US Student Loan Problem: Overview!

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2 US Student Loan Problem: Overview!! $1.52 trillion student loans exceeded the total amount of all other forms of unsecured consumer debt! Up from $663 billion in 2003.! The majority of this debt is comprised of federal government loans.! Total outstanding student loan balance is $1.08 trillion.! 11.5% of outstanding debt is 90+ days delinquent or in default most of which involves private student loans

3 !! GOVERNMENT RESPONSE!! Focal point of the Report was exclusively on private loans!! Two Main Causes of Defaults Identified:!! 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.!

4 Red Herrings!! 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 ).!! 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!

5 A Key Tension in the Student Loan Industry!! Main Tension: ever-increasing expansion of student loans and inability of student debtors to meet their payment obligations.!! Two Key Strategies Underpinning this Tension:!! (i) expansion of loans facilitated through student loan asset-backed securitization (SLABS), or commodification of debt!! (ii) exposing debtors to market discipline through bankruptcy laws!

6 What is Student Loan Securitization (SLABS)? A Mainstream Perspective!! 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 inclusion of the poor!

7 ! Sallie Mae originally created in 1972 as a GSE to raise capital and to ensure liquidity in guaranteeing federal student loans!! Sallie Mae privatized in 1996 (SLM Corporation)!! Largest issuer of SLABS in both federal (public) and private student loans!! Largest educational lender of private student loans in the US!! Main loan service provider for federal student loans for 3.6 million students (since 2010)!! Sallie Mae also offers mortgages, credit cards, and car loans as well as debt collection.!

8 Commodification of Debt: A Critical Treatment of SLABS!! 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 must ultimately return to its origins for redemption = student debtor.!

9 Social Risks Transferred to Students!! 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 private student loans have not completed their studies.!

10 Solution: Keep Debtors in Credit System Why?! 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).!

11 Debtfarism: Managing Social Risks through Market Discipline!! Remove Statutes of Limitations on collection of federal student loan (1991) + increase profits of collection agencies!! Debt Collection Improvement Act (1996) allow government (as super-creditor ) to garnish Social Security benefits!

12 Debtfarism in the New Millennium!! Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)!! Chapter 7 and Chapter 13 extremely difficult to access, unless undue hardship can be proven!! Private student loans are no longer dischargeable!! Private lenders have been granted super-creditor status, e.g., limitless powers to garnish wages, tax refunds, and Social Security payments.!

13 " What is to be done?" "!! 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.

14 Book out August 2014!! ! soederberg1!!