  16. bhikshuni

    Thanks so much for giving this some attention, Yves!

    As a doctoral student, NC readers will be interested to see how our student loan interest rates hover around 7%, while savings earn less than 1% and mortgages can be had for a few points more. Yes it is lower than some credit cards, but it is pure exploitation nevertheless!

    I really wish some of our NC ecogeeks could dig into how the loan servicers get their piece of the action for the fees:

    I.e.,How is it that Wisconsin firm in the Scott Walker’s state, GREAT LAKES Loan Servicers (mygreatlakes.org)gets the deal from the Department of Education to rake in the fees for processing the cash? Just the fact that they are in Wisconsin reeks of corruption.

    Next thing you know, Medicare checks will be processed by Rick Scott, in his bastion of financial ethics!

  17. Kunst

    Like taking candy from a baby. After all, 18-year-olds are adults, aren’t they? And when they get taken to the cleaners by a big corporation run by 50-year-olds, well that’s fair, isn’t it?

  18. Geoff

    I would really appreciate it if someone could dig into the relation of Fanny/Freddy to the USA Group and how the USA sold their huge student loan operation to F&F in July, 2000 for almost $1B. Lumina then became a think tank for privatizing higher ed, it seems. Here’s Lumina’s account of their history: http://www.luminafoundation.org/publications/From_the_Ground_Up.pdf

    Now they’ve funded things like the “Student Success Task Force” which is busy privatizing California Community Colleges with the help of stooges like Barbara Beno, Frank Alvarez and Nancy Shulock. These people are aking to the Appalachin hucksters described above: going town to town with this incredible elixer of “student success” achievable through the miracle of ingredients like “outcomes based funding.” It’s happening right before our eyes and … if we fail to observe it, they will succeed and we’ll all be part of Richard Blum’s for-profiteering success.

  19. (required)

    For the umpteenth time: if student debt could be discharged in bankruptcy, then no bank would ever make a student loan to a student without assets. In other words, student lending would not exist. In other words, “student loan that you can discharge in bankruptcy” is a nonsensical concept. If such a thing existed, students would borrow infinity of it, have a huge bacchanalian orgy for 4 years, then declare bankruptcy.

    If you had actually thought through your arguments while you were writing, instead of just scouring around for authentic-feeling rhetoric that seems to back you up, you would never have published this column.

    1. Geoff

      You are directly denying the existing history *and* obviously afraid of your own body. Try public nudity for a while. See if it helps.

    2. Joe Chabert

      Perhaps if you’d actually read the article, or looked up the numbers on the number of bankruptcies declared by student debtors before the change in this law, you’d realize that at one time the debt was dischargeable and the world didn’t fall apart, nor were there “baccanalian orgies” left and right. The tone of your comment also indicates you have no clue what bankruptcy entails and the type of people who actually have to resort to it.
      As for “authentic-sounding rhetoric,”What you might also try going back to school to learn a bit about the logical fallacy you employ in your comment: picking the worst and most extreme example of your opponent, and using it to attempt to make a point.

  20. Joe Chabert

    Full comment (for some reason it was cut off):

    Perhaps if you’d actually read the article, or looked up the numbers on bankruptcies declared by student debtors before the change in this law, you’d realize that at one time the debt was dischargeable and the world and economy didn’t exactly fall apart, nor were there “bacchanalian orgies” left and right (project much?). The tone of your comment also indicates you have no clue what bankruptcy entails and the type of people who actually have to resort to it (though I’m betting you’ve got a nice little mental image in your head about them).

    As for “authentic-sounding rhetoric”: you might consider going back to school to learn a bit about the logical fallacy (appeal to probability) you employ in your comment: positing the most extreme, unlikely (and patently spurious) outcome, and basing your argument upon that. This is sophistry: it sounds great and is likely to appeal to those incapable of seeing what you’re doing rhetorically: using an emotionally-charged appeal with certain terms likely to stir up an uneducated reader. But again, as the numbers demonstrate in the actual history of student debt bankruptcy (that is, reality itself, not your feverish imagination) this is a highly unlikely outcome and certainly not one supported by history or fact. But by all means, dream up the worst possible outcome of any public policy decision and use that as your standard for evaluating it (“if we build tanks, what will happen when children have them? Sounds like a bad idea, let’s not build any tanks.”) Be prepared, however, to be regarded by anyone with a halfway decent education as a complete idiot.

    Also: “borrow infinity of it?” I haven’t heard this phrase “infinity” (of something) since the 3rd grade. You can’t borrow an unlimited amount of money to attend college; there are already limits in place right now. Maybe familiarize yourself with the current system before expostulating any further about this subject.

    Before I waste any more time replying to your uninformed, childish, and lazily thought-out comment — which was intended solely, I am sure, to deploy what you think is a devastating line (“you would never have published this column”) — I am quitting.

  21. kleptopaul

    Combined with the new reality of unpaid internships or criminally low paying entry level jobs, student loans make many young adults indentured servants.

    Truth Dig has an expose of unpaid internships a few weeks back: http://www.truthdig.com/report/print/its_just_business_how_corporate_america_made_slaves_of_the_young_20120809/

    As a 27 year old with an advanced degree and some 35k in student debt making 32k a year in the NYC-area(pre-taxes) this infuriates me.

    Its basically rent seeking at its most insidious.

  22. Anthony Obrien

    Hello how are you? Nice blog you have I’m wondering if you have alredy been familiarized with the program giving up to 2% everyday with the owner’s 1 mln $ challenge to everyone who will find a flaw in the program. You probrably don’t believe, but if you join you won’t regret. Check this out at http://tinyurl.com/8d7py5e

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