extra credit paper

http://billmoyers.com/story/student-income-loans-transfer-wealth-investors-risk-students/

How Students’ Wealth is Redistributed to the Rich

Student income loans transfer wealth to investors, risk to students.

BY KENNETH J. SALTMAN | SEPTEMBER 19, 2016

Student activists from the various CUNY campuses across New York City hold a rally in front of Hunter College to demand divestment from Israel, the resignation of the CUNY board, free tuition, and a cancellation of student debt. (Photo by Andrew Lichtenstein/Corbis via Getty Images)

At more than $1.3 trillion as of 2016, US

student loan debt has become widely

discussed in the media, the business press and academia as a new debt bubble with the potential to burst

and trigger a global economic crisis that puts everyone at risk. The student debt bubble is regularly

compared to the subprime mortgage debt bubble that resulted in the failure of banks, the great recession

and the public bailout of Wall Street and the auto industry in 2008. Prior to the subprime crisis, high- and

low-risk mortgages were packaged together into investment bonds so that when enough of the high-risk

mortgages defaulted, the bonds that had been rated as safe collapsed. Similarly, one form of student debt

investment security, Student Loan Asset Backed Securities (SLABS), is composed of pooled student debt.

A crucial difference between the subprime debt bubble and the student debt bubble is that the properties

that comprised subprime mortgage securities served as collateral to the mortgage debt. If a homeowner

defaults on a mortgage, the bank claims the property in its stead. Student loan debt has traditionally not

been collateralized. In other words, if a student or former student defaults on student loans, there is no

tangible asset for the bank to claim. However, since a great deal of student loan debt has been federally

subsidized and especially reinsured, private banks that package student loan debt into investment

securities have been able to sell these investment securities because they carry the full faith and credit of

the federal government. Despite having no collateral, they have the federal guarantee.

In 2010, the federal government ended the Federal Family Education Loan Program (FFELP) that

federally subsidized and reinsured private loans that formed the basis of most SLABS, opting to shift

federally subsidized loans into direct federal loans issued through the Department of Education. Despite

the end of FFELP, privately held student loan debt and securities based on it accumulated prior to 2010

remain a massive outstanding debt that is predominately serviced, managed and collected by a single for-

profit corporation, Navient, that spun off from Sallie Mae. Sallie Mae was a public bank that lent to

students and was privatized by the Bill Clinton administration. Navient faces criminal charges of illegal

collection practices and defrauding borrowers and has come under fire most notably from Sen. Elizabeth

Warren (D-MA). With federal insurance and subsidy removed on these privately held FFELP loans as of

2010, Wall Street lost its enthusiasm for securitizing newly issued unsecured private debt, despite the fact

that bankruptcy laws make student loan debt extremely difficult to discharge through bankruptcy. Enter the

Student Income Loan.

Heather McGhee on Student Debt

BY BILLMOYERS.COM STAFF | APRIL 25, 2012

After the end of FFELP in 2010, private investors developed Student Income Loans (also known as

Income Share Agreements or ISAs), an “innovative” financing technique to expand private student loans

and develop a new kind of student debt investment security. Several for-profit and nonprofit companies,

such as 13th Avenue Funding, Lumni and Pave created Student Income Loans that provide tuition in

exchange for a percentage of future income. These lenders pool the Student Income Loans into

investment securities. The financiers have presented Student Income Loans as a service to students,

providing another avenue of educational finance and as an innovation in lending. Since the federal

government does not insure or subsidize the loans, the private investors make terms that mitigate their

risk while maximizing their profit. Profits can be enormous. The Wall Street Journal offers an example of a

student ultimately paying $60,000 for a $15,000 tuition loan.

One key way these Student Income Loan banks limit risk and maximize profit is by restricting loan

issuance to students who study subjects that are expected to result in high incomes, such as engineering,

or by restricting loans to graduate students in select fields. This instrumental and vocational tendency of

student income loans contributes to the rising clamor to defund elements of higher education that do not

directly result in commercial benefits for business, such as programs in the humanities and the arts, the

social sciences and even the abstract sciences.

Other new nontraditional private lenders post-FFELP cater to what Forbes calls “the indebted 1 percent”

because they have “racked up pricey and prestigious debt.” These banks capture the lowest-risk student

borrowers from the outstanding pool of the student loan debt that is eligible for refinancing — 75 percent of

the $1.2 trillion in debt. Companies like CommonBond ($100 million refinanced) and SoFi ($1 billion

refinanced) refinance student loan debt at lower rates than the federal government by cherry-picking the

students and graduates who are seen as the lowest risk of defaulting on their loans. By creaming off the

highest quality — that is, lowest risk — loans, Sofi and Common Bond are able to offer lower interest rates

only to the minority of borrowers who have an average income of more than $130,000 yet raise the overall

risk of other pooled federal student debt.

Higher education spending cuts by states need to be seen as effectively an upward redistribution scheme,

with tuition increasing by the same amount as public defunding, about 10 percent.

Another way Student Income Loans limit risk for investors is by pooling loans together in tranches (like

subprimes). Some Student Income Loan arrangements pool debtors together and make the default by one

debtor to cause the interest rates (percentage of future income taken) for all borrowers to rise. Lenders

like to make these pools of debtors out of students from the same alma mater so that there is an additional

sense of affiliation and moral obligation to fellow students. This arrangement adds a moral culpability onto

the borrower in such a way as to counter the rationality of homo economicus that drives these projects.

Why, after all, wouldn’t a rational economic actor seek to default on these loans in which the only collateral

is their future work and good will? By linking the fate of other borrowers in the investment security, lenders

levy on debtors a social stake in not defaulting (you, borrower, are screwing not just the rich greedy

banker but also your fellow student who has a precarious situation like yours). Of course, the truly social

act would be to dispense with the debt altogether and make the social obligation one for the entire society

to bear rather than restricted communities of borrowers.

Student Income Loans and other new nontraditional private student loans represent not merely a new form

of student loan financing but also: (1) a form of upward economic redistribution in the context of a broader

assault on public institutions, particularly on public higher education, and a downward transfer of

responsibility and risk onto youth; (2) a force for the neoliberal vocationalization and instrumentalism of

higher education that participates in the broader trend driven by neoliberal privatization and corporate

culture; and (3) a form of indenture that relies upon the fabrication of a specific form of restricted morality

and the capture of future forms of associated living. I suggest that these three key elements of Student

Income Loans need to be seen as a material and symbolic project of class warfare waged by the rich on

the rest.

An Assault on Public Higher Education

Following the great recession of 2008 and the ensuing rightist push for austerity, states and the federal

government significantly cut public higher education spending. Universities responded by raising tuition.

As is common during recessions, university enrollments increased. As students assumed debt to pay for

university, an effective redistributive transfer was accomplished whereby youth, among the most

economically vulnerable citizens, absorbed the costs. A number of states not only cut higher education

funding but also enacted educational privatizations and created slush funds for businesses. While

spending has not been fully restored, students are shouldering the debt burden and banks are profiting.

Black Students Feeling Especially Crushed By

Student Debt

BY RICHARD LONG | MAY 6, 2015

Higher education spending cuts by states need to be seen as effectively an upward redistribution scheme,

with tuition increasing by the same amount as public defunding, about 10 percent. Thirty-six percent of

undergraduates take federal student loans and 6 percent take more expensive private loans. Forty-seven

percent of public higher education revenue comes from tuition. The state defunding of public higher

education is regressive, much like the shift from an income tax to a sales tax, in that it puts more of the

burden on a smaller segment of the population while lifting the burden to pay for this public good through

taxation off of those with greater wealth and income.

The federal government also cut education spending in the wake of the recession. To make matters worse

the federal government “generated upward of $100 billion in revenues from its student loan operations

from 2008 to 2013.” To put this federal revenue generation in context, the money that students pay to the

federal government joins a pool of money that in the age of austerity decreasingly goes to pay for the

caregiving functions of the federal government but increasingly goes to pay for its punitive functions.

Perhaps most perniciously, half of federal discretionary spending goes toward the military and military-

related spending, while enormous amounts go to subsidize private industries such as corporate agriculture

and entertainment. In this regard, the shift of the costs of higher education onto students represents a kind

of debt spending by youth to fund the military and corporations. This generational pillage is not just

unethical but it represents an economic burden on future workers and consumers who will be spending to

service debt to create bank profits. In addition to being a financial redistribution, it also represents

atransfer of risk and responsibility.

As Andrew Ross explains, the transfer of fiscal responsibility from the state to the individual is a key

aspect of higher education privatization. He points out that it would only cost $87 billion to federally fund

every two- and four-year public college. This is a miniscule amount relative to the $1.22 trillion spent

annually by the federal government on tax breaks and less than the current $102 billion federal outlay for

education that represents just 2.67 percent of all federal spending.

Vocationalism and Instrumentalism

Student Income Loans further the vocationalizing and instrumentalizing trend that has been expanding

with the corporatization of higher education. The American Enterprise Institute, an outspoken neoliberal

advocate of Student Income Loans or Income Share Agreements (ISA), writes:

Because ISA investors earn a profit only when a student is successful, they offer students better terms for

programs that are expected to be of high value and have strong incentives to support students both during

school and after graduation. This process gives students strong signals about which programs and fields

are most likely to help them be successful.

In this context, successful means students endeavoring to pursue the highest-paying fields that are the

most directly commercializable. As Jeff Bryant of Salon writes, this will likely lead to students being

pushed into academic programs that are “financially incentivized” by investors rather than toward

programs that appeal to students’ imaginations, ideas or interests.

Bryant suggests that the dangers of the vocational tendencies of Student Income Loans may be harmful

not only to the pursuit of meaningful, passionate and interesting work but that it may be harmful to

business as well because “outliers” from the humanities often make important contributions to business.

He emphasizes that unless the interests and desires of a young student are math or science, “a quest for

personal development and intrinsic reward — becomes a lifelong liability regardless of personal

attributes.”

Moreover, making majors in the humanities, arts and social sciences more expensive will result in the

further gutting of these programs from universities and a reduction in the number of not just workers but

citizens who are educated in the knowledge and habits of society and self-reflection grounded in traditions

of culture and scholarly thought. There is more at stake than just individual economic opportunity.

As Henry Giroux argues, the undermining of the humanities as part of the war on public higher education

represents the production of civic illiteracy in that it deprives citizens of the intellectual tools to interpret

and intervene in public problems as well as a form of “organized forgetting” as the history is flattened into

a permanent present understood through acts of working and consuming.

These public and civic concerns expressed by Giroux seem not to be on the minds of the financiers

behind Student Income Loans. McGrath writes:

“Not to be glib about it,” says Tom Glocer, former Thomson Reuters CEO and a CommonBond equity

investor, “but if you’re coming to me for a loan and you’re a dentistry student at the University of

Pennsylvania, I’ll be more willing to make a loan than if you tell me you’re an art history major at Texas

Christian.”

Student Income Loans do not only allow the rich to own the labor of another, they also allow the rich to

create investment securities out of these collected pledges of future time and work while supporting the

institutions that have historically bolstered their own class interests. These speculative instruments then

serve as the basis for additional future private lending and in turn, yet more speculation. Ultimately,

Student Income Loans promote not only a strictly commercial way of seeing education and its social value

and defund fields of study alleged to have little commercial value, they also create a financial incentive to

avoid mass public funding of higher education while fueling a dangerous educational debt bubble.

KENNETH J. SALTMAN

Kenneth J. Saltman is a professor in the Educational Leadership and Policy

Studies Ph.D. program at the University of Massachusetts Dartmouth. Saltman is

the author most recently of Scripted Bodies: Corporate Power, Smart

Technologies, and the Undoing of Public Education (Routledge 2016).