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Private profit, public risk

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Who pays for the high cost of student loans?

We do.  Not just in the form of what it takes out of the economy directly (in the form of money which can’t be spent on other things), and indirectly (lost potential, as people who might pursue an education, and so expand the base of knowledge, or skills, which will keep things humming along) but in cold hard cash.

Student loans are only offered by a small group of companies.  The largest is Sallie Mae, which was privatised a few years back, with all the expected changes that brings about; i.e. profit became the motive, not providing service to the customer.  Example, prior to 2012 (when there was a huge online drive to get people aware) Sallie Mae had a “good faith deposit” before it would allow a “forbearance” of payment for unemployed graduates.  For 150 USD they would suspend the payment requirement.  Interest still accrued, but the loans weren’t in default.  Those “deposits” were actually a fee.  That money wasn’t applied to the loan (neither interest, nor principal), and so they got an extra $150 of profit.

These days the do apply it to the outstanding debt, but only after payment resumes, and even at that it takes six months of payments  before it’s credited(while the interest will be adding up on the outstanding principal: if you don’t have the money for that, “good faith deposit”, then you are in default, interest accrues and your credit score goes in the toilet).  What happens if a loan, made by Sallie Mae ends up in default? The gov’t (that is, us) pays for it.  This is despite Sallie Mae, in theory, being a private lender.  Under Bush they got access to gov’t guarantees.  Obama stopped that (and got some increase in the amount of direct to student lending by the Gov’t), but they are still one of the few companies the gov’t allows to service those guaranteed loans.

Which is part of why they’ve had a 3.7 billion dollar profit in the past, among other tricks they can use those federally backed loans they are servicing as collateral for debt, which they then loan out.  To add insult to injury they are still lending money as if they weren’t able to get it at the interbank loan rate; that’s on top of having seen student debt being excluded from being dischargeable under bankruptcy.

The Consumer Financial Protection Program just released a report on student loans. Among other the things the mean interest rate looks to be a bit more than 9 percent. Recent college graduates who are managing to stay current are paying disproportionately large portions of their income (25 percent, in some cases) to make the payments.  This is a directly depressing input to the economy.

To add insult to the injuries a lot of universities are getting on the action (in a move reminiscent of banks investing in payday lenders) universities have been buying shares in Sallie Mae.

<i>University endowments and teachers’ pension funds are among big investors in Sallie Mae, the private lender that has been generating enormous profits thanks to soaring student debt and the climbing cost of education, a Huffington Post review of financial documents has revealed.

The previously unreported investments mean that education professionals are able to profit twice off the same student: first by hiking the cost of tuition, then through dividends and higher valuations on their holdings in Sallie Mae, the largest student lender and loan servicer in the country, which profits by charging relatively high interest rates on its loans and not refinancing high-rate loans after students graduate and get well-paying jobs.</i>

The cost of education has outpaced the cost of inflation.  The cost of student loans is outpacing the cost of inflation, and doesn’t properly reflect the cost the lenders are paying to get the money they are lending; nor the actual risk of non-repayment they face.

It needs reform, in the worst way.

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One thought on “Private profit, public risk

  1. Hasn’t a large chunk of the student loan business been re-nationalized? I know I was able to bring my interest rate down through the direct consolidation program of the Dep’t of Ed… http://www.direct.ed.gov/

    I’m not saying that this is necessarily good policy, of course. It’s marginally better than letting private companies run the loan system. But it seems obvious that if you believe that making education widely available has positive externalities, you should just go ahead and subsidize it. We currently have a setup where, unless you’re _spectacularly_ brilliant in a way that lets you write your own ticket, you’re going to need a degree (not necessarily an education, but very specifically the sheepskin bearing the name of an accredited school) in order to participate in the white-collar workforce, and the process of getting that degree transfers a large portion of the income it earns you into the pockets of the capital-owning class. (Unless your parents can afford to pay outright, in which case you must already be a member of that class.) In terms of “things that perpetuate and exacerbate income inequality”, the student loan system is near the top of the list.

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