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Posts Tagged ‘securitization’

Student Loans
Student loans are a scam intended to redistribute income from college students to wealthy individual and institutional investors. College students today owe more than $1.4 trillion dollars in student loans, and that figure is getting bigger by the day. Total student loans outstanding exceeded total credit card debt when it hit $1.2 trillion in 2014. Only mortgage debt is greater than student loan debt, but with home values going up, mortgage debt is an investment, whereas student loans have become something of a gamble for a large number of students. (Friedman)

Why do the student loans keep piling up?

About twenty-three years ago, somebody on Wall Street discovered student loans could be securitized. That’s a situation in which investment firms buy student loans from issuers, pool them together, and then issue bonds backed by the loans to wealthy investors. The loan originators earn hefty fees with every loan they sell. The investment firms also obtain a large fee with every bond they sell. (Carrillo)

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For example, a private commercial bank might issue $10 million in student loans at 6 percent interest. A student spends four or five years in college, and then spends ten to twenty years paying off a loan. So that $10 million principal can earn another $10 million in interest or more over the lifetime of the loan. An investment bank might pay $2 million or more for the $10 million in loans from the commercial bank. Then the investment bank will turn around and collect millions in fees from investors for the same loans once they’re bundled together and bonds are issued. The investors might experience a growth in the value of their bonds, so they can sell them, in which case, somebody will get a fee for performing the task. There’s money to be had for all involved in this process, except for the borrowers. (Carrillo)

Most student loans are guaranteed by the federal government. So there’s no risk to investors. It’s free money. The federal government pays the interest on the loans to the investment banks even when the students are still in school. Once the students are out of school, they are required to pay on the interest and the principal to the bondholders. This is how your student loan payments mostly go directly into the pockets of the 1 percent via these bonds. Some of the proceeds go to the service providers.

The Wall Street business strategy on this matter has always been simple: Push the federal government to limit federal grants to college students, and expand the student loan program. That’s precisely what has occurred. In 2016, total outstanding student loans represented roughly 7.5 percent of the United States gross domestic product, up from 3.5 percent only ten years earlier. Nearly 43 million Americans are chained to student loan debt, each with an average balance of $30,000. (Wikipedia)

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While the total number of Federal Pell grants has grown in current dollars since 1976, the cost of education has grown faster. In 1976, for example, the average Pell grant paid 72 percent of the maximum expense of attending a public four year college or university. This figure grew to 79 percent in 1979. Nowadays, the average Pell grant is less than half of that, hovering inside the 32 to 34 percent range. (ACE)

This forces many students to borrow money to help finance their higher education, and it also plays straight into the hands of wealthy investors. The interests of those investors seem to coincide with the concerns of many politicians within the federal government and both major political parties. Student loan default rates jumped from 2010 to 2013. Along with other corporate media sources, CNN reported in 2012 that “The percentage of borrowers who defaulted on their federal student loans within two years of their first payment jumped to 9.1% in fiscal year 2011, up from 8.8% the previous year, according to U.S. Department of Education data.” Investors began selling off their bonds, resulting in declining values. Something had to be done to restore investor confidence, and so the federal government doubled student loan interest rates on all new loans from 3.4 to 6.8 percent on July 1, 2013. (Sheehy)

This increased the return on investment while doubling the burden on the 99 percent who take out new loans to finance what is called the American dream, but it’s really becoming the American nightmare. This is rightly called income redistribution. The doubling of student loan interest rates benefited smaller Wall Street investment banks, as well as such Wall Street heavyweights as JP Morgan/Chase and Goldman Sachs. Loan originators and investment companies receive billions of dollars in fees every year from new student loans. Both JP Morgan/Chase and Goldman Sachs are publicly traded corporations. Both corporations are listed among the Dow Jones Industrials, and both keep their stock prices rising, in part, to the securitization of student loans, which benefits their affluent shareholders.

The more interest students are forced to pay, the higher the bonds can sell for, and the more attractive they are to investors, especially since the government guarantees them. (Carrillo) In this way, America’s higher education policies have been legislatively constructed so as to redistribute the income of the 99 to the 1 percent via higher student loan debt.

Wall Street banks also rigged the game even more against student loan borrowers by having the government make it almost impossible to discharge student loan debt through bankruptcy. Students are tied to the debt until it’s paid, or they die. This leaves less money for students to spend when they graduate, forcing them to curtail their purchases, and weakening the economy in the process.

When the US congress and President Obama allowed the interest rate of new student loans to double to 6.8 percent in 2013, the public outcry was so heavily against it that politicians had to reduce student loan interest rates within a year. The burden for students and their families had been too great. The rate was dropped to 4.9 percent in 2014, which was still 50 percent higher than in 2012. (Lobosco)

Bernie Sanders was right when he declared the government could provide free public education to its people. The money is there, and always has been. During the economic crisis of 2008-2009, the federal government and the Federal Reserve gave out tens of trillions of dollars to rich investors, investment banks and hedge funds. Politicians called these actions “quantitative easing” and “bailouts.” (Irvin) See The $26 Trillion Bailout to Save Incompetent but Rich Investors-JohnHively.wordpress.com. If trillions of dollars to bail out the rich are there whenever they need it, why isn’t that money also available when the rest of us need it?

The answer, of course, is simple.

Like many other issues, student loans are a corrupt, financially rigged game that shows how the government acts as a conduit in redistributing income from the 99 to the 1 percent when it doesn’t have to. Just follow the money and you will know who is corrupting your government.

Works Cited
Friedman, D. (May 17, 2014). Americans Owe $1.2 Trillion Dollars In Student Loans. New York Daily News. http://www.nydailynews.com/news/national/americans-owe-1-2-trillion-student-loans-article-1.1796606

American Council on Education, (ACE) http://www.acenet.edu/news-room/Documents/FactSheet-Pell-Grant-Funding-History-1976-2010.pdf

Merganser Capital Management, Investment Memo http://www.merganser.com/PDF/Memo/2015-Q3.pdf
http://money.cnn.com/2012/09/28/pf/college/student-loan-defaults/

Carrillo, R. (April 14, 2016). How Wall Street Profits From Student Debt, Rolling Stone. http://www.rollingstone.com/politics/news/how-wall-street-profits-from-student-debt-20160414

Irvin, N. (October 29, 2014). Quantitative Easing is Ending, Here’s what it did, in Charts. New York Times. October 29, 2014. https://www.nytimes.com/2014/10/30/upshot/quantitative-easing-is-about-to-end-heres-what-it-did-in-seven-charts.html?_r=0

Sheehy, K. (July 3, 2013). What the Stafford Loan Rate Hike Means for Students. US News and World Report. http://www.usnews.com/education/best-colleges/paying-for-college/articles/2013/07/03/what-the-stafford-loan-interest-rate-hike-means-for-students

Lobosco, K. (June 30, 2016). Student Loan Intereest Rates Are Going Down. CNN Money. http://money.cnn.com/2016/06/30/pf/college/student-loan-interest-rates/

Wikipedia, Student Loans in the United States. https://en.wikipedia.org/wiki/Student_loans_in_the_United_States

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