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Congress Acting Unconstitutionally Towards American Students
Unigov said…
The US Constitution gives Congress the power to establish “uniform Laws on the subject of Bankruptcies”. Congress has used that power – i.e., there is a financial mechanism in our country called “bankruptcy”. But Congress omitted student loans and child support from this process.
The omission of student loans was meant to be, and has been, a huge “welfare program” for universities. Students can borrow way beyond their means, but the schools derive the greatest benefit cause they get most of the money.
My take is that the word bankruptcy means bankruptcy – a tool of last resort by which those who cannot pay their debts get a second chance in life. The intent of the law is to prevent lifetime debt serfdom. IMO it is as unconstitutional for student loans to be excluded from the bankruptcy process, as it would be for Congress to curtail free speech by banning cursing. Many people in their 20′s and 30′s are debt serfs to their alma mater.
But debt is debt. Student loan debt should and must be viewed by bankruptcy courts like any other debt, if the original intent of the Constitution is to be met. The only extent to which the usefulness of the education in landing work should be gauged are extreme cases like someone getting an MD and then refusing to work, so they can go bankrupt…but this is no different from instances where someone has, say, their CDL license but refuses to work in order to go bankrupt (or get their child support reduced).
In short, college debt must be treated like other debt, for the time-honored concept of bankruptcy to work.
October 21, 2013 at 10:59 AM
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U.S. Congressional Answer: More worried about Banks than “OUR CHILDREN And OUR FUTURE!”
Sen. Bob Corker, R-Tenn., said; “seeking bankruptcy protection from student loan debt is “one of the most damaging things that a consumer can possibly do,” and would create a hardship for private lenders.”
“OUR Children are the…OUR FUTURE!” – T.D.P. Admin
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Student loans: The financialized economy of indentured servitude
Get ready students! Your college student loans are due to double on July 2013! The cost of higher education is spiraling and with it the cost of student loans, one of the biggest Wall Street rackets currently in existence. Both the Obama administration and the Republicans are seeking “market solutions” they say will staunch the bleeding (1) (http://www.washington.edu/federalrelations/files/2013/05/SAP-on-H.R.-19112.pdf ) (http://www.congressionaldish.com/h-r-1911-increase-interest-rates-for-students/).
Don’t be fooled: it is ‘market solutions’ that caused the crisis and with the financialization of education, students are seen as little more than commodities to be bought, sold and monetized for profit. Education is now nothing more than a pernicious, seedy investment for those on Wall Street and vulture capitalists along with pension fund managers looking for high returns on their squalid investments. College is no longer a home for the mind; it is now a financial product for the one percent.
Meanwhile the debt level for students seeking a commodified education has increased rapidly, beyond comprehension. This, of course, is personally and socially unsustainable and much like the housing crisis which brought down the US economy and left families living in shelters under the panoptic eye of heady foreclosures policed by Homeland Security, the student loan bubble will eventually rupture as well, leaving taxpayers and ordinary citizens to bail out the financial institutions that traffic in debt servitude.
The whole financialization and monetization of students and education is a moral travesty beyond comprehension and belief and one that flies in face of the UN Declaration of Human Rights adopted in 1948 which guaranteed education to be a human right.
All of this dystopia has been brought on by decades of massive disinvestment in public education and this sinister alchemy has turned college dreams into insidious financial schemes. To understand the social and economic implications of the current debt crisis, it is important to expose the institutional crisis of financial capitalism, along with the profit maximizing firms and hucksters and hustlers who are responsible for shepherding higher education into the grimy hands of the rentier class. Wall Street is not only producing a debt economy, but the packaging and buying and selling of student loan asset backed securities (SLABS) by pension funds is furthering and fueling the debt enslavement catastrophe while threatening current and future educational retirees.
For purposes of this article, my intent is to analyze rise of debt servitude, the neo-feudalism of our age and the role of Wall Street and pension fund managers. This is all part and parcel of a market based ruse designed to shackle American students to the carpet loom of more and more debt while Wall Street spins debt servitude into hefty profits.
The UN Declaration of Human Rights
Is education a human right or a privilege? This is the question that was posed as far back as 1948 when Article 26 of the 1948 Universal Declaration of Human Rights avowed that “everyone has the right to education” (2) (https://www.un.org/en/globalissues/briefingpapers/efa/index.shtml). At that time, the UN recognized that education is a human right not an privilege — much like the right to have proper food, first-rate health care, meaningful work or a roof over one’s head. However the UN Declaration of Human Rights recognized that education is not only a human right, it is a passport to human and social development and societal stability. Education opens doors and expands personal opportunities and freedoms. It contributes to fostering peace, critical thinking, democracy and sustainable economic growth as well as improving health, reducing poverty, violence and illiteracy.
Some History
Historically, people were thought to have individual rights only because of their membership in a social unit, such as a family. This all changed as far back as 539 B.C.E. when Cyrus the Great, after conquering the city of Babylon, did something no one expected — he freed all the slaves during his time to return home. He subsequently declared that people have the right to choose their own religion. The Cyrus Cylinder — a clay cylinder containing his statements; it is often described as the first human rights declaration in history (3) (http://www.britishmuseum.org/explore/highlights/highlight_objects/me/c/cyrus_cylinder.aspx).
The idea of human rights immediately and quickly subsequently spread to India, Greece and eventually to Rome. Since then, the most important advances in human rights have included:
1215: The Magna Carta: The Magna Carta afforded people new rights and made the kings the subject of the law (4) (http://www.archives.gov/exhibits/featured_documents/magna_carta/).
1628: The Petition of Right: This document set out the rights of all people (5) (http://www.constitution.org/eng/petright.htm).
1776: The United States Declaration of Independence: The Declaration of Independence proclaimed the right to life, liberty and the pursuit of happiness (6) (http://www.ushistory.org/declaration/document/).
1789: The Declaration of the Rights of Man and of the Citizen: Following the Declaration of Independence, The Declaration of the Rights of Man and of the Citizen, born from the French revolution stated that all citizens are equal under the law (7) (http://avalon.law.yale.edu/18th_century/rightsof.asp).
1948: The Universal Declaration of Human Rights: finally, in 1948 The Universal Declaration of Human Rights was adopted. It was the first document listing the 30 rights to which everyone is entitled (8) (https://www.un.org/en/globalissues/briefingpapers/efa/index.shtml).
Since and during the struggle for and adoption of these individual freedoms and human rights there have existed contemporary antagonisms designed by the ruling classes who, with their disdain for human rights in favor of class privilege, have sought, through economic and social policies, to reduce these rights to sheer advantage for a privileged few.
Nowhere has this been more evident than in the United States, where the Declaration of Independence has been under siege by decades of ruthless attack by the forces of dis-Enlightenment. In fact, for more than 40 years in the United States, higher education has been the object of sordid disdain by the capitalist class, reduced to a mere commodity that serves the interest of financial capitalism to the detriment of human life and the growth of the human being.
The commodification of education and the monetization of students has not only prevented institutions of higher learning from constituting a foundation for continual self-improvement, personal freedom and societal transformation through critical thinking and learning, but in doing so it has managed to create modern indentured servants by way of a menacing form of debt slavery, antithetical to perceiving education as a human right and educated people has a human resource.
The disinvestment in public education
Compared to the rest of the world, the United States does a particularly poor job in providing education as a human right, although some other countries fair worse (9) (http://www.businessinsider.com/tuition-costs-by-country-college-higher-education-2012-6?op=1). However, this has not been the case simply for the United States, it is a delinquent and rapacious quandary that is seen in throughout the developed and developing world as the financialization of education diminishes what should be a human right to the profit maximizing goals of world capitalism. Massive levels of public disinvestment in all areas of education, has resulted in the creation of material conditions for the commodification of education and the monetization of human beings.
Certainly cavernous state budget cuts since the early 1970’s have battered public higher education, but since the beginning of the Great Financial Crisis in 2008, the circumstances have gotten steadily worse. In the US, (10) per-student spending on education from state and local sources fell to less than $5,900 in the 2012 fiscal year, a 9.1-percent decrease from 2011 and a quarter-century low for the third consecutive year. In 1987, the State Higher Education Executive Officers (11) annual report showed that net tuition revenue (the cost of tuition) accounted for just 23 percent of those costs. In 2001, out of pocket college tuition costs exceeded more than a third of the costs. This percentage just continues to rise.
Currently, steady increases in college and university enrollment coupled with massive social and public economic disinvestment in higher education has meant that net tuition revenue made up a whopping 47 percent of public colleges’ educational costs in 2012; this represents an increase of more than six percentage points from the previous year, more than double that in 1987 according to an (12) annual report from the State Higher Education Executive Officers.
Paul E. Lingenfelter, president of the executive-officers association, observed that these figures were unprecedented in his 40 years of laboring in higher education. In a news release that accompanied the report’s findings, Lingenfelter stated what many economists have also consistently noted over time:
“Tuition revenues are up substantially due to higher prices and more enrollments, but not enough to offset losses of public funding. Students are paying more, while public institutions are receiving substantially less money to educate them” (13) (http://chronicle.com/article/StudentsStates-Near-a/137709/).
Today’s bleak economic reality finds that the impact of the Great Financial Crisis of 2008 on American education has not only dissolved public investment in education at all levels, but more than half of the states are slashing their education budgets once again this year with seemingly no end in sight (14) (http://www.huffingtonpost.com/2012/09/05/education-funding-drops-i_n_1855826.html).
According to a new analysis from the Center on Budget and Policy Priorities,(15) 26 states will spend less per pupil in fiscal year 2013 than the year before and 35 are still spending at levels lower than those before the 2008 Great Financial Crisis. All of this, while Wall Street posts colossal gains never before seen in the history of the world. This is more than a moral travesty, it is contemptuous social policy.
Alaska, Alabama and Washington State, to take one example, are cutting the most in dollar figures — reducing resources by more than $200 per student from 2012 — while in Arizona, Alabama and Oklahoma, each of these states have slashed per-student funding by more than 20 percent since 2008. Another 17 states have dropped funding levels by more than 10 percent since this time (16).
The report’s authors note that the cuts to public education have yielded a downward spiral effect as hundreds of thousands of educators have lost their jobs or been reduced to precariat-professors, part-time adjuncts, much like Wal-Mart workers. These cuts also have the effect of forcing the termination of needed school programs and services, which hinder education reform efforts that are often disproportionately focused on low-income minority communities, furthering the education and achievement gap among students of varying economic backgrounds, virtually locking them out of society (17).
Add to this the fact that by last fall, according to the Campaign for America’s Future (18), evidence suggests that cuts to public education funding are leading to cutbacks from early childhood education programs, fostering increases in class sizes and the termination of art, music, physical education and other elective subjects (19). Special education programs are also being slashed and burned as a result — including those that assist students with special needs as well as Advanced Placement courses, extracurricular activities and special academic programs for science, foreign language and technology.
Without needed public revenues to support what was once valued and considered a human right, access to higher education without the necessity to be sacrificed on the altar of debt peonage or debt servitude, now find students not only facing severe tuition spikes but also assure they have no access to public school classes due to the divestiture in public education at the college and university level. Course offerings are simply drying up and deliquescing.
The recently released State Higher Education Finance (SHEF) study (20) reports a 25-year low in state and local support for higher education, the result of an additional decrease of 9 percent in 2012. As a result of ravaging public divestiture, the individual students’ share of higher education costs (fees, tuition and the like) is now a staggering 47 percent. The report goes on to assert that they expect students and their families “to continue to make increasingly greater financial sacrifices in order to complete a postsecondary education.” This financial sacrifice means taking on more and more debt without the guarantee of receiving an education, as for-profit colleges and on-line learning swallow up more and more of what used to be the public commons, offering little in the form of edification and much in the form of commodification and investment opportunities for the reigning one percent.
The rise of student debt peonage and servitude
According to Finaid, an online site that provides a student loan debt clock:
“Total student loan debt outstanding exceeded total credit card debt outstanding (21) for the first time in June 2010. The seasonally adjusted figure for revolving credit in the Federal Reserve’s G.19 report, the current report, historical data, was $826.5 billion in June 2010 (22). (Credit card debt represents as much as 98% of revolving credit) (http://www.finaid.org/loans/studentloandebtclock.phtml) (23).
Meanwhile, student loan obligations have been steadily increasing due to the fact that ‘need-based grants’ have not been keeping pace with escalating increases in college costs and tuition. Federal outstanding student loan debt reached approximately $665 billion and private student loan debt reached approximately $168 billion in June 2010, for a total student loan debt of $833 billion.
And as Finaid notes, these figures do not include capitalized interest on the total outstanding federal education loans. This is because when federal agencies publish debt figures, those numbers cleverly include only the portion of the original principal balance remaining. Because students routinely defer repaying student loans during the time spent in-school and grace periods by continuously capitalizing the interest, this means the interest persists during the time students are not paying. If this amount is added in the debt figures, and it should be, then this would increase the total federal outstanding student loan debt by about another 6% to 7%, or about $50 billion (24).
If one were to abandon the ‘Enron’ accounting tricks and actually include the capitalized interest students must eventually pay on their loans, then total federal and private student loan debt probably hit the $1 trillion milestone in late 2011 (25).
Nevertheless, the student loan debt clock officially reached the $1 trillion milestone on May 8, 2012 at about 6:40 am ET even without adding in capitalized interest. Yet since there is not a reliable source of data concerning capitalized interest, the student loan debt clock fails to tell the real time in debt servitude, for it fails to include the authentic, reliable statistics.
On May 30th, 2013, when this article was written, the student loan debt minus the capitalized interest was $1,095,515,293,035 and steadily rising (See the clock steadily move at: http://www.finaid.org/loans/studentloandebtclock.phtml) (26). Add the capital interest and this increases the total outstanding federal student loan debt by about 6% to 7% or about $50 billion more (27).
Some facts on debt in general
Debt bondage is a form of involuntary servitude where individuals are legally bound to creditors until their debts are paid off. The individual debt is often high and the wages usually low, so the debts are often impossible to pay off. Debt bondage was one of several forms of peonage or indentured servitude employed in the South after the Civil War so whites could continue to profit from the labor of African Americans. Other forms included sharecropping and the leasing of prison labor.
Under sharecropping, tenant farmers were charged inflated prices for tools and seed and then underpaid for their crops, leaving them in perpetual debt. After the Civil War, the Thirteenth Amendment (28) prohibited involuntary servitude except for convicted criminals. Consequently, many southern states enacted laws targeting African Americans who were then arrested, incarcerated and/or leased out to businesses (http://en.wikipedia.org/wiki/Peon) (29).
Today the ugly face of personal and social debt can be found in the deracinated social relations, within which the new precariat now finds herself. Everyone knows someone who has been touched by the repulsive finger of debt. The ugly face of ‘owing’ and ‘paying’ are the anguished lines drawn on the face of societal cruelty, personal confusion and heartbreak, rising suicide rates, social death and tormenting hopelessness and helplessness. Human life is literally monetized before it is out of the womb and womb-to-tomb debt is now the standard, the hideous reality that faces the vast majority of citizens, most of them young. “Buddy can you loan me a dime” is now a financial relationship, a cry for low interest rate loans, not a charitable call for assistance as it was during and after the Great Depression of 1929.
Capitalism in its early historical manifestation was not always like this. During the industrial revolution throughout the developing world, there was once a mass of wage workers willing or better stated, forced, to sell their labor in the capitalist market. What Marx called proletariats — those who lived to work, hand and mouth by selling their labor in the labor market, and those who worked to live. Under the new, current financial regime of capitalism workers no longer can count on steady employment, but instead they labor under ‘just in time employment’ or no employment at all. They have become disposable human beings, no longer necessary for the extraction of surplus value or profit.
Under contemporary financial capitalism these former proletariat workers have been replaced by a multitude of what are now called precarious workers. These are workers who swing back and forth from the trees of low paying jobs to low-paying jobs when and if they are lucky enough to find them. We all know them and in fact many reading this may find themselves the new ‘precariats’ — workers who have no promise of work, no steady source of income but instead labor for downward spiraling minimum wages, shifting from job to job as the economy closes opportunities and wages shrink.
The proletariat was certainly exploited by capital during the Golden Age of Capitalism (1948-1973) and before, but that exploitation was cleverly hidden by a system that embraced the market illusion of a free and equal exchange among owners of commodities.
According to the old commercial chimera once prevalent under industrial capitalist relations of production, the owner of capital (the boss) met the owner of labor (the worker) in the free contractual marketplace and there they entered into reasonable, fair and free exchange relationships: “I will give you my work, my labor and in exchange you will give me a wage”. Of course this was more myth than reality for the capitalist, the boss, had far more power over the worker-laborer and thus the illusion of fairness was simply that. The source of all profits was the labor of the proletariat in the form of surplus value and this could only be extracted by harsh eye to eye and hand to hand oppressive exploitation.
However this old, industrial capitalism’s antiquated relationship of production has now been transformed and with it has come the eternal spring of debt. Capital is at present the entire social fabric and it massively exploits the total range of productive and consumptive capacities. Capitalism has now transmogrified into financial capitalism and it reigns supreme over our bodies, over our minds, over our food, the air we breathe, over our capacities for communication, over our intelligence and creativity.
The new financial capitalist relationship currently encompasses the full spectrum of all of our affective relations, both objectively and subjectively and as such, constitutes a new nauseating morality. All of life is dominated by the exigencies of financial capitalism and its rabid necessity to maximize profits at the expense of human lives. All of life is now reduced to a commodity to be exploited and exchanged and thus all human life is now the product of the capitalist class to be traded in financial markets by the ruling elite.
Today, the old model of the factory floor, where labor was ruthlessly disciplined, maintained under the lash of ruthless exploitation and then used for individual or corporate profit maximization has now morphed into a system whereby the capitalist accumulates wealth primarily through rent. This basically means that profits are now encapsulated and encased through finance and are guaranteed by and through financial instruments found within the central banking systems on Wall Street, the World Bank, the European Central Bank and the International Monetary Fund. Modern capitalist exploitation is now based primarily and principally on debt. What this denotes is that the majority of the population of the world owes everything to the one percent: work, money, obedience, mind, body and soul — their entire life is now mortgaged to a tiny percentage of the population that controls the new relations of financial production. This tiny percentage constitutes the rentier class.
Unlike under the capitalist regime of old, today, in order to survive, those who are increasingly mired in debt must sell their entire life to manage and endure the peonage brought on by mortgaging their lives – they must advance their complete future to debt servitude. In this financial model of despair, consumption is how most people now define themselves; they no longer see themselves as workers. This has astonishing implications for how people comprehend themselves and others in the relations of production for when one no longer sees themselves as producers in gainful employment, but as consumers in debt for which they must work to satisfy, it is as Noam Chomsky has noted in the case of student debt:
“Students who acquire large debts putting themselves through school are unlikely to think about changing society. When you trap people in a system of debt, they can’t afford the time to think. Tuition fee increases are a “disciplinary technique,” and, by the time students’ graduate, they are not only loaded with debt, but have also internalized the “disciplinarian culture.” This makes them efficient components of the consumer economy” (http://stfuconservatives.tumblr.com/post/45867666470) (30).
Citizens who have internalized the disciplinarian culture are indeed efficient components, for when most citizen/workers no longer think of themselves or see themselves as producers but only as consumers and debtors, then as Chomsky rightly notes, one becomes psychically chained to the soft underbelly of debt servitude.
Also, this change in capitalist relations does not represent so much a shift to a service economy, as many economists have maintained, but rather capitalism’s long trenchant, mutilated trek from direct worker exploitation under industrialism to a system that places working people in naked indebtedness. Unlike the old system of direct extraction of surplus value (profit) from proletariats, financial profits wheedled out from the new precariat through ‘rent’ represents a more intangible conceptualization of the accumulation of the surplus value that is socially produced. The ‘invisible hand’ of the market is now the ‘invisible hand of debt’.
From the captain’s seat of finance the exploitation of labor literally remains unseen, attired in monetary clothing that hides the particular nature of modern, financial capitalist exploitation. Production and surplus value extraction currently increasingly relies on sizeable pooled, socialized labor — that is, on workers who come together globally to combine their labor collectively on a large, almost invisible scale; this global collective is scantly noticed even by the workers themselves who increasingly, through their inability to “think due to indebtedness”, more often than not see themselves as little more than consumers on the social and economic weighing machine of life. The rentier class is no longer the whip in the hand on the factory floor, the visible lash on the back of the worker — it now remains globally remote and invisible. It is a ‘whip’ alienated from the harsh realities and repugnancy of uber exploitation, while at the same time creating handsome profits from the production of rent and the enlargement of personal and social debt.
As poverty and inequality accelerate at lightening speeds and robotization increasingly renders labor unnecessary for profit maximization, thereby causing heightened levels of surplus labor or increasing unemployment, poverty is now exemplified primarily by how much one owes. The increasing generality of indebtedness today marks an unvarnished and stark restoration of the relations of servitude reminiscent of feudalism — now to be conceptually grasped in theory as neo-feudalism.
The new masters of the neo-feudal landscape, within which most of the world population is forced to live in bondage, are those of the new financial rulers — the uber class and under them and exploited by them — the new, post-modern indentured servant. Unable to rise from the misery to which they are often unconsciously reduced, the indebted are now bound by invisible chains they cannot perceive, only shadows on the wall (http://faculty.washington.edu/smcohen/320/cave.htm) (31). For this reason, what now form the modern shackles of servitude must be clearly distinguished, critically understood and eventually destroyed if life is to have any meaning other than work under debt peonage and bondage.
Thus it is within this new capitalist arrangement of social and economic relations that student debt must be understood. Although student debt is only one form of debt under the neo-feudal relationships controlled by the new financial rentier class it is an insidious form of debt, for it darkens the educational opportunities for mass populations and if allowed to continue, will not only plunge society back into the dark ages of servitude and bondage but this time, it also threatens an impending Digital Dark Ages where what was once thought of as a human right, education, becomes not simply commodified peonage, but mental anguish and repression that threatens the very foundations of personal and social freedom.
How Wall Street turns profit into student loan debt and student loan debt into profit
Most of the conversations regarding student loan debt orbits around students themselves — the servitude that they are forced to face and how they are digging themselves a debt grave to pay for a commodified college degree, their struggles to find jobs afterwards (32) when they graduate and the disastrous effect all of this has on the broader economy (33) as paying debt prevents broader consumption, so necessary as the motor engine of capitalism.
What gets lost in the mind of the public and certainly in the coverage of the issue by the corporate press, is that for every student who takes out a loan there is a lusty, shylock willing and able to lend – the rentier class. This rentier class is not only willing and able to loan to students at usury rates, placing them on the altar of debt purgatory, but they also are enthusiastically investing and trafficking in student debt in financial markets. Thus, the financial capitalist class is engaged in financial rapacious activity not once, but twice. Lending the money to students provides high levels of interest but buying and selling student debt in financial markets bestows even higher profits.
More than 90% of the over $1 trillion total student debt is overseen by the government, meaning there is no underwriting and the loans are not investable. However, the remaining chunk not directed by the government (private student loans) is in high demand. It is important to note that government-backed student loans (34) — even though they aren’t bundled and sold — are hardly part of a more trustworthy landscape, as most have no lending standards at all. Take government generated Stafford loans, for example. They account for more than 75% of federal student loans and they not only impose no credit standards, but they have a high $57,500 cap for undergraduates.
This spring, The Wall Street Journal ran an article about student-loan securities, referring to them as a “hot asset.” (35). As the article indicated:
“Investors had been slow to embrace student loans since the financial crisis, even as other asset-backed securities rallied. But investors have stepped up their search for yield since the Fed in September announced its latest bond-buying program, aimed at lowering long-term rates” (http://investorplace.com/2013/03/dont-ignore-the-lenders-and-investors-behind-student-debt/) (36).
In the first two months of 2013, a whopping total of $5.6 billion of student-loan-asset-backed securities (SLABS) were sold to and by the investment class; this represented more than three times as many student-loan-asset-backed securities (SLABS) that were sold at the same time last year. According to the Wall Street Journal, in one week alone, Sallie Mae — formally known as SLM Corp. (NASDAQ:SLM) — issued $1.1 billion of SLABS (http://online.wsj.com/article/SB10001424127887323293704578334542910674174.html) (37).
Student Loan Asset Backed Securities (SLABS) are now a major sector of the ABS market. There are more than $400 billion in assets backing various student loan deals that are issued in the market. SLABS, like the sub-prime housing loans and asset backed mortgage securities, are traditionally a favorite for fixed income investors, like pension funds. Why? This is owed to their supposed high credit quality (as stamped by supplicant crediting agencies like Moodys, Fitch and Standard and Poors) and their assumed low their volatility. SLABS have now become institutionalized; they form a regular fixture in all major institutional investors’ portfolios. The beauty of the SLABS for investors is that since the private debt is non-dischargeable in bankruptcy court, the financial institutions and holders of the SLABS have nothing to worry about; they get paid through bail-outs by taxpayers if students default; this, of course, is a form of direct subsidy or what can be referred to as “socialism for the rich”.
SLM Corp., SLM +0.62% the largest U.S. student lender, sold $1.1 billion of securities in April of this year, 2013, securitized by private student loans. More incredibly, the demand for these risky securities was 15 times greater than the supply (38). As all of this was taking place, SecondMarket Holdings Inc., a New York-based trading group said it would be rolling out this spring a platform to allow lenders to issue student-loan securities directly to investors.
According to Barry Silbert, founder and chief executive of SecondMarket:
“The catalyst for this new suite of services is investor demand” (http://online.wsj.com/article/SB10001424127887323293704578334542910674174.html) (39).
Yet as investors are stuffing their cash into student loans, student loan borrowers are falling behind on their payments faster than consumer demand is falling. According to a report issued in April 2013 by the Federal Reserve Bank of New York, 31% of people paying back student loans were at least 90 days late at the end of the fourth quarter, up from 24% in the fourth quarter of 2008. The figures include federal student loans and those issued by private lenders. And this is just the beginning of plummeting repayments.
Add to this the fact that in a recent report, from the Center for College Affordability and Productivity, the conclusion derived was that while college-educated Americans are less likely to collect unemployment, many of the jobs they do have aren’t worth the price of their diplomas (40).
If this has the pungent aroma of the hideous home mortgage backed security crisis that wiped out entire savings and whole families, it should. Fannie Mae and Freddy Mac hustled potential homeowners, herding them into loans they could not afford and now it is Sallie Mae that is now corralling needy students in search of a diploma with promises of student loans and well paying jobs.
Meanwhile, bankers and vulture capitalists are actually doing the same thing they did with mortgage backed bonds; they tell potential investors the SLABS are triple A rated, insured and hedged with credit default swaps.
However as any financial analyst will tell you, a Triple A rating from an obsequious credit agency is illusory or at best a cruel hoax; for it is subject to revision and can be easily downgraded by the crediting agencies at their whim. As for the insurance and hedging — none of this is payable to the investors; instead, like in the mortgage backed asset fiasco, bankers will collect insurance, credit default swaps and another subsidized federal bailout provided by unaware taxpayers, while pension funds and their members, along with institutional investors, will be left holding an empty bag. To see all of this devastation play out under the historical umbrella of a not so distant past by Wall Street can only be owed to the fact that historical lessons have not been learned – either by those victimized by fnancialized criminals nor by the criminals themselves. A lack of financial literacy among the American population is also a culprit.
Yes, this is the same game that brought the economy to its knees in 2008 with the help of propagandized monopoly controlled press and a financially illiterate public. At a time when those in the corporate class are bantering about the mythical ‘fiscal cliff’ and clamoring about ‘economic responsibility’, where is there any talk about the Student Loan Asset Backed Securities that are toxic time bombs peppered throughout Wall Street financial instruments and pension funds like IEDs?
Pension funds race after illusory interest rates while unsuspecting members sit unaware
In an epoch of low returns on current investments, pension fund investors, hungry for risky loans that will yield the money necessary to pay present and future retirees, are willing to go to any lengths to generate returns. This is particularly true now that the Fed, in September of 2012, announced its latest bond-buying program which is aimed at lowering long-term rates.
However, what is so disconcerting and so erroneously ignorant is that 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. All of this fraudulent investment undermines educational workers and public education.
Sallie Mae is a private lender and they make loans that aren’t backed by the federal government. Their lending strategy is based in part on a student borrowers’ credit history. Sallie Mae is a former government-sponsored enterprise that was fully privatized in 2004 and now trades publicly as SLM Corp. The private lender reported in March of this year that 4.6% of its loans in repayment were more than 90 days past due in the fourth quarter, down from 4.9% in the fourth quarter of 2011 (http://online.wsj.com/article/SB10001424127887323293704578334542910674174.html) (41). Yet, their spokespeople eagerly state that they have actually begun to tighten their lending strategies since the Great Financial Crisis of 2008.
The new, privatized Sallie Mae is now a highly profitable, financialized company — it generated a 21 percent return on equity last year. The company attributes their earnings in part to the lack of competition in a market in which borrowers’ need for credit is only increasing. But this is little more than a vicious deception and perfidious propaganda.
Sallie Mae is a loan trafficking racket and it reported $939 million in net income last year, its highest since 2006, two years after it was privatized. The publicly-traded company benefits from a government guarantee on most of its $174 billion in assets and it has been profitable in eight of the last 10 years, generating a cumulative $7.3 billion profit. Its shares have risen 54 percent over the past year alone, outpacing the 19 percent gain in the Standard & Poor’s 500 Index, America’s benchmark equity gauge. This explains why pension funds race to invest in the privatized institution. But its financial machinations are managed by hedge fund managers on Wall Street — companies like Highfields Capital Management, a hedge fund that manages more than $11 billion and is the second-biggest Sallie Mae shareholder (http://www.huffingtonpost.com/2013/05/09/sallie-mae-student-loans_n_3247979.html) (42).
What is so discouraging and should be of grave concern to teacher pension fund retirees, both past present and future, is that pension funds for teachers and other school employees such as the New York State Teachers’ Retirement System, State Teachers Retirement Board of Ohio, Pennsylvania Public School Employees Retirement System, New Mexico Educational Retirement Board, Teacher Retirement System of Texas and California State Teachers Retirement System (CalSTRS) also own significant chunks of Sallie Mae, as does asset manager TIAA-CREF, which oversees retirement funds for teachers (43).
Current teacher retirees and any future retirees are receiving money furnished and subsidized by debt. Their monthly stipends are built on the backs of students mired in financial misery with little hope of emerging for oxygen. And what is remarkable and unseen, is that these pension funds are literally sitting on financial time bombs that could collapse as students face the harsh whirl winds of decreasing employment making their payback strategies impossible. The result would be devastating for all concerned, save of course Wall Street and the money changers.
The pawning off of debt to institutional investors like teacher pension funds is appalling but it is logical under the financial regime of capitalism, for it subscribes to the historical phase of financial capitalism where debt rules the economic landscape as high yields and high returns are chased down in a privatized predatory environment.
As I reported at Dailycensored.com in February of this year:
According to a recent article found at Dollarcollapse.com, pension funds are now morphing into hedge funds, a virtual back alley crap game or what Dollarcollapse calls “rolling the dice in exotic investments”, for Wall Street and their minions (http://dollarcollapse.com/investing/pension-funds-become-hedge-funds-roll-the-dice-on-exotic-investments/) (44).
In a report written by author, John Rubino on January 28th, 2013, he notes that there was a time when running a pension fund used to be one of the more facile jobs in finance. Money came in steadily and predictably from member contributions and the funds were then invested in AAA grade bonds and blue chip stocks. The target was to meet a modest, but assured, annual return of 8% interest (ibid). Not anymore. That was before the financialization of capitalism and the economic collapse.
Now, as the author correctly notes, the pension funds in effect have two criminally incompetent overlords trying to serve two contradictory economic demands. On the one hand, at the national and state level the US borrows too much and lets its banks go on an unregulated ‘wilding’ with dire consequences for working people. This causes and has caused severe debt crisis’ to which the overseers of capital respond by lowering interest rates to the point where investment grade bonds, once the heart and soul of pension funds, yield next to nothing.
At the state and local level, the corporate owned governors and mayors refuse to raise taxes on their real constituency, the corporations and the rich, which would have the beneficial effect of balancing the funds; they instead pressure funds to continue to make their ‘vig’ of 8%. This, even though not only is this stupidly optimistic, but it is wildly impossible. So, what are the pension fund managers doing now? They are doing what financial capital requires: they are acting like gambling casinos by increasingly turning the whole pension fund investment strategy into a dangerous explosive landmine, twisting them into hedge funds, all to the detriment of working people and to the advantage of Wall Street” (http://www.dailycensored.com/financial-capitalism-and-the-us-teachers-pension-fund-fraud/) (45).
This is how financialization works. It is a particular phase of capitalist development where everything is monetized and commodified and where debt chases debt in an assumed never ending cycle of misery. But it does not bode well for teachers or retirees, let alone the entire economic system.
According to the Huffington Post when it comes to Sallie Mae investors profit twice off of students by: first by hiking the cost of tuition and then through reaping dividends and higher valuations on their holdings in Sallie Mae, the largest student lender and loan servicer in the country. Sallie Mae profits by charging relatively high interest rates on its loans and then refusing to refinance high-rate loans after students graduate (http://www.huffingtonpost.com/2013/05/09/sallie-mae-student-loans_n_3247979.html) (46).
Barmack Nassirian, who served as associate executive director of the American Association of Collegiate Registrars & Admissions Officers where, as a champion for students, he battled with for-profit colleges, depicting their collusion in ripping off students through subsidized for-profit college tuition that sell costly commodified degrees, told the Huffington Post recently that higher educational professionals who have holdings in privatized Sallie Mae face severe ethical problems as they work to garnish higher and higher profits:
“The issue becomes whether maximizing returns should be tempered by additional concerns and ethical considerations. This form of ‘double-dipping’ can create a very dangerous loop, where you have incentives beyond what you claim in your public rhetoric — namely to put students into deeper debt?” (47).
As usual, Nassirian makes an excellent point and one that eludes most of the unwary public, especially pension fund members.
Right after the privatization of Sallie Mae in 2004, two years later, in 2006 Sallie Mae reported at least $1 billion in profit and enjoyed a return on equity above 20 percent. All of this while students who were forced to borrow more and more money to go to college for degrees that find many of them overqualified for the precarious jobs that exist (http://www.kvue.com/news/188770591.html) (48). These students took out private Sallie Mae loans that were then securitized. The students were borrowing at interest rates that were about 4.4 to 5.0 percentage points above the standard borrowing rate for financial corporations, known as the three-month commercial paper rate. Now, researchers at The Center for College Affordability have found that 15 percent of taxi drivers had at least a bachelor’s degree in 2010 (http://centerforcollegeaffordability.org/research/studies/underemployment-of-college-graduates). (49).
Apologists for the privatized borrowing company argue that they are helping students by lowering interest rates, but these same apologists fail to tell the public that they exclude the company’s overall cost of funds. It is this low cost of funds that enable the Sallie Mae lending outfit to finance a wide range of assets much more cheaply. This then boosts their earnings, making the whole scheme attractive to investors chasing profits to pay off their debts. Sallie Mae’s cost of funds is now substantially lower now than it was in 2006. This was two years before the credit crisis was widely acknowledged to have even started.
The Huffington Post went on to report that:
In 2012, the company borrowed funds at an average interest rate of 1.45 percent. In 2006 it was 5.37 percent. Interest rates paid by its student borrowers on all of the company’s loan products have not dropped by a corresponding amount, enabling the company as a whole to record a higher spread between its cost to borrow and what it earns off loans to students (http://www.huffingtonpost.com/2013/05/09/sallie-mae-student-loans_n_3247979.html) (50).
In other words, Sallie Mae is really profiting off debt at enormous levels by borrowing low and lending high. Think about it: this is much like loan sharking.
Wall Street accounting tricks also aid and abet Sallie Mae when it comes to garnishing yields. Sallie Mae’s low borrowing costs are aided in part by a borrowing agreement it has with the Federal Home Loan Bank in Des Moines, a government-sponsored entity originally created to provide cheap financing to home mortgage lenders. Sound familiar?
As part of its 2010 agreement with the Des Moines bank, Sallie Mae can engage in accounting methods that post government-backed education loans (debt) as collateral or securitization for more credit. Posting debt as collateral to get borrow more is the Sallie Mae financial plan (51).
At the end of 2012, for example, Sallie Mae was able to borrow as much as $8.5 billion using such Enron accounting schemes. None of this gets translated into lower student debt. Add to this the fact that Sallie Mae is on the record as being against any refinancing of student loan debt to lower the interest rates students have to pay. In securities filings the company goes so far as to warn investors that if policymakers provide refinancing opportunities for student borrowers, it could negatively impact earnings, as high-rate debt is paid off and the company’s servicing volumes shrink (52). This would all be bad news for investors, driving home the fact the student loans and student debt is a very big business and the fact teachers’ pension managers are going along with the sordid plan is more than sardonic, it’s criminal.
What is even more maddening are the Enron accounting schemes used by the government to calculate just how much money we are talking about in non-dischargeable student debt. The government’s official “cohort-default rate,” which measures the percentage of borrowers who default in the first two years of repayment and is used to penalize colleges with high rates, downplays the long-term cost of defaults, capturing only a sliver of the loans that eventually lapse.
According to the article in the Huffngton Post, Sallie Mae warned investors (meaning Wall Street) of potential policy changes emanating from Washington that might actually force refinancing of student debt, quoting the company as saying:
“The adoption and implementation of any such proposals, individually or in combination, could significantly increase our costs, affect our ability to service and collect loans, significantly alter whether or not we remain in certain businesses and the form in which we do so and materially and adversely impact our business, financial condition and results of operations” (53).
On another sordid note, Sallie Mae has shrewdly paid off the coin-operated politicians in Washington to prevent to all of these potential new policy changes that they might be considering. Federal records show the company spent more than $1.4 million lobbying members of Congress in the last quarter alone (54). This money is of course borrowed money (debt) coupled with outrageous student loan debt meaning that Sallie Mae is little more than a shylock’s dream, a Ponzi stratagem of outrageous proportions whose fiduciary duty is to their investors, not to struggling students or taxpayers as they are so fond of stating. They thus profit off of debt, as noted earlier, in profound and multiple fashions.
Conclusion
As I noted at Dailycensored.com, the whole pension fund fiasco, beginning with Sallie Mae and beyond is about leveraged debt. As I stated then:
“This grand charade is all about leveraging debt, which is the specialty of Wall Street and their cronies. “Leverage’ relies on borrowing more and more sums of cash and then using derivatives (phony insurance) to make large investments in Wall Street. In this way the funds don’t have to put up as much cash – money they don’t have any way. It is like borrowing on credit cards to buy stocks and bonds but it is much worse, for it is not an individual problem, it is a socio-economic one that promises to drive the funds right down the same path as the banking crisis and housing “bubble” that brought down whole countries and economies, like Greece and Iceland. All of this is great for Wall Street and death for workers” (http://www.dailycensored.com/financial-capitalism-and-the-us-teachers-pension-fund-fraud/) (55).
Therefore under the financialization racket, one man’s misery is another man’s investment strategy. Yet from the point of view of the average teacher, bus driver school cafeteria worker, and those who are vested in pensions, they are unaware for they simply want to do their job, make a living, feed their children and provide for retirement, a chore that is not possible under the current regime of capital. For the student who simply wants an education, the whole mess is a travesty.
Mis-education, a lack of critical thinking skills and carnivorous investment schemes have left workers and students prey for the wolves of high-finance while the pension managers ski in Aspen, buy fancy goods and otherwise screw over workers by investing in a system of mendacity and despair that has proven time and time again to be a time bomb. All this while Wall Street gets fatter, bonuses are given out with impunity, politicians garnish more and more largess and privatization squeezes the life out of civil society while hurdling students into debt purgatory for the rest of their lives.
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