The Student Debt Bubble
An interview with Alan Nasser
January 2012 By Collin Harris
Alan Nasser is professor emeritus of political economy at Evergreen State College in Olympia, Washington and co-author of the article “The Student Loan Debt Bubble.”
HARRIS: How severe is the issue of student loan debt?
NASSER: It was announced last summer that the total student loan debt—at $830 billion—now exceeds the total U.S. credit card debt, itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 billion a year, now approaching $1 trillion. The most recent statistics cover 2008 when debt was held by 62 percent of students from public universities, 72 percent from private nonprofit schools, and 96 percent from private for-profit (“proprietary”) schools.
For-profit school enrollment is growing faster than enrollment at public schools and a growing percentage of students attending for-profit schools represent holders of debt that are likely to default.
What are the parallels between the student debt bubble and the broader subprime mortgage financial crisis? Do you see the same criminality and collusion between lenders, ratings agencies, and government agencies?
The extraordinary growth of student debt parallels the beginning of the dot.com bubble in the mid-1990s to the bursting of the housing bubble. From 1994 to 2008, average debt levels for graduating seniors more than doubled to $23,200, according to the Student Loan Project, a nonprofit research and policy organization. More than 10 percent of those completing their bachelor’s degree are now saddled with over $40,000 in debt.
In the build-up to the housing crisis, the major ratings agencies used by the biggest banks gave high ratings to mortgage-backed securities that were in fact toxic. A similar pattern is evident in student loans. A credit score is not required for federal loan eligibility. Neither is information regarding income, assets, or employment. Borrowing is still encouraged in the face of strong evidence that the likelihood of default is high.
Of course, the usual suspects are among the top private lenders: Citigroup, Wells Fargo, and JP Morgan-Chase. Loaning money to anyone without prime qualifications was “subprime lending” during the ballooning of the housing bubble, when banks were enticing otherwise ineligible candidates to buy houses they could not afford. Shouldn’t lending without adequate credit checks to college students with insecure credit also be considered “subprime lending?”
What are the social and economic demographics underlying the student debt issue? What are the racial and class dimensions involved? Who’s being targeted, what are some important recruitment bases? Who’s most likely to default and who’s most likely saddled with adjustable-rate private loans. Who’s attending for-profit colleges?
Even the disturbing findings of recent Congressional hearings on the recruitment techniques of proprietary colleges hasn’t jeopardized these schools’ access to federal funds. The hearings displayed footage from an undercover investigation showing admissions staff at proprietary schools using recruitment techniques explicitly forbidden by the National Association of College Admissions Counselors. Admissions and enrollment employees are also shown misrepresenting the costs of an education, the graduation and employment rates of students, and the accreditation status of institutions.
These deceptions increase the likelihood that graduates of for-profits will have special difficulties repaying their loans, since the majority enrolled at these schools are low-income students. Don’t think that predatory lenders market loans only to actual students. Potential students are targeted as well. A major mantra nowadays is that the best protection against unemployment is a college education, which has led some private lenders to recruit borrowers at the unemployment office.
I mentioned earlier that 96 percent of students at for-profit schools have taken student loans and that these students are the most likely to default. The Education Department reports that 43 percent of those who default on student loans attended for-profit schools, even though only 26 percent of borrowers attended such schools.
These schools target the military market with an aggressive and highly successful recruitment campaign. High numbers of active duty and recently discharged military personnel attend for-profits. Twenty-nine percent of military enrollments are in the for-profit sector and 40 percent of annual tuition assistance to veterans winds up going to proprietary schools. Data from the U.S. Army and Defense Department show that the University of Phoenix, the largest university in North America, is the third largest receiver of education funding from the U.S. Army. According to a U.S.-Senate-sponsored study, the University of Phoenix receives 90 percent of its funding from the federal government. Military personnel are often targeted while still enlisted. Waiting for them are generous GI Bill benefits that allow them to pursue vocational or baccalaureate degrees at accredited colleges. The for-profit sector is poised to corner that market as public institutions squeeze their enrollments, raise tuition, and watch public support of higher education dwindle in the current resurrection of pre-Keynesian economic policies.
How is default measured and reported? Do lenders profit off students defaulting on their debts? Should we be expecting a future bailout for the lenders invested in the student debt bubble?
The health of student loans is officially assessed by the “cohort-default rate,” a supposedly reliable predictor of the likelihood that borrowers will default. But the cohort-default rate only measures the rate of defaults during the first two years of repayment. Defaults that occur after two years are not tracked by the Department of Education for institutional financial aid eligibility. Nor do government loans require credit checks or other types of regard for whether a student will be able to repay the loans.
As noted earlier, total outstanding federal and private student-loan debt is approaching $1 trillion. Only 40 percent of that debt is actively being repaid. The rest is in default or in deferment (when a student requests temporary postponement of payment because of economic hardship), which means payments and interest are halted or in forbearance. Interest on government loans is suspended during deferment, but continues to accrue on private loans. As tuitions increase, loan amounts increase; private loan interest rates have reached highs of 20 percent. Add that to a troubled economy and dismal job market, and we have the trappings of a major bubble. As it goes with contemporary bubbles, when the loans go into default, taxpayers will be forced to pick up the tab, since just about all loans made before July 2010 are backed by the federal government.
In September 2008, then-Secretary of Education Margaret Spellings announced in a news release that default rates on federal loans were “historically low”: only 5.2 percent of recent grads were in trouble. Spellings used the cohort-default rate to arrive at this figure. But the Department’s Inspector General Office employed a more realistic method in its 2003 audit, which calculated lifetime risk. It estimated that over their lifetime between 19 and 31 percent of college freshmen and sophomores would default on their loans (depending on the type of loan and when it was taken). For community college students, the prospects were grimmer still as between 30 and 42 percent were expected to default. And the future was most discouraging for students at for-profits: between 38 and 51 percent were anticipated to default. You can see that the default rate among student borrowers is expected to be higher than that for subprime home mortgages.
We’ve seen one way that government aids and abets the lenders, by fudging default rates. But government’s participation in this rip-off goes deeper than that. The Department of Education has its own loan program and, accordingly, a positive interest in defaults. It makes a financial killing on its recovery of Federal Family Education Loan Program (FFELP) defaulted loans.
In a Wall Street Journal report, John Hechinger reveals that for every dollar the Education Department pays out in default claims, it is able to rake back the entire principal, plus almost 20 percent in interest, penalties, and fees. Keep in mind that the value of the default portfolio includes not merely principal plus interest at time of default, but also the interest that continues to accrue after default. A glance at the Supplement to President Obama’s 2010 budget shows that the most recent recovery rate—the amount recovered compared to the amount of the defaulted loan—for defaulted FFELP loans is 122 percent. This is the highest recovery rate for all types of federal loans and more than twice the rate for the next highest loan category. You get a sense of the relative enormity of Uncle Sam’s looting binge when you look at the recovery rate for credit card defaults—about 25 cents on the dollar.
Alan Collinge of StudentLoanJustice.org has shown that the Department of Education makes more on defaulted loans than it does on loans in good stead. Washington has as much interest in encouraging student loan defaults as do, for example, collection companies, which obviously live off defaults. This is exactly what the first president Bush meant when he declared his intention to “run government like a business.” Government has become a predatory lender. It has the same incentive to benefit from default as do private lenders.
The fee system is at the heart of the private lenders’ affection for default. Collinge has analyzed IRS filings of guarantors of federal student loans. It turns out that guaranty agencies average about 60 percent of their income from fees alone. If the default rate declines, so do the fees and income of the guarantors. The biggest private lenders, like SLM Corporation (Sallie Mae) and Citigroup, have interests comparable to the guarantors. This is because the latter, as well as some of the biggest collection agencies, are often owned by the lenders. The lender, guarantor, and collector thus form a system of interwoven interests: a lender defaults a loan, which then becomes bloated with collection fees, which then generates a flow of revenues to the guarantor and the collector. If the latter two are owned by the lender, we have income continuously flowing to all three—provided that borrowers continue to default.
What recourse, legally speaking, do student borrowers have? Are ordinary consumer protections like bankruptcy or refinancing options available?
No, it’s not possible for student debtors to escape financial devastation by declaring bankruptcy. This most fundamental of consumer protections would have been available to student debtors were it not for legislation explicitly designed to withhold a whole range of basic protections from student borrowers. I’m not talking only about bankruptcy protection, but also truth in lending requirements, statutes of limitations, refinancing rights, even state usury laws. Congress has rendered all these protections inapplicable to federally-guaranteed student loans. The same legislation also gave collection agencies hitherto unimaginable powers, for example, to garnish wages, tax returns, Social Security benefits, and—believe it or not—disability income. Twisting the knife, legislators made the suspension of state-issued professional licenses, termination of public employment, and denial of security clearances legitimate measures to enable collection companies to wring financial blood from bankrupt student-loan borrowers. Student loan debt is the most punishable of all forms of debt—most of those draconian measures are unavailable to credit card companies. Maybe I’m being too harsh. After all, Sallie Mae recently announced that it will forgive a debt under either of two conditions: in case the borrower dies or becomes totally disabled.
How can we situate the student debt bubble within the larger context of the American economy?
When we think about the impact of swollen student debt on the debtors, we need to keep in mind the economic situation of this generation apart from the educational debt burden. Students are entering a world in which there will be fewer jobs and the majority of available jobs will be low-paying. What President Obama said of the auto industry, that “many of these jobs will not come back,” is true of the job market in general. Just as no one expects the Nasdaq to re-inflate, and no one expects, or should expect, the housing bubble to re-inflate, we cannot expect income levels or job opportunities to resemble what Americans of my generation took for granted during the so-called “Golden Age” of American capitalism. That was the longest period of sustained growth in U.S. history with the highest standard of living the working class ever knew. That’s gone and won’t return. This was quite clear in the December 2009 job projections released by the Bureau of Labor Statistics (BLS). Between now and 2020, most new jobs will be low paying and will not require a post-secondary education. Obama’s “restructuring” of the auto industry, with new workers making half of what had been the standard industry wage, and with reduced benefits to boot, will not be reversed once the economy is “back on its (much smaller) feet.” And, I might add, that this is a problem facing young people all over the world.
In order to maintain anything resembling a decent standard of living under these circumstances working people are going to have to become something grimly resembling debt peons. Current income will not suffice to meet the basic needs of the typical household, so future income will have to be mortgaged in the form of debt. This is not surprising in a country where the elite are no longer primarily wealthy industrial capitalists producing “real” goods and services, but are now financial capitalists producing financial “products.” Yes, that’s what debt is called in the financial world: it’s the principal product of financial capital.
The mythology of “the American Dream” has always been a crucial means of diffusing class tension in the U.S., but as this pretense of perpetual social mobility begins to crumble, millions of young people are left angry, alienated, and un/underemployed. This is becoming a source of social and class conflict in America and for a massive youth movement in the years to come. What are your thoughts on this?
The objective conditions for the possibility of both a mass movement and a student movement whose fundamental issues are ballooning education costs and education debt are in place. This is a remarkable development. But the key words here are “objective” and “possibility.” The deliberate imposition of mass working-class austerity in order to protect and magnify the wealth of the elite is indeed objectively excellent grounds for organized resistance.
I happen to believe—and this is by no means a conviction shared by all on the Left—that what is required is a Party with a clear program and the ability to reach out effectively to working people with the twin aims of learning from them and sharing with them plausible Left understandings of the current crisis. This will require identifying and building on already-existing popular grievances. I think that a necessary part of this task is to have accessible and compelling alternatives to existing arrangements.
Two examples are: (1) Jefferson’s notion that the national bank, in our case the Fed, should be owned and operated as a public utility; (2) a bailout-for-the-people, which would address the mortgage crisis. Instead of giving trillions of our money to finance capital, government might begin by requiring that the true market value of homes be determined. This is much easier than determining the true value of the notoriously complex toxic bundled securities.
It’s not even clear that there is such a thing as “the true value of Collateralized Debt Obligations.” This is surely doable and has government functioning unambiguously on behalf of working-class interests.
When I say that this is doable, I do not imply that such a project would not be met with fierce resistance by the vested interests. That resistance would have to be met by just-as-fierce counter-resistance. That presupposes an organized Left political tendency already in place and entails a protracted struggle which, like the women’s suffrage and civil rights movements, we do not expect to win in the short run. Serial defeats are to be expected. What we hope to build is what Bush Sr. called “the big mo,” momentum.
Why do you think American students—and the general population—have been, until the Occupy movement, quiescent in comparison to their European counterparts?
The quiescence has been stunning. Surely a major consideration in Europeans’ militancy is the history of socialist and communist parties there. These parties were not demonized as they have been here. Another important factor is the degree of propaganda that Americans have been subject to since the early 20th century. Freud’s nephew, Edward Bernays, is considered the father of modern advertising and public relations. Thus, anti-capitalism is considered anti-American. Other developed countries don’t have this kind of economic patriotism. It has been an explicit agenda of the U.S. to carefully and “scientifically” indoctrinate the population with the ultra-nationalism we see here.
The issue of student debt seems like a unifying issue around which American youth are starting to mobilize, not only for immediate reforms like robust public funding for education and debt forgiveness, but to open up opportunities for long-term organized resistance to American state and corporate power. So how can we begin to move in that direction?
I was recently interviewed by a group in New York who are working on a website where present and former students could enter a few pertinent facts about their debt and learn in a few seconds, through a graphic, just what percentage of their debt payments were going where—to the school, to which bank, etc. These are well-informed people and their project seems to be a good example of one of the ways students can be brought into a project that would be informative, educational, and movement-building at the same time.
What are some short-term tactics for students to gain a little breathing room, which can allow for a widening of the struggle and sustained effort into the future? If ordinary legal protections are denied to student borrowers, then do class-action lawsuits and demands for student-debt cancellation need to be part of the strategy?
Yes, class action lawsuits and demands for unqualified debt forgiveness should certainly be on any Left movement’s agenda. All the questions above arise regarding the difficulties and requirements for the formation of an organized Left resistance. But there is the fact about which we can be certain now: if all student debtors, or even most of them, simply refused to pay, the creditors would be powerless to recoup their losses. Shades of the General Strike.
Collin Harris is a freelance writer, media producer, and activist. He will be launching MOSS Magazine this winter.