Securitizing Students: How Wall Street Helped Indenture Young America
The Consumer Financial Protection Bureau and Department of Education released a new report detailing the private student loan market. As the report states, private student loans mushroomed over the last decade, fueled by the very same forces that drove subprime mortgages through the roof: Wall Street’s seemingly endless appetite for new ways to make profit.
In this case, investor demand for student loan asset backed securities (SLABS) resulted in private student lenders—primarily Sallie Mae, Citi, Wells Fargo and the other big banks—to relax lending standards and aggressively begin marketing these loans directly to students.
Unlike federal student loans, private loans have higher and fluctuating interest rates and come without any flexibility for tailoring payments based on income. Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. But between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent. And the volume of private student loans mushroomed from less than $5 billion in 2001 to over $20 billion in 2008. The market shrunk back to $6 billion after the financial crisis as lenders tightened standards.
Today, there is a total of $1 trillion in outstanding college loans--$150 billion of which is private student loan debt. And just like the subprime mortgage market, not all students were aggressively targeted by these rapacious lenders. The largest percentage of private loans taken out in 2008 were by students at for-profit colleges. In 2008, just 14 percent of all undergrads took out a private loan while 42 percent of students at for-profit colleges took them out. And as we now know, these loans are sinking borrowers who are more likely to be unemployed and have monthly loan payments that eat up a quarter of their total income—with absolutely no ability to discharge these loans by filing bankruptcy.
The CFPB and DOE include recommendations that would help ensure student don’t get hoodwinked in the future by private loans. Among their recommendations, the strongest are to require that schools certify the need for private loans and to re-examine the very special exemption of these loans from any type of bankruptcy relief. Other recommendations from the two agencies mostly deal with better disclosure and information delivery mechanisms.
All of those recommendations are good stuff. But there’s a much bigger phenomenon underlying the growth of student loans of all kinds, and that’s the financialization and privatization of public goods in our country—and higher education and post-secondary training is certainly a public good. Our nation can’t function without plumbers, nurses, teachers, doctors and our markets can’t function without accountants, logistic experts or lawyers. Yet, over the last three decades, the funding of higher education has shifted from being a public responsibility to a private responsibility shouldered mostly by students in the form of ever-increasing amounts of debt. That transfer of responsibility has created $1 trillion pile of debt obligations for those who went to college and a gravy train of profits for all the big banks.
As a result, the debt-for-diploma system provides a powerful incentive for the big banks to maintain the status quo—a lobby that has consistently showed little disregard for the public interest and has a pretty darn good record of getting its way. They're eager to see student debt reach $2 trillion, and barring a massive cultural and political shift, they’re likely to get it.
