The Student Loan Debt Bubble Curse of the First 'Austerity Generation'

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It was announced
last summer that total student loan debt, at $830 billion, now exceeds
total US 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.

There are
far fewer students than there are credit card holders. Could there
be a student debt bubble at a time when college graduates’
jobs and earnings prospects are as gloomy as they have been at any
time since the Great Depression?

The data indicate
that today’s students are saddled with a burden similar to
the one currently borne by their parents. Most of these parents
have experienced decades of stagnating wages, and have only one
asset, home equity. The housing meltdown has caused that resource
either to disappear or to turn into a punishing debt load. The younger
generation too appears to have mortgaged its future earnings in
the form of student loan debt.

The most recent
complete statistics cover 2008, when debt was held by 62% of students
from public universities, 72% from private nonprofit schools, and
a whopping 96% 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 likely to default. In order to get a better
handle on the dynamics of student debt growth, it is helpful to
sketch the connection between the current crisis in public education
and the recent rapid growth of the for-profits.

Crisis of Public Education Precipitates Private School Growth

Since the most
common advise to the unemployed is to “get a college education,”
and tuition at public institutions is at least half or less than
private-school rates, public higher education institutions have
been swamped with an influx of out-of-work adults. This has resulted
in enrollment gluts at many state colleges. At the same time, tuition
is increasing just when household income and hence the affordability
of higher education are declining.

Here is how
this scenario unfolds:

With few exceptions,
state-funded colleges and universities set tuition rates based on
policy and budget decisions made by state legislatures. High and
increasing unemployment and declining wages have resulted in declining
public revenues. This in turn leads to budget cut directives from
legislative bodies to public higher education institutions, often
accompanied by the authority to increase tuition.

For example,
a 14% budget cut to an institution may be u201Coffset” by giving
the governing boards of the school the authority to raise tuition
by a maximum of 7%. Often the imbalance created by a cut to the
base budget and an increase in tuition is made worse by limits on
enrollment. A state legislative body may cut an institution’s budget,
allow it to increase tuition, but not provide per-student funding
increases to keep pace with the accelerating enrollment demand.

This affects
tuition rates at for-profit institutions. More students who would
otherwise attend a state institution or a private, non-profit school
are finding themselves without a seat at over-enrolled campuses.
More students are pushed into the online and for-profit sectors,
and proprietary schools seize the day by inflating their tuition
costs.

Because online
colleges lack the enrollment constraints of a physical campus, they
are uniquely poised to capture huge proportions of the growing higher
education market by starting classes in non-traditional intervals
(the University of Phoenix, for example, begins its online classes
on a 5-week rolling basis) and without regard to space, charging
ever-increasing rates to students who have no other choice.

Instead of
waiting for an admissions decision or a financial aid package from
a traditional college, students can enroll immediately online. This
ease of use and accessibility to any student has allowed the for-profit
sector to capture a growing portion of the higher education market
and a growing proportion of education-targeted public money. Enrollments
at for-profit colleges have increased in the last ten years by 225%,
far outpacing public institution increases.

Thus, the
neoliberal assault on public education not only tends to push more
students into private institutions, it also generates upward pressure
on tuition costs. This results in growing pressure on enrollees
at proprietary schools to take on student loan debt.

How Healthy
Are Student Loans?

The extraordinary
growth of student debt paralleled the bubble years, from the beginnings
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.

Are student
loans as financially problematic as the junk mortgage securities
still held by the biggest banks? That depends on how those loans
were rated and the ability of the borrower to repay.

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.

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.

There is about
$830 billion in total outstanding federal and private student-loan
debt. Only 40% 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%. Add that to a deeply troubled economy and
dismal job market, and we have the full 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 to date are backed by the federal government.

Of course
the usual suspects are among the top private lenders: Citigroup,
Wells Fargo and JP Morgan-Chase.

Financial
Aid and the Federal Tilt to Private Schools

A higher percentage
of students enrolled at private, for-profit (“proprietary”)
schools hold education debt (96 %) than students at public colleges
and universities or students attending private non-profits.

Two out of
every five students enrolled at proprietary schools are in default
on their education loans 15 years after the loans were issued. In
spite of this high extended default rate, for-profit colleges are
in no danger of losing their access to federal financial aid because,
as we have seen, the Department of Education does not record defaults
after the first two years of repayment.

Nor have the
disturbing findings of recent Congressional hearings on the recruitment
techniques of proprietary colleges 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. (Forbes magazine, Oct.
26, 2010, “When For-Profits Target Low-Income Students,”
Arnold L. Mitchem)

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.

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
easy lending without adequate credit checks to college students
with insecure credit also be considered “subprime lending”?

Government’s
Bias Toward the Private Educational Sector

In 2009 President
Obama initially pledged $12 billion in stimulus funds to help community
colleges through the economic crisis. Last March that sum was slashed
to $2 billion. The umpteenth example of a broken Obama promise.

We see a drastic
cut in federal stimulus funding even as state funding for higher
education is expected to fall even further. At a time when community
colleges across the country are overflowing with returning students
seeking new skills and high school graduates who can’t afford
ever-rising tuition rates at many four-year schools, the majority
of education-bound stimulus funds are going to for-profit institutions,
not community colleges. (Our home state of Washington illustrates
the general direction of the administration’s “reform”
of higher education: for the first time in the state’s history,
public funds no longer pay the majority of higher education costs.)

Apart from
stimulus funding, overall government student aid is disproportionately
aimed at those attending proprietary schools. Nearly 25% of federal
financial aid is spent on students attending for-profit colleges,
even though these colleges enroll less than 10% of the nation’s
college students.

Proprietary
schools now rely on federal financial aid – PELL Grants and
federal loans – as their primary source of revenue.

Even the most
profitable proprietary schools receive the majority of their funding
from federal financial aid programs. According to a U.S.-Senate-sponsored
study, The University of Phoenix, the largest private university
in North America, receives 90% of its funding from the federal government.
Not-so-incidentally, proprietary schools are among the largest donors
to Education Committee members.

Proponents
of the system defend it by pointing out that public colleges also
rely on taxpayer subsidies for the majority of their revenue. But
this overlooks a decisive difference: what proprietary schools don’t
have that public schools do, is an obligation as a state agency
to deliver a high-quality education to its students. Instead, proprietary
schools have a legal fiduciary duty to their stockholders, like
any other for-profit enterprise. As a result, according to a PBS
Frontline investigation, the sector spends 20 to 25 % of its budget
on marketing and only 10 to 20 % on faculty.

The Track
Record of For-Profit Colleges

The track
record of for-profit colleges does not justify their disproportionate
share of government largesse.

Drop out rates
are higher than they are at public and non-proprietary private schools,
often as high as 50 %. Irrespective of whether a student drops out,
the for-profit college has already pocketed tuition and fees. The
student is left still burdened with a substantial loan obligation.

As for graduation
rates, a 2008 report by the National Center for Education Statistics
puts the graduation rate for students at for-profits beginning their
studies in 2002 at 22%, an 11% drop from students enrolling in 2000.
The same cohort attending public and private non-profits graduated
at rates of roughly 54% and 64%, respectively. Graduate or not,
the debt burden remains.

Suppose the
student does not drop out but either seeks to transfer to a public
or another non-profit, or completes her studies and enters the job
market with a proprietary degree? Many students assume that credits
are transferable to a public or nonprofit, but they aren’t, so they
pay twice to attain their degree. The school holds out the lure
of high-paying jobs upon graduation, but either no such jobs exist
or they require education or experience beyond what the school provided.
Congressional studies have shown that the earnings of proprietary
graduates are the lowest of all graduates. According to a 2009 Bloomberg
report on salary comparisons between traditional and online degree-holders,
graduates with bachelor’s degrees from traditional colleges
earn a median salary of $55,200, while those with degrees from the
University of Phoenix earn only $50,500, and $43,100 from for-profit
American Intercontinental.

On top of
these earnings and job-prospect disadvantages, proprietary graduates
bear the heaviest academic debt burden. The Education Department
reports that 43 % of those who default on student loans attended
for-profit schools, even though only 26% of borrowers attended such
schools. Many of those who attended for-profits don’t earn
enough to repay their loans. It’s not uncommon for a student
who either paid out of pocket or took out a loan for a $30,000 degree
to find herself stuck in a $22,000 a year job. This only adds insult
to injury: a Government Accounting Office study reports that “A
student interested in a massage therapy certificate costing $14,000
at a for-profit college was told that the program was a good value.
However, the same certificate from a local community college cost
$520.00.”

Paying back
student loans out of low income and over a long period of time can
rule out the possibility of making other financial investments required
for the vanishing American Dream, such as buying a house, or saving
for retirement or for one’s children’s education.

All in all,
the for-profits’ track record is more than dismaying. In too
many cases, students leave proprietary schools in worse financial
shape than they were in before they enrolled. The problem is not
limited to proprietary graduates: most of this generation of college
grads now possess more debt than opportunity.

You might
think that the unflattering record of for-profit schools would restrain
government gift-giving. After all, the Obama administration’s
current education policy would punish “underperforming”
public schools and teachers. But these policies target the public
sector exclusively: the aim is to undermine teachers’ unions
and encourage privatization by boosting charter schools. It is entirely
consistent with Washington’s agenda that the dismal performance
of proprietary schools does not jeopardize their future access to
public financial aid funds – as long as the student does not default
on their loan within two years of dropping out.

The Career
College Association, the lobbying arm of publicly traded colleges,
finds all this to be irrelevant. It relies on a different type of
indicator from the rest of the higher education sector to measure
the success of its for-profit colleges: stock prices. Remarkable.
We see the disproportionate flourishing of “schools” whose
primary concern has nothing to do with education.

Proprietary
Schools and the Military

Proprietary
schools target the military market with an aggressive and highly
successful marketing campaign. For-profit colleges are the destination
of high numbers of active duty and recently discharged military
personnel. Data from the US Army and Defense Department show that
the University of Phoenix is the third largest receiver of education
funding from the US Army.

29% of military
enrollments are in the for-profit sector, and 40% of annual tuition
assistance to veterans winds up going to proprietary schools. Often
targeted while still enlisted, military personnel are attracted
to the relative ease with which they can attend school, often at
night, on the weekends, or for active-duty military, even while
deployed. With the recent reduction of troops in Iraq, more service
members are returning to the United States. Waiting for them are
generous G.I. Bill benefits, allowing 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
policy.

The job prospects
for military personnel at for-profits are predictably poor. A Bloomberg
report quotes a retired Marine Corps Colonel who now directs human
resources for U.S. Fields Operations at Schindler Elevator Corp.,
as saying “we don’t even consider” online for-profit
degree-holding candidates for the company’s management development
program.

THE PRIVATE
LENDERS: SECURITIZATION AS USUAL

The two largest
holders of student loans are SLM Corp (SLM) and Student Loan Corp
(STU), a subsidiary of Citigroup. SLM -Sallie Mae- was originated
as a Government Sponsored Enterprise (GSE) in 1972. The idea was
to prime it for eventual privatization. In 1984 the company began
trading on the New York Stock Exchange under the ticker symbol SLM.
In 2002 Sallie Mae shed the its GSE status and became a subsidiary
of the Delaware-chartered publicly traded holding company SLM Holding
Corporation. Finally, in 2004 the company officially terminated
its ties to the federal government.

As the nation’s
largest single private provider of student loan funding, SLM has
to date lent to more than 31 million students. In 2009 it lent approximately
$6.3 billion in private loans and between $5.5 billion and $6 billion
in 2010.

In the 1990s,
well before its full privatization, Sallie’s operations were
increasingly swept into the financialization of the economy. It
jumped whole hog onto the securitization bandwagon, lumping together
and repackaging a large portion of its loans and selling them as
bonds to investors. SLM created and marketed its own species of
asset-backed securitized student loans, Student Loan Asset Backed
Securities (SLABS). When derivatives trading went through the roof
following the 1998 repeal of Glass-Steagal, increasingly diverse
tranches of Sallie-Mae-backed SLABS entered the market. The company
is now also buying and selling the obligations of state and nonprofit
educational-loan agencies.

Student loans
were included in the same securities that are blamed for the triggering
of the financial crisis, and financial products containing these
same student loans continue to be traded to this day. The health
of these tranches and securities is, as we have seen, highly suspect.

SLM’s
risk was minimized as long as the feds guaranteed its loans. But
as part of last March’s health care legislation, starting in
July 2010 federally subsidized education loans were no longer available
to private lenders. What do education loans have to do with health
care? Since the government took federal loan originations in-house,
making them available only through the Department of Education,
it no longer has to pay hefty fees (acting as the guarantee) to
private banks. The Obama administration expects to save $68 billion
between now and 2020. $19 billion of this will be used to pay for
the $940 billion health care bill.

SLM will do
quite well despite this seeming setback. The company anticipated
the change in government lending policy by executing an ingenious
trick as a borrower. Early last year it made its insurance subsidiary
a member of the Federal Home Loan Bank of Des Moines, which agreed
to lend to big-borrower SLM at the extraordinary rate of .23%. And
anyhow, subsidized loans are almost always insufficient to cover
the entire cost of a college degree. For a while the student gets
to enjoy the benefits of a government loan. Interest rates are lower
and during deferment interest does not accrue. But eventually many
students must also take out a private loan, usually in larger amounts
and with higher interest rates which continue to mount during deferment.

THE WORST-CASE
SCENARIO: GOING BANKRUPT

Credit card
and even gambling debts can be discharged in bankruptcy. But ditching
a student loan is virtually impossible, especially once a collection
agency gets involved. Although lenders may trim payments, getting
fees or principals waived seldom happens.

The Wall Street
Journal ran a revealing report on the kinds of situation that can
lead to financial catastrophe for a student borrower. (“The
$550,000 Student Loan Burden: As Default Rates on Borrowing for
Higher Education Rise, Some Borrowers See No Way Out,” Feb.
13, 2010) Here is an excerpt:

“When
Michelle Bisutti, a 41-year-old family practitioner in Columbus,
Ohio, finished medical school in 2003, her student-loan debt amounted
to roughly $250,000. Since then, it has ballooned to $555,000.

It is the
result of her deferring loan payments while she completed her residency,
default charges and relentlessly compounding interest rates. Among
the charges: a single $53,870 fee for when her loan was turned over
to a collection agency.

Although Bisutti’s
debt load is unusual, her experience having problems repaying isn’t.
Emmanuel Tellez’s mother is a laid-off factory worker, and $120
from her $300 unemployment checks is garnished to pay the federal
student loan she took out for her son.

By the time
Tellez graduated in 2008, he had $50,000 of his own debt in loans
issued by SLM… In December, he was laid off from his $29,000-a-year
job in Boston and defaulted.

Heather Ehmke
of Oakland, Calif., renegotiated the terms of her subprime mortgage
after her home was foreclosed. But even after filing for bankruptcy,
she says she couldn’t get Sallie Mae, one of her lenders, to adjust
the terms on her student loan. After 14 years with patches of deferment
and forbearance, the loan has increased from $28,000 to more than
$90,000. Her monthly payments jumped from $230 to $816. Last month,
her petition for undue hardship on the loans was dismissed.”

THE FIRST
AUSTERITY GENERATION’S JOB PROSPECTS

Most of those
affected by the meltdown of 2008 had completed their education and
were either employed or retired. The student loan debt bubble signals
a generation that enters the work of paid work cursed with what
is more likely than not to be a life of permanent indebtedness and
low wages.

Both recent
trends and the most informed projections for the future of the labor
market reveal that most of the current cohort of indebted students
will face earnings prospects far poorer than what job seekers could
expect during the period of the longest wave of sustained economic
growth and the highest wages in US history, 1949-1973. The present
generation will experience the indefinite extension of Reagan-to-Obama
low wage neoliberalism.

According
to the National Association of Colleges and Employers more than
50 % of all 2007 college graduates who had applied for a job had
received an offer by graduation day. In 2008, that percentage tumbled
to 26 percent, and to less than 20 % in 2009. And a college education
has been producing diminishing returns. For while a college degree
does tend to correlate with a relatively high income, during the
last eight to ten years the median income of highly educated Americans
has been declining.

Every two
years the Bureau of Labor Statistics issues projections of how many
jobs will be added in the key occupational categories over the next
ten years. The projected future jobs picture indicates that the
grim employment situation is not merely a temporary reflection of
the current unusually severe downturn. But you miss this if you
get your news only from mainstream sources. The New York Times’s
report on the most recent BLS projections, issued in December 2009,
paints an unduly optimistic picture of future employment opportunities.
(Catherine Rampell, “Where the Jobs Will Be,” Dec. 15,
2009) Here is how a misleading report can be produced without falsifying
the facts:

BLS releases
two job projections, on the Fastest
Growing Occupations
and on Occupations
With the Largest Job Growth
. The Times focuses on the
former, where the two fastest growing occupations, biomedical engineers
and network systems and data communications analysts, require a
college degree. The Times echoes BLS’s comment that occupations
requiring postsecondary (a bachelor’s degree or higher) credentials
will grow fastest. This is redolent of the ideology of the “New
Economy”: the US is turning into a society of professionals
and knowledge workers, and the key to success in this upgraded economy
is a college education.

But we need
more information, about the degree requirements of the total number
of job categories listed in both projections, and about the number
of new jobs expected to materialize in each projection. Of the total
jobs listed, only one of five require a postsecondary degree. By
far the fastest growing category is biomedical engineers, projected
to grow 72.02 %, from 16,000 in 2008 to 27, 600 in 2018. That’s
11,600 new jobs. Is that a lot? Well, compared to what? The percentage
figure, 72.02, is high, but what about the number of new jobs? Let’s
compare that Fastest Growing occupation with retail salespersons,
the fifth occupation on the Largest Growth list. Retail sales workers
will grow by a mere 8.35 %. But that amounts to almost 375,000 new
jobs, an increase from 4,489,000 jobs in 2008 to 4,863,000 jobs
in 2018. Compare that to the 11,600 new jobs at the top of the Fastest
Growing list. Just do the simple math on all the categories on both
lists: the great majority of new jobs will be low-paying.

The US is a
nation of knowledge workers? Most new jobs will offer the kind of
wage we would expect from an economy in which, according to one
of Obama’s most repeated mantras, “we” will “consume
less and export more.” BLS avers as much when it projects 51
million “job openings due to growth and replacement needs,”
fewer than 12 million of which will require a bachelor’s degree.

Our first
austerity generation will be in debt to its teeth and stuck with
low-wage work. The relative penury will require more debt still.
Michael Hudson calls this debt peonage. We need to begin thinking
of political organization that has little to do with the ballot
box. And thinking won’t be enough…

January
11, 2011

Alan
Nasser [send him mail]
is professor emeritus of Political Economy at The Evergreen State
College in Olympia, Washington.

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