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Alan Collinge
May 5, 2011

For many years, Academia, the lending industry attached to it, and the US Government failed to inform the public that all of the elements comprising the lending system (lenders, collection companies, guarantors) made far more money when students defaulted on their loans.  Nevertheless, this is true fact, and is well documented.  More disturbing:  recent analysis of the President's Budget data reveals  that even the US Department of Education, on average, recovers $1.22 for every dollar paid out in default claims.  After collection costs, this still leaves a net revenue of more than 15%.  This should be highly  alarming to interested readers:  These perverted financial incentives are defining characteristics of a predatory lending system. The primary reason for this is that unlike all other types of debt, bankruptcy and other standard consumer protections have been removed from student loans.

The consequences of these types of financial motivations, both for the students, and for the lending system itself are too numerous to describe here, but one very significant result is that during the legislative process, when the schools, lenders, and their lobbyists pressure Congress to raise the allowable loan limits, the Department of Education is one of the only entities available to act in the interest of the students.  Instead of voicing concern, or even objections to such proposals, the Department of Education instead remains largely silent, despite their knowledge about the true default rates, etc.  This, again, is a key failure in oversight that effectively causes Congress to make decisions without the interests of the borrowers being represented (Of course the lenders and schools claim to have the interests of the students at heart, but their obvious financial motivations obviously discount their credibility on this claim).   Therefore, Congress continues to rubberstamp these legislative efforts, and the schools quickly raise their tuitions to reach the new lending ceilings.

If the Department of Education were seeing a material, financial loss with loan defaults, they likely would be far more assertive about the reasons NOT to raise the loan limits...and this would provide a critical check on the process.  But they have been largely absent from these debates,  and their  misaligned interest is certainly the reason why.

So it must be agreed that lack of Department oversight contributes directly to repeated votes by Congress to raise the loan limits, and we've already established the link between this poor oversight, and the removal of consumer protections. So undoubtedly, the removal of standard consumer protections has effectively allowed the schools and lenders to have their way with Congress on this issue.

Critics could argue that the established student advocacy groups should have stepped in to fill this role...and this is obviously a true statement...but the advocates can claim that they did not know that defaults were as high as they were (recent evidencesuggests that the true default rate exceeds 1 in 3), therefore any objections from them (assuming they did object) were not strong.  Had they known that defaults were as high as they were, one can only assume that they would have objected far more forcefully.  

The current debate surrounding college prices is a confusing mix of rhetoric that typically involves in fingers pointing in all directions..."like a scarecrow in the wind" between lenders, schools, the Department of Education, the student advocates, and Congress.  But of these five entities, four were behaving as expected (i,e, schools pushing for raising the limits, advocates wringing their hands in the absence of defensible proof that things were going awry, lenders playing their part as the selfish, amoral entities they are understood to be, Congress debating what they are told, and ultimately voting based upon this debate.)

The Department of Education, however, failed to fulfill its role, and did not disclose to the group the true magnitude of the default problem, as one would expect it to.  Therefore they are clearly the party whose behavior can ultimately be questioned with strong justification.  Of course citizens have every right to be seethingly resentful and angered by all of these actors to point out what was obvious...that the students were being saddled with outrageous increases in student loan debt, but strictly speaking, the Department's failure is the only one with zero defense.  

This is a critical, unambiguous link that is never pointed out, but which is key- the  key-  to explaining the rampant inflation we have seen in academia over the years.

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Comment Preferences

  •  A claim like this (2+ / 0-)
    Recommended by:
    marykk, Oh Mary Oh

    would be more persuasive if you linked to the data.

  •  One of the housing bubble websites had a plot (3+ / 0-)
    Recommended by:
    kyril, Oh Mary Oh, evilhoodedcrow

    showing that the trends of CA housing costs and CA public college/univ tuition looked quite similar. Throw in more expensive books and dorms/housing, and we will probably soon see the same carnage at colleges that has hit real estate. The belief in fabulous rewards, when combined with gimmick financing, will always lead to financial ruin.

    I voted with my feet. Good Bye and Good Luck America!!

    by shann on Thu May 05, 2011 at 10:14:27 PM PDT

    •  predatory (1+ / 0-)
      Recommended by:

      it is straight-up predatory lending.  There is no better term to describe it, and it even people who borrowed moderately, did well, and were responsible in repayment have found themselves in a trap, owing 3, 4 TIMES what they originally borrowed, and with absolutely no recourse.

      But your point is well taken.  Nationally student loan debt increase, has even outpaced home prices, and by a significant margin, but I'm not sure if this is true for California home prices-

      Please support the StudentLoanJustice.Org PAC

      by studentloanjustice on Fri May 06, 2011 at 01:31:15 AM PDT

      [ Parent ]

    •  These two factors may very well be (0+ / 0-)


      the trends of CA housing costs and CA public college/univ tuition looked quite similar

      but probably less through student loan policies than by the simple fact that the housing price run-up was in part fostered by tax cuts that left the affluent with more $$s to bid up house prices.

      The very same (or related) tax cuts that slashed governemnt funding for education in CA, which sent direct fees to students soaring . . ..   But, while housing prices can easily crash, I fail to see a mechanism how tuition & fees for public education in CA is in similar "danger" of crashing.  That would require a massive infusion of state (or federal) $$s - do you really see that in the offing?

      •  That's a scenario I don't enjoy discussing... (0+ / 0-)

        No, this is a good point.  In terms of analogies with subprime home mortgages:  this is not a bubble that will burst like subprime, crashing prices, etc...Rather, this bubble bursts out of public view, in the living rooms of millions of families...

        The dirty secret is that the default rate has been insanely high...certainly about 1 in 3...for YEARS, so this bubble has been bursting in a hugely harmful way for at least a decade.  So this is a soft landing couched in secrecy that policymakers, bankers, etc love.  There is no finger of blame pointed at anyone, but perhaps the borrower, who will usually opt to suffer in silence.

        However, the system has allowed to evolve according to the interests of the lending and academic interests, not the student interests for so long that now, a doomsday scenario that you describe (ie falling prices, university bailouts, etc) is a far, far greater reality today than even a couple of years ago.  I rarely considered this possibility in 2006, but today, I must consider it very seriously.  Here is the description:

        At some point, the default rates will inevitable reach a critical point where, in the space of a few short months, possibly even days, the borrowers will, enmasse, simply reject the debt.  Student loans will become a national joke, and something like 70% of the borrowers will simply resolve to never repay the debt, and this will be with ample justification, given the systemic predation that was allowed to subsume the system).

        So that will leave the Fed with a tremendous liability, which it may or may not pay to the loan holders in full, and Im guessing they would halt lending for a prolonged period.  This is where the colleges lose huge revenue streams overnight, and much of academia simply freezes until they get it sorted out. Its a foggy, unclear scenario that I don't think about much, but its definitely not pretty, and will be accompanied by a lot of unrest.

        Right now, my best guess would be that we are at a 40% default rate...this is up from my previous estimate of 33% which I made using similar methods (quite crude, but also with an effort to err conservatively).  If it was actually higher, I would not be overly surprised.

        So given no meaningful congressional actions to return bankruptcy protections, dramatically reduce college prices, or other actions that will reduce defaults...I would say we are in some peril in the fairly near term (ie 1-2 years) of this. In hindsight, I've been conservative on every prediction I have made on this issue over the past 5-6 years, it turns out, so I doubt that I am highballing it by much, and recent actions by the Department of Education to increase their collection activities against defaulted borrowers may well hurry this along.  When there are enough people walking around penniless due largely to the predatory nature of this system, and for purely greedy interests as opposed to any real public interest, they tend to get seriously pissed, and will express that. in a myriad of ways.

        Please support the StudentLoanJustice.Org PAC

        by studentloanjustice on Fri May 06, 2011 at 06:44:39 PM PDT

        [ Parent ]

  •  If one reads the link this comes from: (0+ / 0-)
    More disturbing:  recent analysis of the President's Budget data reveals  that even the US Department of Education, on average, recovers $1.22 for every dollar paid out in default claims.  After collection costs, this still leaves a net revenue of more than 15%.

    The situation is relatively more complex - in that the government only recovers 85% when accrued interest is factored in.

    It seems like the concept of paying interest on money that is loaned out is a well established principle in our economy, so that alone isn't too shocking or horrific to me.    

    I suppose a bigger issue is whether the government should be in the student loan business at all (the gist of this diary is that it shouldn't, since when it applies normal business practices to its loans, howls of shock and outrage ensue . . . .).

    •  No. Read the comments (0+ / 0-)

      below the Chronicle Article where that claim is repeated.

      This is a fallacious claim, and unfortunately, both Mark Kanrowitz and Jason Delisle used an obviously inappropriate costing methodology to arrive at this figure.

      Essentially, they claim that the government's "cost of money" (how much having their money tied up in a defaulted loan) is  the interest rate on the loan itself, when in fact, the Department of Education, if it pays any cost for the time value of money it has out, would be at most the T-bill rate for the relevant time period...probably far less than 5%.  This is the true cost, and Mark Kantrowitz, in fact, acknowledged this point in an extremely lengthy email exchange some months ago.

      Jason Wrote a paper trying to defend this claim, and even his friends were deriding the claim this is bad analysis, and I suspect that both of these men know it, but were willing to dishonor themselves because they simply are unwilling to let the public know that the government is, indeed, making, not losing money on defaults.

      Please see my original report

      ..or put it to the simple smell test:

      The Department of Education, by this claim, is asserting that a loan that defaults with a balance of $100,000 will ultimately cost $35,000 to collect!!

      A similar sized, generalized defaulted bank loan (say, a boat loan, or similar) costs about $3500 to collect, and these types of loans usually involve a ton more effort due to property seizure/storage costs, far more legal/administrative costs (obtaining a judgement, taking title, etc)...So this claim is simply ridiculous, and  as I said, Mark and Jason did themselves a tremendous dishonor by stooping to this sort of blatant press manipulation.  Ask Mark....or Jason to justify this cost of money, and see them squirm.

      Im happy to re engage this debate with them.  In fact, I would love to have a public, formal debate on this important controversy...I'd love to shove Mark's nose in the truth one more time, quite frankly, since I rarely, if ever am on the winning side of our many arguments :-)

      Please support the StudentLoanJustice.Org PAC

      by studentloanjustice on Fri May 06, 2011 at 07:04:20 PM PDT

      [ Parent ]

  •  It ain't just loans; colleges are 'profit centers' (0+ / 0-)

    Certainly the exemption of usurious education loans from bankruptcy protection and the grotesque way taxpayer dollars are laundered and funneled into the pockets of privat bankers is obscene.

    But it's not just about the loans. The entire edifice of 'higher education' has come to resemble a mafia business. Tenure tracks eliminated and replaced by underpaid, no-benefits temp workers (excuse me, 'adjunct or associate professors'); maintenance and janitorial staff paid ever shrinking wages with few benefits; wholesale elimination of printing costs as coursework is posted on line. The racket of selling and re-selling the same textbooks to students over and over, while paying them pennies on the dollar to buy them back. Meanwhile tuition and fees rise by multiples of the inflation rate every single year....

    Honestly, if I wanted to get filthy rich, I wouldn't go into banking. I'd start a university.

    •  No argument here (1+ / 0-)
      Recommended by:

      Underlying this all is greed, and this is obvious.  However, If one had to look at this from a system analysis standpoint, and identify what failed in the system to allow this to happen, (ie what parts did not perform as designed), it is the critical failure of ED to give Congress a realistic portrayal of the situation.  They should have been issuing public advisories about the true default rate, for instance, years ago but didn't.  

      The student advocates like TICAS, PIRG, NCLC, and others are also culpable, inasmuch as they knew the true default rate was high, and they saw the damage these loans were doing to large numbers of students...but I suspect they will claim ignorance, or some similar weak excuse..In any event, The ultimate backstop that must not fail is the federal government, and this is precisely what happened at the Office of Federal Student Aid....and the sooner Obama, Geithner, Warren, or whoever else steps up to fix this obvious example of bad governance, the better Obama will look, and the more trust the public will have that we have people running the show who are actually capable of solving an obvious problem in a way that makes sense, and actually does fix the problem, and actually does benefit the people who have been robbed from so blindly, and without recompense in so many other areas.

      This is the outcome I was going for...its a no brainer, and should be non-partisan...but so far I get no indication that they will walk the talk on "fixing what is broken" we shall see.

      Please support the StudentLoanJustice.Org PAC

      by studentloanjustice on Fri May 06, 2011 at 07:14:17 PM PDT

      [ Parent ]

      •  Gotta think like a blue collar tea-bagger. (0+ / 0-)

        While everyone wants the best for their kids, it's hard to exaggerate the contempt felt for "those pampered college kids" by construction workers and other participants in our Mal-Wartâ„¢ economy. Certainly there's a desperate need to make the system work again, and yanking the bankers out of the loop and permitting governmenet to take over lending directly to students was a great start. But unless you're extremely careful about how it's pitched, and unless you're willing to stand up and defend it against the zombie teabagger hordes, the whole thing will be demagogued out of existence as "yet another hand out to those god-damn pampered  DFH college kids".

  •  more student debt than credit card debt (0+ / 0-)

    Total US student loan debt is greater than total US creditcard debt.  I learned that at the
    Student Sit-in at Rutgers

    I suspect this is the next boom-and-bust cycle coming down the road.

    It's not a fake orgasm; it's a real yawn.

    by sayitaintso on Fri May 06, 2011 at 06:10:47 AM PDT

    •  Ha! (0+ / 0-)

      Ha!  Glad you brought that up...

      To brag a bit... I was the original source for that story, it turns out...although Mark K. always gets credit for that headline, it was me who actually discovered this, and alerted both Mark and the WSJ (See the press release on this at our website, and compare the dates between the two if you doubt).

      I have to say, I've been getting a bit petty lately seeing this story credited to Mark always, when we actually get this one.  

      There was actually a far more important story that came out that week...see our website mainpage to discover what I'm alluding to (Chronicle of Higher Ed).

      Please support the StudentLoanJustice.Org PAC

      by studentloanjustice on Fri May 06, 2011 at 07:23:59 PM PDT

      [ Parent ]

    •  You were at the Rutgers thing? (0+ / 0-)

      I should thank you for having the ambition, public spirit to go to that sit-in...I've been hoping students would get out and stick up for themselves for years now...I know I certainly didn't give loans two thoughts while I was in school, so thank you...and I hope you will take the time to understand the problem, which is bankruptcy!

      This is the key all comes down to this, unfortunately...This is the thing that simply has to get returned, so while no one wants to file for bankruptcy, and it really is sucky to be the guy to stand up and demand the return of bankruptcy protections, it turns out that this is precisely what must be done...this is what will right the entire ship, and all else (ie asking for more funding, etc, etc) are just bandaids that will make the students look like fools in the eyes of the media and public.

      If you are still reading this, my last bit of advice:

      Although it really sucks demanding bankruptcy protections, and people will be quick to call you a in fact are not a deadbeat, don't want to default on your loans (no one does), and are arguing for a conservative, free market mechanism that every economist in this world will agree is essential to the healthy functioning of any lending system.

      ...And believe it or not, this is the only demand you could make that the university administration will take seriously.  They will respect this, and you will have turned a key that's never been turned if you and your fellow students can get to this point.

      They will blow smoke up your ass if you say anything else, and you will get nothing but confused.  Please email me if you want any of this explained...Im happy to brief you and your group if you all are serious about making change...(I know the berkeley guys seem to be more interested in taking off their clothes, and burning stuff ;-) )

      Please support the StudentLoanJustice.Org PAC

      by studentloanjustice on Fri May 06, 2011 at 07:42:56 PM PDT

      [ Parent ]

      •  I didn't sit in (0+ / 0-)

        and I'm not a student.

        But the AFT staff and faculty unions did support the sit in.

        In fact, we spent the whole time trying to deliver food to the sit-downers,  including while the TV camers were there.

        I'll pass your info on to the students who did the hard work.

        It's not a fake orgasm; it's a real yawn.

        by sayitaintso on Sat May 07, 2011 at 10:34:08 AM PDT

        [ Parent ]

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