US Student Loan Problem:
Overview
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$1.52 trillion
student loans exceeded the total amount of all
other forms of unsecured consumer debt
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Up from $663 billion in 2003.
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The majority of this debt is comprised of federal government
loans.
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Total outstanding student loan balance is $1.08 trillion.
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11.5% of outstanding debt is 90+ days delinquent or in default
GOVERNMENT RESPONSE
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Focal point of the Report was exclusively on private
loans
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Two Main Causes of Defaults Identified:
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! Lack of financial education !
! Private educational lenders engage in risky lending practices – Secretary
of Department of Commerce Sub-prime lending has moved from housing markets to colleges. !
Red Herrings
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! Report shifts the blame to private lenders and student debtors, whilst absolving the role of
the state.!
! On-going and deep cuts in educational spending = steep rise in tuition (e.g., 4-year public
college increased 20% from 2008-2012).!
! Higher Education Reconciliation Act of 2005 cut $12.6 billion from financial aid forcing
students to seek more expensive, private students loans.!
! Private, for-profit colleges have been subsidized by the US government.!
! Private, for-profit colleges more expensive than public colleges (need for larger, private
loans) and target poor (e.g., University of Phoenix). !
! Graduating students lack of jobs offering living wages to cover debt + increasing costs of
living (housing and health)!
! Underlying tensions and power relations inherent to debt and credit-led accumulation
ignored!
A Key Tension in the Student Loan
Industry
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Main Tension:
ever-increasing expansion of student loans
and inability of student debtors to meet their payment
obligations.
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Two Key Strategies Underpinning this Tension:!
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(i)
expansion of loans facilitated through student loan
asset-backed securitization (SLABS), or ‘commodification
of debt’
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(ii)
exposing debtors to market discipline through
What is Student Loan Securitization
(SLABS)? A Mainstream Perspective
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! A financial strategy that transforms illiquid assets (student
loans) into tradeable securities through a legally created entity called a Special Purpose Vehicle, .e.g., Sallie Mae.!
! SLABS act as the main artery through which funds are channelled
from investors to students.!
! SLABS are widely seen as a win-win strategy and highly efficient
method of raising capital and mitigating risk for lenders.!
! SLABS are an important instrument in achieving financial
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Sallie Mae originally created in 1972 as a GSE to raise capital
and to ensure liquidity in guaranteeing federal student loans
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Sallie Mae privatized in 1996 (SLM Corporation)
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Largest issuer of SLABS in both federal (public) and private
student loans
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Largest educational lender of private student loans in the US
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!Main loan service provider for federal student loans for 3.6
million students (since 2010)
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Sallie Mae also offers mortgages, credit cards, and car loans
Commodification of Debt: A
Critical Treatment of SLABS
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! SLABS are not apolitical, technical instruments; but forms of social
power backed by the state.!
! The commodification of student debt affords financial corporations
such as Sallie Mae the power to transform unsecured student debt into ‘assets’ in order to accelerate the the time of the repayment (plus
interest), issue more loans (origination fees), and decrease financial risk.!
! Basic Problem Remains: As privately created money (credit), SLABS
Social Risks Transferred to Students
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! SLABS affords no protection to student borrowers in dealing
with the social consequences of unsustainable debt burdens!
! Unemployment rate for young college graduates approximately
9% in 2010 and 7% in 2013.!
! Real wages declining since 2008!
! Almost three-quarters of students, who have defaulted on their
Solution: Keep Debtors in
Credit System – Why?
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• Debt has been a historical means to maintain power and influence
over others (Luxemburg).!
• Debt obligations are an essential feature of capitalism, i.e., fear
and respect of the rules of the credit system must be continually reproduced, depoliticized, and legitimated by the state. !
• Bankruptcy law plays a key role in this regard as does other
disciplinary means to ensure debtors remain good ‘market’
citizens (e.g., growing significance of credit ratings, credit checks by employers).!
Debtfarism: Managing Social Risks through
Market Discipline
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Remove Statutes of Limitations on
collection of federal student loan
(1991)
+ increase profits of collection agencies
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Debt Collection Improvement Act
(1996)
– allow government (as ‘super-creditor’)
to garnish Social Security benefits
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Debtfarism in the New Millennium
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Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA)
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Chapter 7 and Chapter 13 extremely difficult to
access, unless “undue hardship” can be proven
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!Private student loans are no longer dischargeable
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!Private lenders have been granted super-creditor
status, e.g., limitless powers to garnish wages, tax
refunds, and Social Security payments.
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What is to be done?
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! Individual debtors should not be the site for reform but instead the
state – reinvest in public education and other social services.
! Instead of toothless ‘consumer protection’ implement meaningful
forms of protection for workers, e.g., guarantee living wages
! Immediate reversal of loan-based aid to grant-based aid, especially
for low-income students.
! Closure of private, for-profit colleges = site of majority of private loan
defaults and hefty government subsidization.
! Democratize and curtail the power of educational lenders by
subjecting them to legally binding laws.
