We really seem to be having a lot more than usual. Gee, I wonder why?
“What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?”
Why, I’m glad you asked that question! Turns out that education loan-backed derivatives are yet another investment bubble that helps drive up the cost of education — and We The People are already on the hook for reimbursement when they crash:
Even with the Treasury no longer acting as co-signer on private loans, the flow of SLABS won’t end any time soon. What analysts at Barclay’s Capital wrote of the securities in 2006 still rings true: “For this sector, we expect sustainable growth in new issuance volume as the growth in education costs continues to outpace increases in family incomes, grants, and federal loans.” The loans and costs are caught in the kind of dangerous loop that occurs when lending becomes both profitable and seemingly risk-free: high and increasing college costs mean students need to take out more loans, more loans mean more securities lenders can package and sell, more selling means lenders can offer more loans with the capital they raise, which means colleges can continue to raise costs. The result is over $800 billion in outstanding student debt, over 30 percent of it securitized, and the federal government directly or indirectly on the hook for almost all of it.
If this sounds familiar, it probably should, and the parallels with the pre-crisis housing market don’t end there. The most predatory and cynical subprime lending has its analogue in for-profit colleges. Inequalities in US primary and secondary education previously meant that a large slice of the working class never got a chance to take on the large debts associated with four-year degree programs. For-profits like The University of Phoenix or Kaplan are the market’s answer to this opportunity.
While the debt numbers for four-year programs look risky, for-profits two-year schools have apocalyptic figures: 96 percent of their students take on debt and within fifteen years 40 percent are in default. A Government Accountability Office sting operation in which agents posed as applicants found all fifteen approached institutions engaged in deceptive practices and four in straight-up fraud. For-profits were found to have paid their admissions officers on commission, falsely claimed accreditation, underrepresented costs, and encouraged applicants to lie on federal financial aid forms. Far from the bargain they portray themselves to be on daytime television, for-profit degree programs were found to be more expensive than the nonprofit alternatives nearly every time. These degrees are a tough sell, but for-profits sell tough. They spend an unseemly amount of money on advertising, a fact that probably hasn’t escaped the reader’s notice.
But despite the attention the for-profit sector has attracted (including congressional hearings), as in the housing crisis it’s hard to see where the bad apples stop and the barrel begins. For-profits have quickly tied themselves to traditional powers in education, politics, and media. Just a few examples: Richard C. Blum, University of California regent (and husband of California Sen. Dianne Feinstein), is also through his investment firm the majority stakeholder in two of the largest for-profit colleges. The Washington Post Co. owns Kaplan Higher Education, forcing the company’s flagship paper to print a steady stream of embarrassing parenthetical disclosures in articles on the subject of for-profits. Industry leader University of Phoenix has even developed an extensive partnership with GOOD magazine, sponsoring an education editor. Thanks to these connections, billions more in advertising, and nearly $9 million in combined lobbying and campaign contributions in 2010 alone, for-profits have become the fastest growing sector in American higher education.
If the comparative model is valid, then the lessons of the housing crash nag: What happens when the kids can’t pay? The federal government only uses data on students who default within the first two years of repayment, but its numbers have the default rate increasing every year since 2005. Analyst accounts have only 40 percent of the total outstanding debt in active repayment, the majority being either in deferment or default. Next year, the Department of Education will calculate default rates based on numbers three years after the beginning of repayment rather than two. The projected results are staggering: recorded defaults for the class of 2008 will nearly double, from 7 to 13.8 percent. With fewer and fewer students having the income necessary to pay back loans (except through the use of more consumer debt), a massive default looks closer to inevitable.
Unlike during the housing crisis, the government’s response to a national wave of defaults that could pop the higher-ed bubble is already written into law. In the event of foreclosure on a government-backed loan, the holder submits a request to what’s called a state guaranty agency, which then submits a claim to the feds. The federal disbursement rate is tied to the guaranty agency’s fiscal year default rate: for loans issued after October 1998, if the rate exceeds 5 percent, the disbursement drops to 85 percent of principal and interest accrued; if the rate exceeds 9 percent, the disbursement falls to 75 percent. But the guaranty agency rates are computed in such a way that they do not reflect the rate of default as students experience it; of all the guaranty agencies applying for federal reimbursement last year, none hit the 5 percent trigger rate.
With all of these protections in place, SLABS are a better investment than most housing-backed securities ever were. The advantage of a preemptive bailout is that it can make itself unnecessary: if investors know they’re insulated from risk, there’s less reason for them to get skittish if the securities dip, and a much lower chance of a speculative collapse. The worst-case scenario seems to involve the federal government paying for students to go to college, and aside from the enrichment of the parasitic private lenders and speculators, this might not look too bad if you believe in big government, free education, or even Keynesian fiscal stimulus. But until now, we have only examined one side of the exchange. When students agree to take out a loan, the fairness of the deal is premised on the value for the student of their borrowed dollars. If an 18-year-old takes out $200,000 in loans, he or she better be not only getting the full value, but investing it well too.
In other words, it might all be a lot cheaper if we just paid for education outright.
State Rep. Ronald Waters is the chairman of the Pennsylvania Legislative Black Caucus:
When he unveiled his budget for the commonwealth, Gov. Tom Corbett said, “If government is here to share the taxpayers’ wealth, then everyone needs to share in the sacrifice.”
His budget proposal shows no such “sharing” of sacrifice. Most disturbing in Gov. Corbett’s budget is the complete lack of funding for the commonwealth’s most needy residents – including seniors, minorities, working families, single mothers, and those without health insurance.
The governor has shown a complete lack of commitment and compassion for the state’s most disadvantaged residents, even going so far as to allow adultBasic health insurance to expire.
This is plain wrong when the state’s publicly funded health insurers sit on billions of dollars in trust funds which should be used to give the poorest among us access to health care.
As the chairman of the Pennsylvania Legislative Black Caucus, I am speaking out against the governor’s budget, as it disproportionally affects African Americans and other citizens of color. The governor’s budget includes cuts to basic social programs and education – all while the governor has chosen to put more non-violent offenders in jail for longer periods, and more of our fathers and mothers in prisons far away from home.
Case in point, one line item which would not suffer on the budgetary chopping block is prisons — a $186 million increase. As neighboring states are reducing prison costs and enhancing public safety, Pennsylvania has increased its prison spending. The state spends $30,668 per prisoner annually, but only $10,723 per student. Are we telling our children that if they fail in life because they can’t get a good education or find a decent job, there’s always room for them in prison?
Gov. Corbett’s “reality-based budget” is based on an alternate reality where Pennsylvanians believe they can slash and burn our investments in the future, build more prison cells, ignore new revenue sources, and give tax breaks to corporations that don’t need them.
Call the governor’s office at 717-787-2500 and tell him you don’t want cuts to social services, while he gives billions in tax breaks to corporations.
This would be delightful. I hope he does it:
Senate Democratic aides expect Senate Majority Leader Harry Reid (D-Nev.) to force Senate Republicans to vote on the Paul Ryan budget plan.
Reid hasn’t made a formal decision yet, and won’t until he returns from an overseas trip.
The idea is to drive a wedge through the GOP caucus and put vulnerable incumbents such as Sens. Scott Brown (R-Mass.) and Olympia Snowe (R-Maine) in a political jam.
Senate Democrats felt encouraged Friday after Sen. Susan Collins (Maine) emerged as the first Senate Republican to publicly oppose the House-passed budget blueprint, named after Budget Committee Chairman Paul Ryan (R-Wis.).
“I don’t happen to support Congressman Ryan’s plan, but at least he had the courage to put forth a plan to significantly reduce the debt,” Collins said on WCSH 6, an NBC affiliate in Portland, Maine.
If Reid can show that a bloc of Senate Republicans will not support the dramatic spending cuts and sizable tax cuts passed by the lower chamber, it would help his negotiating leverage with Speaker John Boehner (R-Ohio).
I call him that because of the dead long-haired guinea pig he wears on his head. Anyway, DD has finally moved on from questioning Obama’s country of birth, to… questioning how he got into Harvard! Because he’s black, you know, and since everyone knows that black people only get into top schools because of affirmative action, this line of questioning pleases the very same people who liked the first one! Isn’t he clever?
And plus, Don knows what it’s like to have doors open for you, simply on the basis of your DNA, so there’s that.
Now they’re going after current employees, not just new ones.
Unfortunately, I didn’t find out about this until after the deadline, but damn. There’s no way in hell I could answer all those questions. Could you?