|SUBPRIME LENDING FROM HOUSING TO COLLEGES
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|Author:||Merrill [ Mon Aug 17, 2015 3:18 pm ]|
|Post subject:||SUBPRIME LENDING FROM HOUSING TO COLLEGES|
In 2010, the Federal Direct Loan Program (see glossary) assigned Sallie Mae and four other private educational lenders (FedLoan Servicing, Great Lakes Educational Loan Services, Nelnet, and Direct Loan Servicing Center) the role of federal loan servicers. These are companies that handle, for a fee, the billing and other services on federal student loans. By far the largest, Sallie Mae (or, more precisely, its offshoot company Navient), provides service to 3.6 million loan customers on behalf of the U.S. Department of Education.
Sallie Mae has been growing at such a rapid pace that it has been diversifying into areas such as debt collection, insurance and consumer banking, and the issuing of credit cards to college students. Sallie Mae remains the main lender of private student loans and the largest issuer of SLABS.
Raising Funds, Reducing Risks—for Whom?
SLABS is often presented by economists and neoliberal policy makers as a highly efficient method of raising capital and reducing risk for lenders, including the risks of default and bankruptcy. This view of SLABS conveniently ignores the unequal relations of power in the educational loan business—and how the business generates revenue from commissions, fees, and interest.
Consider, for example, a first-year undergrad at UCLA who gets a four-year, $25,000 student loan from Sallie Mae. Depending on the repayment schedule and an interest rate based on creditworthiness, this student could end up paying Sallie Mae anywhere from $50,545.95 (based on a 145-month repayment plan) to $70,259.07 (based on a 193-month repayment plan) to even $74,126.61 (based on a 144-month deferred repayment plan).
The deferred repayment option costs more because the student is not required to make payments during school or, according to the Sallie Mae website, is allowed to “pay as much as you’d like.” Sallie Mae’s rosy language leaves out why student borrowers might choose loan terms that are more expensive in the long run: they are worried about their ability to repay, because their families have no extra resources and they may end up unemployed or underemployed after graduating from college.
Shortly after issuing the loan to the UCLA student, Sallie Mae securitizes the debt, packaging it with a bundle of other similar student loans. It then sells this debt bundle to an outside investor, like a pension or hedge fund, pocketing the total amount of the original loans plus fees and commissions. In doing so, Sallie Mae receives payment on its student loans immediately, as opposed to receiving small monthly payments for twelve to 16 years from students and bearing the risk that these students might default.
Revenue is extracted in student debt collection, too. Thanks to amendments to the Higher Education Act in 1991, debt collectors that specialize in student debt are permitted to tack on hefty collection (25%) and commission fees (28%) to the outstanding loan, making debt collection a highly lucrative business.
Private lenders are not the only ones benefiting from the educational loan business. The Department of Education, which also securitizes its loans, is believed to have generated $101.8 billion in revenue from student loans from 2008 to 2013. It does so largely by exploiting a spread between the low interest rates it pays to borrow money (e.g., 2.52% based on the 10-year Treasury bond rate in 2013) and what it charges students (e.g., 6.8% for Stafford Loans (see glossary below)).
The basic premise driving SLABS is that powerful financial actors and institutions are able, through regulatory and legal sanctioning by the government, to transform a debt obligation (student loan) into a financial asset (SLABS) that can be traded on the secondary markets. This can be understood as the “commodification of debt.” The underlying assets for SLABS are student loans that have been sliced and diced to create packages of debt obligations that are then sold to investors such as pension funds. SLABS has proven to be a lucrative device to hedge risk for investors, raise capital, and even to generate income when student loan debtors default (through derivative contracts such as credit default swaps, which pay off in the event of default).
Once we peel away the complexities of SLABS, we are left with the basic problem: the success of the “investment” ultimately depends on the ability of the debtor to earn enough money to pay the principal of the loan, plus interest and fees. The alchemy of finance cannot erase the risk of how hard it may be for the student to ever repay the loan because the student will struggle to find gainful employment after graduation. From this angle, SLABS—like all forms of credit—rests on the ability of the state to ensure that debtors (students) will repay the loan—no matter what their incomes may be.
For the student loan industry to continue to expand and remain lucrative in the face of increasing rates of delinquency and default, the state must discipline the debtors. In my recent book, Debtfare States and the Poverty Industry (2014), I refer to this new feature of neoliberal governance—emerging alongside the rollback of the welfare state, dereliction of labor laws, and increased levels of precarity among working- and middle-class Americans—as “debtfarism.”
Debtfarism represents a set of institutional and ideological practices aimed at regulating and normalizing the growing dependence on expensive consumer credit to meet basic needs, such as education. Personal bankruptcy law is a core regulatory feature of debtfarism, as it acts to deal with defaults in the student loan industry and to ensure the legal and moral obligation of debt—regardless of the borrower’s ability to repay.
For many students, the draconian changes to the bankruptcy code with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 represented a major turning point. Among its notable features, the BAPCPA was designed to keep student debtors out of bankruptcy in three ways:
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