Wall Street-Inflated Student Debt Bubble Hits $1 Trillion; Debtors Rally for Relief
You could call it a bubble, but it's more like a ball and chain. Bubbles are, after all, light and airy.
The collective weight of American student debt is now over $1 trillion, and that weight is a drag not just on those paying the debt, but on our entire economy. It's hard to calculate exactly, because the lenders are notoriously unwilling to hand over their data, and with students defaulting at ever-higher rates, interest rates and fees are always changing, adding constantly to the weight of the burden college graduates (and those who didn't graduate but still have to pay off the loans they took out in more hopeful times) carry.
Around the country, activists are marking the date with actions; in New York, a rally and march will be the centerpiece of what the Occupy Student Debt Campaign has dubbed 1-T day; the day the amount of debt we're carrying to pay for our education officially got too big to bear silently. The rallies aim to end the isolation that debtors often feel, to bring people together to understand that the problem they have is shared by millions of others—and that it calls for political solutions.
“I think that we in America have become so separated from one another, partially due to this debt,” Pam Brown, an organizer with the Occupy Student Debt Campaign, told AlterNet. “The debt makes us very individual; we can't afford to help someone else, we can't afford to spend our time in a way that's not productive.”
How did we get here, with more student debt than credit card debt, with student loans rising twice as fast as mortgage debt at the height of the housing bubble? Recent graduates face terrifying unemployment numbers—ThinkProgress reported that over half of all college grads under the age of 25 are either jobless or underemployed and median wages for grads with bachelor's degrees are down from 2000—and delinquencies on debt is steadily climbing.
Those are complicated issues, because student lending is a complicated industry, one that highlights the degree to which the government is entwined with Wall Street, and state and federal policy play off one another to push students to ever greater levels of borrowing. As students and debtors rally to shake the stigma off their debt burden and call attention to the involvement of big finance in their education, let's take a look at the system that led us to a trillion dollars in debt.
The Politics of Debt
You know you have a problem when even Mr. 1 Percent himself, Mitt Romney, is declaring his support for a move to hold student loan interest rates low. "I support extending the temporary relief on interest rates for students as a result of -- as a result of student loans, obviously -- in part because of the extraordinarily poor conditions in the job market,” Romney said this week, probably in an attempt to blame President Obama for the lousy conditions young workers are facing. (Romney has also said he supports Paul Ryan's budget, which allows student loan interest rates to go back up to 6.8 percent from the 3.4 percent current rate for new loans. Ryan's budget also slashes Pell grants, the government's method of giving rather than lending money to low-income students.)
On the campaign trail, Obama has pounded the issue by calling for Congress to temporarily extend the low interest rates. Members of Congress have introduced legislation to permanently keep the rate at which the government lends money at 3.4 percent. Roosevelt Institute fellow Mike Konzcal has noted that the government borrows at a far lower rate than that, which raises the question of why it is not investing more robustly in young people.
Konczal pointed out that the government makes a profit somewhere around 13 percent for each dollar of loans, and because the loans are not dischargeable in bankruptcy and Social Security payments can even be garnished to make them up, default may even be more profitable for lenders than borrowers making payments on time. There's almost no risk of losses, which are the reason for high interest in the first place. Keeping interest rates low won't cost the government money, it will simply cut into its profit margin a little bit. While the big banks that crashed the economy continue to enjoy ultra-low interest rates, there's no reason to let the rates get any higher.
With Romney saying that temporarily extending the low interest rate is a good idea, it's past time for Obama to start calling for permanent low rates. But too many of Obama's solutions simply kick the can down the road. Income-based repayment might make it easier for students to meet their monthly bill, but as they pay smaller amounts each month, interest continues to accumulate and the overall bill gets higher. A one-year fix on interest rates isn't enough, and even the permanent fix does nothing to shrink the size of the overall debt burden—it simply prevents it from getting even bigger.
It may be time for more drastic fixes. Rep. Hansen Clarke, a Michigan Democrat, introduced a bill that would forgive up to $45,000 in student debt after a borrower makes 10 years of income-based payments (no more than 10 percent of income). A petition in support of Clarke's bill has nearly 900,000 signatures. And of course, the Occupy Student Debt campaign is calling for free public higher education, interest-free loans and a write-off of existing debt.
It's important to remember that the spike in student debt is caused by a spike in tuition rates—often at state schools, which have borne the brunt of austerity-induced budget cuts as well as years of ideological slicing and dicing. As a recent report from think-tank Demos noted, as state support for public universities has declined, institutions have picked up the slack by charging students more—which becomes more debt.
Biola Jeje, a member of the Brooklyn College Student Union who recently traveled to Montreal to meet with Canadian student strikers fighting their own tuition increases (over 165,000 students on strike), pointed out that the tuition hikes are ideological both in Quebec and in the US. Students around the world have protested tuition and school fee hikes that governments claim to be necessary in the “age of austerity,” but that students are well aware are ideologically driven. Students and recent graduates with heavy debt loads are at the base of the Occupy movement, and Paul Mason of the BBC has pointed out that the “graduates with no future” were at the base of Egypt's revolution and the global fight against austerity.
Here in the States, our particular partisan political system makes organizing around student debt difficult, Brown noted. Political arguments, she pointed out, tend to swing one way or the other—either the Republican brand of anti-government populism that attacks the schools and government spending, or the liberal side, that targets the banks. Yet in the case of student debt, they're all responsible.
“There is an overlapping relationship between the schools who have raised their tuition enormously, between the government which has lowered its spending and has subsidized this debt, and the banks who are profiting from it still. Most of the student loans are still on their books and they've securitized them, or they're getting paid to service them and they're collecting fees,” Brown said.
Follow the Money—All the Way To Wall Street
“Education is really a right and it shouldn't be something for Wall Street to make a lot of money off of,” Brown said. Yet that's exactly what's happening. And those same big banks and student lenders like Sallie Mae then use their profits to turn around and lobby the government—not just on a federal level, but the states as well—for policies more favorable to them. Oh, and many of those big bankers are also on the boards of both private and public universities, where they get to help make decisions, including decisions about costs that students will bear.
“The banks who are giving us the loans, are then on the boards and raising tuition, and then giving us more loans. It's eating us and feeding us at the same time,” Jeje, who is a junior at Brooklyn College, said.
Robert Oxford, a graduate student at NYU researching the financialization of student debt and an organizer with the Occupy Student Debt campaign, pointed out that even government-granted loans mean profits for the banks and the lenders that get paid to service the loans. “Profiteering on student indenture is common financial practice within the realm of Student Loan Asset Backed Securities,” he told AlterNet. “The 'servicers,' third parties the government contracts to bundle its student loans, are essentially middlemen which bring big finance to collateralize millions of American student loans.”
Like other forms of asset-backed securities (which you might be familiar with from the housing bubble—mortgages were bundled together and sold to investors), student loans are repackaged, bundled and sold at auction. “The people who buy it are mainly the biggest banks in the world, hedge funds, etc.” Oxford said. “The secondary market it more difficult to trace because the deals are done at auction, but are in the finance industry.”
He added, “So similar to mortgages but different in that you can't foreclose on someone's education.”
You might not be able to foreclose on an education, but that doesn't mean the debt isn't being traded as an asset. Because the federal government backs up the student loans, because they cannot ever be discharged in bankruptcy and so essentially follow borrowers all their lives, they don't lose value for investors--you might default, but the government covers 98 or 99 percent of the value, you get sued, and the bank that collateralized your loan still has the money. But investors move them around for their own purposes, Oxford noted.
Whether they're making loans (for all too many students, the $31,000 the government will lend doesn't begin to cover the cost of four years of undergraduate education, and so private lenders step in to make up the difference), collecting on former subsidized Federal Family Education Loans that are still on their books, or reselling student debt as SLABS, the big banks are making bank on students. Lenders like Sallie Mae, meanwhile, get paid by the government to bundle its loans for banks to carve up and resell. And they're all using the money they make to push for policies that push students into ever more debt.
Sallie Mae, the largest private student lender, makes a good example because student debt is its only business. In 2011, Sallie Mae spent over $3 million in lobbying at the federal level, lobbying the House and Senate, as well as the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Commission (FDIC). Those lobbyists include the Podesta Group, founded by Obama adviser John Podesta and his brother Tony. Their targets? The budget, the Dodd-Frank Wall Street reform act, the Fairness for Struggling Students Act of 2010 (which would've restored bankruptcy protections for student debt) and more.
On the state level, between 2005 and 2011, Sallie Mae had registered lobbyists in California, Florida, Illinois, Louisiana, Maryland, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Utah, and Virginia. The company spreads its political donations on both sides of the aisle—in 2010, House Majority Leader John Boehner was the top recipient of Sallie Mae money, and he's also enjoyed a close relationship with Sallie Mae CEO Albert Lord, his golfing buddy. Boehner's gotten well over $250,000 in his career from Sallie Mae. This year, it's New York Senator Kirsten Gillibrand, a Democrat, along with Representative Patrick McHenry (R-NC) who've each gotten $5,000 from the lender so far.
What's all that spending gotten Sallie Mae? Record profits. And it's not the only one—JP Morgan Chase, Discover, Wells Fargo, and others continue to make money on student debt.
“Trillion Dollar day is a reminder that private banks are still very much in the predatory lending business,” Andrew Ross, an NYU professor and one of the organizers of the Occupy Student Debt Campaign, said. “Champagne glasses will be raised all over Wall Street today. It's time to put an end to this racket.”
Breaking the Links
The Occupy Student Debt Campaign is focusing on the connection between Wall Street and student debt with rallies and actions in New York and around the country. In New York City's Union Square at 4pm, there will be a mass rally with Reverend Billy Talen and the Stop Shopping Choir, Billionaires for Debt and Occupy Wall Street's plus brigades, holding a mock debt jubilee and hosting speakers like David Graeber, author of the book Debt, Frances Fox Piven, and Jill Stein of the Green Party.
Solidarity actions include a student debt “exorcism” at Brooklyn College with student activists, a global teach-in at NYU with a global webcast, actions at universities from Madison, Wisconsin to Huntsville, Alabama. Sallie Mae offices will see acts of civil disobedience as borrowers focus on the lender's predatory practices.
The problem for organizers working on student debt has been connecting students on campus, most of whom are not yet paying their student loan bills, with those who have graduated or left school, who are struggling with their bills in relative isolation. “Students are much more focused on the issue of tuition hikes, but they don't really connect the consequences of that until later. Once they are no longer in the collective of students, they're out in the world on their own and it is challenging to collectivize debtors,” Brown said.
For Jeje, the militant actions of students in Quebec have been a lesson that she and other student organizers are eager to apply at home. From visibility campaigns like the red felt squares student strikers wore in Montreal to the street marches and hard picket lines on campuses, she believes that the success of the student movement in Quebec mirrors the success of Occupy Wall Street in capturing the narrative.
Mass rallies around the issue of student debt have the potential to connect a generation of debtors—one in seven Americans, according to Matthew Stoller at Naked Capitalism, are currently being chased by debt collectors—with one another and with current students and a culture of campus activism. And the Occupy Student Debt Campaign is hoping to rally borrowers on and off campus around their debt refusal pledge.
“In my mind it's really the only available form of direct action we can take, to say we're not going to pay this,” Brown said, and Jeje agreed—not paying one's debts on one's own is terrifying, not to mention simply leads to higher fees and interest rates, a hit to one's credit rating, and in the end, more profits for the banks. But collective non-payment could be, as organizer Stephen Lerner pointed out, a form of collective bargaining for debtors. It will require a heck of a lot of organizing, but the Occupy Student Debt campaign and the growing national student movement are aware that they're just getting started.
After all, they don't have a lot of choice—employment prospects remain grim, the economy remains stagnant, and tuition keeps going up—as does the involuntary default rate. “It is the next big bubble, and when it pops, they might try to blame students as the ones who're killing the economy,,” Jeje said. “We're not killing the economy, you're killing us.”