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2008 financial collapse all over again…? We need to understand the student loan speculation bubble

Originally published: Facts For Working People by Jason O'neil (March 8, 2018)  

For those who may have missed it, a major economic indicator emerged regarding student loan debt last week. Excessive debt, like student loans, has become one of the biggest barriers to current economic growth in the United States. On Thursday, March 1, 2018, the Chairman of the Federal Reserve, Jerome Powell, appeared before U.S. Congressional representatives. During this “meeting” between politicians and their private banking overlords there was discussion of the possibility of reversing federal legislation to allow student loan debt to be discharged through bankruptcy. A move initially questioned by some lawmakers, as they set interest rates for those loans which allow schools to be federally subsidized, this topic is sure to spark further discussion in the weeks to come.

A report issued by CNBC stated the following:

Education debt swelled to nearly $1.38 trillion at the end of 2017, with 11 percent of borrowers 90 days or more delinquent, according to the New York Fed. Policymakers have sought ways to keep the student loan problem from swelling out of control but have struggled to come up with solutions.

Debt on ones backIt appears the latest investment vehicle for private banking profits is running out of gas. This is not a surprise for those of us who have been following the developments with student loan debt over the past few years. Personally, I happen to be one of the more than 40 million Americans who are now in debt to a private capital lender for partially financing the last two years of my college degree.  Ironically, I went to a “public” university in California which was once a state that offered free education from kindergarten to college.

As a first-generation college student, and military veteran, my personal story is not unique. However, there are millions of Americans who received federal financial aid to attend a for-profit university with many “students” never setting foot in a classroom. How that is even possible is baffling to me and calls into question the integrity for financing the nation’s higher education system.

Some points I would like considered in relation to the latest developments concerning student debt should be:

  1. How are higher education loans in the U.S. marketed and disbursed?
  2. Who holds the paper on these debts? What are their interests?
  3. Exactly who is ultimately financially responsible for repaying them?
  4. And, why is this particular form of debt exempt from “charge off” as bad debt for those who can no longer afford to pay, especially when one considers the number of bankruptcies declared by the current occupant of the Oval Office?

Before we explore each of these questions, we must keep in mind how this pending crisis will affect the lives of working families and the poor and we must continue to ask ourselves — Are federal legislators our elected officials or are they just puppets for loan sharks?

Perhaps, you have been one of millions of Americans who have watched a television commercial with an advertisement about finishing your education or getting a college degree. And, just maybe, you’ve called the toll-free number listed at the bottom of one because it sounded like a good idea. If you are like me, you responded to an internet ad which asked for your email address and telephone number. For those readers interested, I have included my own personal story at the end of this article, but for now I will continue to explain the student loan bubble from my own observations and experiences over the last decade.

Everyday, millions of people are on the receiving end of a booster campaign to get them to enroll in college. Some ads are directly from one of the thousands of brick and mortar universities with an actual faculty. Unfortunately, most of the professors in these public education institutions are part-time (at least in California) with no benefits. Another story all together when one considers the amount of federal money being poured into the higher education system of the United States. But, we must return this conversation to student loans and commercial advertising.

What many Americans are unaware of is that for-profit schools are also getting checks from the government. I am not referring to exclusive private or Ivy League schools like Harvard, Yale, or even Stanford. I am specifically identifying schools like University of Phoenix and Kaplan College, or any other “college,” which sets up shop in an office park building and sells degrees. To make matters even more incomprehensible is that many of these schools also have online study programs which are usually just internet “classes” with fast-paced lesson plans completed in 30 days.

These schools are in fact loan brokers masquerading as education systems and have become so widespread and corrupt that even small corporations are advertising college degrees and professional credentials through specific trade schools. They also attract international students and receive federal education grant money for “scholarships.” Over the past few years they have increasingly targeted low-income households in the poorest areas of the country to market their services and receive money earmarked for financial aid.

Because many of them aren’t credentialed, or accredited by the Department of Education, most coursework from these schools is not transferrable to another college. Sadly, many graduates from these types of universities receive no benefit from their “piece of paper” that says they now have a degree. New graduates are finding it difficult to pay back their student loans with limited opportunities for employment and a significant number of them saddled with debt to private lenders.

This has become a major problem because over the course of the past two decades enrollment in these for-profit universities has increased by more than 225 percent. This was according to a 2013 report published by the National Conference of State Legislatures. States began taking a harder look at these “diploma mills” after a two-year investigation was concluded by a United States Senate Committee. The resulting “Harkin Report” condemned for-profit colleges over costs and practices according to a New York Times article from 2012 (Tamar Lewin, “Senate Committee Report on For-Profit Colleges Condemns Costs and Practices,” July 29, 2012):

Students at for-profit colleges make up 13 percent of the nation’s college enrollment, but account for about 47 percent of the defaults on loans. About 96 percent of students at for-profit schools take out loans, compared with about 13 percent at community colleges and 48 percent at four-year public universities.

And…

Enrolling students, and getting their federal financial aid, is the heart of the business, and in 2010, the report found, the colleges studied had a total of 32,496 recruiters, compared with 3,512 career-services staff members.

Among the 30 companies, an average of 22.4 percent of revenue went to marketing and recruiting, 19.4 percent to profits and 17.7 percent to instruction.

Their chief executive officers were paid an average of $7.3 million, although Robert S. Silberman, the chief executive of Strayer Education, made $41 million in 2009, including stock options.

Public outcry was almost nonexistent in the major news media, but demands were made of these schools which have remained exempt from regulation and a series of standards were recommended by the government. If they wanted to continue to receive federal funds by enrolling students, the for-profit colleges had to provide statistics on registrations and student performance. Companies, many of them publicly traded on Wall Street, which owned underperforming schools closed them down and funneled resources to prop-up their best schools to keep the billions rolling in from the government coffers. According to a National Public Radio (NPR) announcement in 2011, many of the companies controlling the finances of these colleges had already ramped up recruiting efforts which targeted those who could not afford it. The first wave of customers were military veterans, but know these schools are going after communities of low-income families and students of color.

Many of these students drop out before graduating or can’t find the types of jobs that will allow them to repay their loans, leaving them with staggering debt.

In October 2014 U.S. News and World Report published an article (Susannah Snider, “3 Must-Know Facts About For-Profit Colleges, Student Debt“) which revealed enrollment costs at for-profit universities averaged more than fifteen thousand dollars a year. A significant markup in price from the national average for community colleges ($3,264) and four-year universities ($8,893). And, a crippling cost for students, many of which who are military veterans using their G.I. Bill benefits. The same article stated the following:

Nearly 90 percent of 2012 for-profit graduates had student loans​, with the average debt among for-profit college graduates who borrowed reaching nearly $40,000.

Graduates typically are 20 percent less likely to be hired with their degree, and three times as likely to default on their loan, when compared to nonprofit colleges. Why has nothing been done to address this issue years later? Courts all over the United States are handing down decisions in favor of the for-profit schools who don’t want to be held accountable to oversight on budgets, loans issued, graduation rates, or employment statistics for graduates. State legislatures are scrambling with the threat of regulation over these companies, however, many friendly votes have already been secured through campaign contributions to keep the standards from changing. This is not a new battle, but it is one that has been fought for the past fifty years as the two cartels of political power and money in the U.S. have always sided with the bankers. First, the cut funding for schools. Then, student “consumers” are forced into a loan market. Finally, this allows private capital to issue loans and collect interest on the debt.

Back in 2012, Time magazine wrote an in-depth piece on regulation of the student loan industry in the United States (Kayla Webley, “Why Can’t You Discharge Student Loans in Bankruptcy?” Feb. 9, 2012). They wrote, “before 1976, all education loans were dischargeable in bankruptcy. That year, the bankruptcy code was altered so loans made by the government or a non-profit college or university could not be discharged during the first five years of repayment.” That stayed in place until 1984 when private student loans were excepted from bankruptcy protections. The scales tipped in favor of the banks again in 2005, when Congress passed a law titled the Bankruptcy Abuse Prevention and Consumer Protection Act. The law made it so that NO STUDENT LOAN could be charged off through bankruptcy as bad debt, whether it was federal or private. Student loans are now in the same class of debt as child support and criminal fines.

Taking into consideration the political trend in controlling this speculation market which exists within the student loan industry, it is not a distant leap to the conclusion that the government will try to get the people to agree to another round of taxpayer-funded bailouts for private bankers and their bad education loans. We saw this in the 2008 home mortgage crisis as Congress voted to give $12.9 trillion dollars in tax money to private banks to cover their financial losses after the economic collapse of the real estate bubble they helped create. How much longer will the people of this country agree to go along with these concessions to private capital before they say they’ve had enough?

Public universities are not too far behind when it comes to providing funds for their degree programs. Case in point, I had to finance nearly twenty thousand dollars of my education to supplement my Stafford and Pell Grants provided through the Free Application for Federal Student Aid (FAFSA). Some of the loans were federally subsidized at a lower interest rate, but the rest were locked in at the going rate. I went to a university in California where out of the 41,000 students in attendance nearly 40% are on financial aid.

The fact that 43 million Americans are burdened by student loan debt (excluding for-profit schools) must be connected to the next pending market “correction.” It will be a financial crisis similar, if not worse than, the one in 2008. The ripple effects will spread throughout society. The history of student loan debt also has much to do with the current assaults on education in the United States. We have covered the recent West Virginia Teachers’ Strike and have discussed how their struggle is linked to the pillaging of state resources by big oil and coal companies who control the courts, legislature, and political bodies in that state. It is a crisis created by capitalism. The teacher’s fight is also linked to legislation that pushes for charter schools to receive tax money while cuts are made to funding public education systems around the country. The battle shaping up is also a result of so many states passing “right to work” laws which attack public sector unions. Rank and file union members are under the gun and labor leadership is running out of options on how to keep them contained and pacified.

What to do with student loan debt, however, is a simple solution. Abolish all of it. One might ask, “where will the money come from?” But I ask readers to consider this: If the U.S. government can continue to fund a fighter plane which Scientific American has labeled the “greatest boondoggle in recent military purchasing history” at a price of $1.5 trillion (Michael P. Hughes, “What Went Wrong with the F-35, Lockheed Martin’s Joint Strike Fighter?” June 14, 2017), then there is enough money to forgive student loan debt. And, if we push the conversation further, the U.S. has spent more than three times that amount on the invasions of Iraq and Afghanistan. Sadly, like what is happening in West Virginia, the politicians from both parties refuse to upset their campaign contributors and go after the industries that have taken the tax money in the first place.

My own story…

Boot of debt.I came across what is called a “lead capture” advertisement with some catchy phrase like “interested in getting a degree?”, or something like that, while I was surfing the web back around 2004. It interested me at the time, but I didn’t really know much about the way student aid worked.

I was a federal law enforcement officer and getting kind of burnt out on my job. I processed pedestrian and vehicle traffic through a Customs and Border Protection facility in San Diego, CA. It also happened to be the busiest land-border crossing in the world and, although grossly compensated for my work, I just didn’t want to do it anymore. I didn’t have a college degree, so I toyed around with the idea of going back to school. Throughout the next few months, I endured the constant phone calls and junk email letters from those for-profit university representatives. They were given, and probably purchased, my information from that same internet ad I responded to months before. They promised easy classes and the convenience of online lecture sessions. Some even claimed they could get me college credit for skills I picked up while serving in the military. The catch was they were very expensive. I remember one guy actually told me that at his school, a name I can’t even remember, a bachelor’s degree was going to cost me about fifty thousand dollars. But, I didn’t have to worry because I could get loans. I decided that for a price like that I should try going the “traditional” route.

Ultimately in the fall of 2006, I enrolled at my local community college in San Diego. After taking the proper assessment tests to begin classes, I successfully registered my corresponding veteran benefits, given through the G.I. Bill. I was getting paid about $700 a month to go to night school. This was on top of my federal salary, which at the time I was averaging about sixty thousand dollars a year including overtime, and I had benefits. All initial out of pocket expenses I incurred through enrollment were also reimbursed. I completed a total of seventeen units over the next three semesters before I had to stop classes. I was receiving a decent amount of money from my veteran benefits because tuition, fees, and books only ran me about $500 a semester. Each semester is about four months long, so I made a few thousand dollars a semester. I had no financial difficulties, so to speak, and I was even able to buy a house in September of 2007.

In all, I cruised on the extra cash for a little more than a year before I had to resign my federal job in January 2008. I had also decided to stop taking classes until I was earning a more stable income. Another reason was because my G.I. Bill benefits expired the semester before. The particular federal program I was entitled to required veterans to enroll in school within ten years of separating from the military. I had waited more than eight years to go back to school and my time had run out.

With no job and no income, I took work at the loading dock of the San Diego Convention Center. I was also receiving supplemental unemployment when there were no trade shows or events in town. Having trouble keeping up with my house payments I needed a boost and I started working in the local real estate market.

At the time, the community where I lived, was the epicenter for the entire state of California when it came to the number of homes which were in foreclosure or with delinquent mortgages. Chula Vista is a town with a population of about a quarter of a million people and, in the early summer of 2008, the old neighborhoods and new housing developments further east had more than 50% of its homes worth less than the loans owed on them. The financial collapse fueled by speculation in mortgage backed securities happened that September. It was nearly two months before the 2008 Presidential Election, which saw Democrats return to the White House by the way, and I was only upset that I lost my commission checks. Memorable moments from those few days, when capitalism wrecked the lives of millions while robbing the citizens of this country out of billions of dollars, was the political theater. Both the sitting Republican administration’s Secretary of Treasury, Hank Paulsen (a former CEO of Goldman Sachs), and his “prospective” replacement should the other capitalist political party win, Tim Geithner (President of the Federal Reserve Bank of New York), were involved in negotiations between the United States government and private investment banks. The deal was negotiated by Ben Bernanke, who was the Chairman of the Federal Reserve at that time. Private banks were to be given federal tax money to make them solvent. This would be like a gambler going bust and the casino giving them their money back. Only the money came from the pockets of the housekeepers, cooks, and desk clerks.

My own class consciousness had not been lifted during that part of my life. I was unable to see the destructive path cut by capitalism and its need to create markets. These opportunities are designed to attract investors so banks can generate money by transferring property. I was oblivious as to how money in an economy is created through loans and promissory notes (debt). I had my own problems to worry about.

I had bought a home the year before and needed to make my own house payments. Because I was only receiving commission, I had already started to rent out two rooms in my house to make just enough money to even do that. I didn’t understand the danger of negative amortization and interest only loans when the price of a home drops in value. I had a fixed-rate mortgage, but after I lost my job, I couldn’t make payments and my house lost 25% of its value over the next two years.

After the economic collapse of 2008, and during the Great Recession which followed, I took up bartending to make my way through the next few years. Eventually short-selling the house in 2010, I returned to renting small apartments or rooms from friends. Although the house sold for nearly $150 thousand less than my loan, I didn’t have to pay taxes on the charged off amount. Usually, a homeowner in my situation would have to pay income taxes on capital gains, but for a couple of years millions of former homeowners were given a reprieve. Realizing that I had no real skill set, other than enforcing the law, I decided to return to school to at least complete an associate degree.

I have explained my personal situation to give readers the opportunity to see what economic conditions I was living under when I decided to return to college. The second time around, I qualified for financial assistance because I made so little money on payroll that I was considered low-income. I took it. I figured if I didn’t make some changes I was going to have to accept that job as the pinnacle of my existence. An honorable trade in a country which consumes so much alcohol, but not really a job cut-out for a long-term career. The hospitality industry in food and beverage has such a high turnover that workers have very little chance of unionizing and end up competing with one another. The drive to provide the best service is fueled by a desire to make more tips that the other guy. Never mind trying to fight for anything higher than minimum wage. Also, benefits and retirement are practically unheard of in this line of work, while age and gender are factors which determine longevity and “appeal.” Bartending and serving alcohol is an industry which is exceptionally brutal on its female employees who must endure all varieties of sexual harassment. Not just from intoxicated customers, but also from co-workers and management.

I had saved up enough tip money to re-enroll at the same community college in the fall of 2012. I was eligible for the Board of Governor’s fee waiver and Cal Grant, which was linked to the FAFSA. When my financial aid was processed and disbursed, I ended up receiving a few thousand dollars extra every semester for the next three years. I remember the first time I opened the mailbox and it had check inside for more than two thousand dollars. That was just a partial payment and I’d get another $800 before the end of the semester.

It was during this time while I was at community college that I began to learn and understand how the political economy functions and works in the United States. It was also when I met some influential friends and professors who have been actively engaged in discussing the role of trade union leadership in a new American labor movement. Many encouraged me to continue my education and to finish my bachelor’s degree. I would need to complete my lower division courses before I could transfer. My school had only a 23% graduation rate, with even fewer who successfully moved on to graduate from a four-year school. I was determined to be one of them.

During my second year in community college, I began writing for the campus paper. I wrote opinion pieces and stories which focused on financial aid, immigration, and the environment. I also became aware of some inefficiencies and, at many times, the negligent nature of this system of higher education.

Public colleges, with limited funding from the state, were and are being overrun by capitalist interests. To complete building projects, not to mention recreational facilities, schools must rely on local voters to approve the solicitation of capital bonds. Communities promise away future tax revenue to cover payments and interest on private loans given today for temporary improvement funds to public education systems. Sometimes, as in the case of the Poway Unified School District in San Diego, they will be forced to pay back almost ten times what was borrowed.

To make matters worse, it was also during my second year that my community college began using the “financial technology services” of Higher One, a holding company which according to its own website promises to “streamline the processes of financial aid disbursement.” Started by three Yale students in 2000, Higher One has grown to dominate the college debit card business. They have been subject to numerous investigations and penalties for overcharging on students’ transactions and they disburse financial aid in increments holding on to students’ money sometimes for months. I remember that every student had to create a customer profile through the school’s website to have Higher One send them their financial aid. They offered bank accounts and direct deposit services, for a fee of course. And, at the time I enrolled, Higher One was publicly traded on Wall Street with a presence on hundreds of campuses across the country. They also had more than 2 million students paying them an average of $49 a year to access financial aid money faster.

When I transferred to a four-year university after my third year, I saw Higher One was used there, too. My school I.D., used to access the library and administrative services, was in fact a Higher One “debit card.”

I spent two years completing a double major, before I graduated last spring and I now live in Phoenix, AZ. Working for a little more than minimum wage, I have made only one payment to my student aid loans. Ironically, one of the jobs I recently interviewed for was an admissions counselor for American Intercontinental University and their sister school, Colorado Technical University. They are an online outfit, with a few branch “campuses” and are owned by Career Education Corporation. I was going to have to sell students on the benefits of enrolling in this school, mainly the convenience of taking classes from home. The average class enrollment period is every five weeks and most of my days were to be spent making telephone calls and sending out emails to prospective students. To fill the rosters every five weeks we would have to collect and process hundreds of applications. According to Wikipedia, and something I confirmed during my interview is, AIU receives more than 90% of its funding from the U.S. government, $29 million from the G.I. Bill alone. I am happy they didn’t call me back for the job, but I am ashamed to admit that I almost considered it. Where does desperation lead us sometimes?

I have recently been hired by a political consulting group advocating for clean energy initiatives in local government and the state legislature. After a few paychecks clear, I might start paying for my student loans soon.

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