January 2011, Week 2


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A Primer on the The Student Loan Debt Bubble
By Alan Nasser and Kelly Norman
Common Dreams
January 11, 2011

It was announced last summer that total student loan
debt, at $830 billion, now exceeds total US credit card
debt, itself bloated to the bubble level of $827
billion. And student loan debt is growing at the rate
of $90 billion a year.

There are far fewer students than there are credit card
holders. Could there be a student debt bubble at a time
when college graduates' jobs and earnings prospects are
as gloomy as they have been at any time since the Great

The data indicate that today's students are saddled
with a burden similar to the one currently borne by
their parents. Most of these parents have experienced
decades of stagnating wages, and have only one asset,
home equity.  The housing meltdown has caused that
resource either to disappear or to turn into a
punishing debt load. The younger generation too appears
to have mortgaged its future earnings in the form of
student loan debt.

The most recent complete statistics cover 2008, when
debt was held by 62 % of students from public
universities, 72 % from private nonprofit schools, and
a whopping 96 % from private for-profit ("proprietary")

For-profit school enrollment is growing faster than
enrollment at public schools, and a growing percentage
of students attending for-profit schools represent
holders of debt likely to default.

In order to get a better handle on the dynamics of
student debt growth, it is helpful to sketch the
connection between the current crisis in public
education and the recent rapid growth of the for-

Crisis of Public Education Precipitates Private School

Since the most common advise to the unemployed is to
"get a college education", and tuition at public
institutions is at least half or less than private-
school rates, public higher education institutions have
been swamped with an influx of out of work adults. This
has resulted in enrollment gluts at many state
colleges. At the same time, tuition is increasing just
when household income and hence the affordability of
higher education are declining.

Here is how this scenario unfolds:

With few exceptions, state-funded colleges and
universities set tuition rates based on policy and
budget decisions made  by state legislatures. High and
increasing unemployment and declining wages have
resulted in  declining public revenues. This in turn
leads to  budget cut directives from legislative bodies
to public higher education institutions, often
accompanied by the authority to increase tuition.

For example, a 14% budget cut to an institution may be
"offset" by giving the governing boards of the school
the authority to raise tuition by a maximum of 7%.
Often the imbalance created by a cut to the base budget
and an increase in tuition is made worse by limits on
enrollment. A state legislative body may cut an
institution's budget, allow it to increase tuition, but
not provide per-student funding increases to keep pace
with the accelerating enrollment demand.

This affects tuition rates at for-profit institutions.
More students who would otherwise attend a state
institution or a private, non-profit school are finding
themselves without a seat at over-enrolled campuses.
More students are pushed into the online and for-profit
sectors, and proprietary schools sieze the day by
inflating their tuition costs.

Because online colleges lack the enrollment constraints
of a physical campus, they are uniquely poised to
capture huge proportions of the growing higher
education market by starting classes in non-traditional
intervals (the University of Phoenix, for example,
begins its online classes on a 5-week rolling basis)
and without regard to space, charging ever-increasing
rates to students who have no other choice.

Instead of waiting for an admissions decision or a
financial aid package from a traditional college,
students can enroll immediately online. This ease of
use and accessibility to any student has allowed the
for-profit sector to capture a growing portion of the
higher education market and a growing proportion of
education-targeted public money. Enrollments at for-
profit colleges have increased in the last ten years by
225%, far outpacing public institution increases.

Thus, the neoliberal assault on public education not
only tends to push more students into private
institutions, it also generates upward pressure on
tuition costs. This results in growing pressure on
enrollees at proprietary schools to take on student
loan debt.

How Healthy Are Student Loans?

The extraordinary growth of student debt paralleled the
bubble years, from the beginnings of the dot.com bubble
in the mid-1990s to the bursting of the housing bubble.
From 1994 to 2008, average debt levels for graduating
seniors more than doubled to $23,200, according to The
Student Loan Project, a nonprofit research and policy
organization. More than 10 % of those completing their
bachelor's degree are now saddled with over $40,000 in

Are student loans as financially problematic as the
junk mortgage securities still held by the biggest
banks? That depends on how those loans were rated and
the ability of the borrower to repay.

In the build-up to the housing crisis, the major
ratings agencies used by the biggest banks gave high
ratings to mortgage-backed securities that were in fact
toxic. A similar pattern is evident in student loans.

The health of student loans is officially assessed by
the "cohort-default rate," a supposedly reliable
predictor of the likelihood that borrowers will
default. But the cohort-default rate only measures the
rate of defaults during the first two years of
repayment. Defaults that occur after two years are not
tracked by the Department of Education for
institutional financial aid eligibility. Nor do
government loans require credit checks or other types
of regard for whether a student will be able to repay
the loans.

There is about $830 billion in total outstanding
federal and private student-loan debt. Only 40% of that
debt is actively being repaid. The rest is in default,
or in deferment (when a student requests temporary
postponement of payment because of economic hardship),
which means payments and interest are halted, or in
forbearance. Interest on government loans is suspended
during deferment, but continues to accrue on private

As tuitions increase, loan amounts increase, as do
private loan interest rates, which have reached highs
of 20%. Add that to a deeply troubled economy and
dismal job market, and we have the full trappings of a
major bubble. As it goes with contemporary bubbles,
when the loans go into default, taxpayers will be
forced to pick up the tab, since just about all loans
extended before July, 2010 are backed by the federal

Of course the usual suspects are among the top private
lenders: Citigroup, Wells Fargo and JP Morgan-Chase.

Financial Aid and Subprime Lending

A higher percentage of students enrolled at private,
for-profit ("proprietary")  schools hold education debt
(96 %) than students at public colleges and
universities or students attending private non-profits.

Two out of every five students enrolled at proprietary
schools are in default on their education loans 15
years after the loans were issued. In spite of this
high extended default rate, for-profit colleges are in
no danger of losing their access to federal financial
aid because, as we have seen, the Department of
Education does not record defaults after the first two
years of repayment.

Nor have the disturbing findings of recent
Congressional hearings on the recruitment techniques of
proprietary colleges jeopardized these schools' access
to federal funds. The hearings displayed footage from
an undercover investigation showing admissions staff at
proprietary schools using recruitment techniques
explicitly forbidden by the National Association of
College Admissions Counselors. Admissions and
enrollment employees are also shown misrepresenting the
costs of an education, the graduation and employment
rates of students, and the accreditation status of

These deceptions increase the likelihood that graduates
of for-profits will have special difficulties repaying
their loans, since the majority enrolled at these
schools are low-income students. (Forbes magazine, Oct.
26, 2010, "When For-Profits Target Low-Income
Students", Arnold L. Mitchem)

A credit score is not required for federal loan
eligibility. Neither is information regarding income,
assets, or employment. Borrowing is still encouraged in
the face of strong evidence that the likelihood of
default is high.

Loaning money to anyone without prime qualifications
was "subprime lending" during the ballooning of the
housing bubble, when banks were enticing otherwise
ineligible candidates to buy houses they could not

Shouldn't easy lending without adequate credit checks
to college students with insecure credit also be
considered "subprime lending"?

Government's Bias Toward the Private Educational Sector

In 2009 President Obama initially pledged $12 billion
in stimulus funds to help community colleges through
the economic crisis. Last March that sum was slashed to
$2 billion.

We see a drastic cut in federal stimulus funding even
as state funding for higher education is expected to
fall even further. At a time when community colleges
across the country are overflowing with returning
students seeking new skills and high school graduates
who can't afford ever-rising tuition rates at many
four-year schools, the majority of education-bound
stimulus funds are going to for-profit institutions,
not community colleges. (Our home state of Washington
illustrates the general direction of the
administration's "reform" of higher education: for the
first time in the state's history, public funds no
longer pay the majority of higher education costs.)

Apart from stimulus funding, overall government student
aid is disproportionately aimed at those attending
proprietary schools. Nearly 25% of federal financial
aid is spent on students attending for-profit colleges,
even though these colleges enroll less than 10% of the
nation's college students.

Proprietary schools now rely on federal financial aid -
PELL Grants and federal loans - as their primary source
of revenue. Not-so-incidentally, proprietary schools
are among the largest donors to Education Committee

Proponents of the system defend it by pointing out that
public colleges also rely on taxpayer subsidies for the
majority of their revenue. But this overlooks a
decisive difference: what proprietary schools don't
have that  public schools do, is an obligation as a
state agency to deliver a high quality education to its
students. Instead, proprietary schools have a legal
fiduciary duty to their stockholders, like any other
for-profit enterprise. As a result, according to a PBS
Frontline investigation, the sector spends 20 to 25 %
of its budget on marketing and only 10 to 20 % on

The Track Record of For-Profit Colleges

The track record of for-profit colleges does not
justify their disproportionate share of government

Drop out rates are higher than they are at public and
non-proprietary private schools, often as high as 50 %.
Irrespective of whether a student drops out, the for-
profit college has already pocketed tuition and fees.
The student is left still burdened with a substantial
debt obligation.

As for graduation rates, a 2008 report by the National
Center for Education Statistics puts the graduation
rate for students at for-profits beginning their
studies in 2002 at 22%,  an 11% drop from students
enrolling in 2000. The same cohort attending public and
private non-profits graduated at rates of roughly 54%
and 64%, respectively. Graduate or not,  the debt
burden remains.

Suppose the student either seeks to transfer to a
public or another non-profit, or completes her studies
and enters the job market with a proprietary degree?
Many students assume that credits are transferable to a
public or nonprofit, but they aren't, so they pay twice
to attain their degree. The school holds out the lure
of high-paying jobs upon graduation, but too often no
such jobs exist or they require education or experience
beyond what the school provided.

Congressional studies have shown that the earnings of
proprietary graduates are the lowest of all graduates.
According to a 2009 Bloomberg report on salary
comparisons between traditional and online degree-
holders, graduates with bachelor's degrees from
traditional colleges earn a median salary of $55,200,
while those with degrees from the University of Phoenix
earn only $50,500, and $43,100 from for-profit American

On top of these earnings and job-prospect
disadvantages, proprietary graduates bear the heaviest
academic debt burden. The Education Department reports
that 43 % of those who default on student loans
attended for-profit schools, even though only 26% of
borrowers attended such schools. Many of those who
attended for-profits don't earn enough to repay their

It's not uncommon for a student who either paid out of
pocket or took out a loan for a $30,000 degree to find
herself stuck in a $22,000 a year job. This only adds
insult to injury: a Government Accounting Office (GAO)
study reports that "A student interested in a massage
therapy certificate costing $14,000 at a for-profit
college was told that the program was a good value.
However, the same certificate from a local community
college cost $520.00." (GAO, "For-Profit Colleges:
Undercover Testing Finds Colleges Encouraged Fraud and
Engaged in Deceptive and Questionable Marketing
Practices", Nov. 30, 2010)

Paying back student loans out of low income and over a
long period of time can rule out the possibility of
making other financial investments required for the
vanishing American Dream, such as buying a house, or
saving for retirement or for one's children's

All in all, the for-profits' track record is more than
dismaying. In too many cases, students leave
proprietary schools in worse financial shape than they
were in before they enrolled. The problem is not
limited to proprietary graduates: this generation of
college grads now possesses more debt than opportunity.

You might think that the unflattering record of for-
profit schools would restrain government gift-giving.
After all, the Obama administration's current education
policy would punish "underperforming" public schools
and teachers. But these policies target the public
sector exclusively. The villains are supposed to be
irresponsible public schools and teachers' unions. It
is entirely consistent with Washington's agenda that
the dismal performance of proprietary schools does not
jeopardize their future access to public financial aid
funds - as long as the student does not default on
their loan within two years of dropping out.

The Career College Association, the lobbying arm of
publicly traded colleges, finds all this to be
irrelevant. It relies on a different type of indicator
from the rest of the higher education sector to measure
the success of its for-profit colleges: stock prices.
Remarkable. We see the disproportionate flourishing of
"schools" whose primary concern has nothing to do with

The Private Lenders: Securitization as Usual

The two largest holders of student loans are SLM Corp
(SLM) and Student Loan Corp (STU), a subsidiary of
Citigroup. SLM -Sallie Mae-  was originated as a
Government Sponsored Enterprise (GSE) in 1972. The idea
was to prime it for eventual privatization. In 2002
Sallie Mae shed the its GSE status and became a
subsidiary of the publicly traded holding company SLM
Holding Corporation. Finally, in 2004 the company
officially terminated its ties to the federal

As the nation's largest single private provider of
student loan funding, SLM has to date lent to more than
31 million students. In 2009 it lent approximately $6.3
billion in private loans and between $5.5 billion and
$6 billion in 2010.

In the 1990s, well before its full privatization,
Sallie's operations were increasingly swept into the
financialization of the economy. It jumped whole hog
onto the securitization bandwagon, lumping together and
repackaging a large portion of its loans and selling
them as bonds to investors.

SLM created and marketed its own species of asset-
backed securitized student loans, Student Loan Asset
Backed Securities (SLABS). When derivatives trading
went through the roof following the 1998 repeal of
Glass-Steagal, increasingly diverse tranches of Sallie-
Mae-backed SLABS entered the market. The company is now
also buying  and selling the obligations of state and
nonprofit educational-loan agencies.

Student loans were included in the same securities that
are blamed for the triggering of the financial crisis,
and financial products containing these same student
loans continue to be traded to this day. The health of
these tranches and securities is, as we have seen,
highly suspect.

SLM's risk was minimized as long as the feds guaranteed
its loans. But as part of last March's health care
legislation, starting in July 2010 federally subsidized
education loans were no longer available to private
lenders. What do education loans have to do with health
care? Since the government took federal loan
originations in-house, making them available only
through the Department of Education, it no longer has
to pay hefty fees (acting as the guarantee) to private
banks. The Obama administration expects to save $68
billion between now and 2020. $19 billion of this will
be used to pay for the $940 billion health care bill.

While there appears to be no relief for student
borrowers, private banks manage to survive apparent
setbacks just fine. SLM will do quite well despite the
withdrawal of government backing. The company
anticipated the change in government lending policy by
executing an ingenious trick as a borrower. Early last
year it made its insurance subsidiary a member of the
Federal Home Loan Bank of Des Moines, which agreed to
lend to big-borrower SLM at the extraordinary rate of
.23%. And anyhow,  subsidized loans are almost always
insufficient to cover the entire cost of a college
degree. For a while the student gets to enjoy the
benefits of a government loan. Interest rates are lower
and during deferment interest does not accrue. But
eventually many students must also take out a private
loan, usually in larger amounts and with higher
interest rates which continue to mount during

The Worst-Case Scenario: Going Bankrupt

Credit card and even gambling debts can be discharged
in bankruptcy. But ditching a student loan is virtually
impossible, especially once a collection agency gets
involved. Although lenders may trim payments, getting
fees or principals waived seldom happens.

The Wall Street Journal ran a revealing report on the
kinds of  situation that can lead to financial
catastrophe for a student borrower. ("The $550,000
Student Loan Burden: As Default Rates on Borrowing for
Higher Education Rise, Some Borrowers See No Way Out",
Feb. 13, 2010) Here is an excerpt illustrating the toll
that forced indebtedness can take on the student

"When Michelle Bisutti, a 41-year-old family
practitioner in Columbus, Ohio, finished medical school
in 2003, her student-loan debt amounted to roughly
$250,000. Since then, it has ballooned to $555,000.

It is the result of her deferring loan payments while
she completed her residency, default charges and
relentlessly compounding interest rates. Among the
charges: a single $53,870 fee for when her loan was
turned over to a collection agency.

Although Bisutti's debt load is unusual, her experience
having problems repaying isn't. Emmanuel Tellez's
mother is a laid-off factory worker, and $120 from her
$300 unemployment checks is garnished to pay the
federal student loan she took out for her son.

By the time Tellez graduated in 2008, he had $50,000 of
his own debt in loans issued by SLM... In December, he
was laid off from his $29,000-a-year job in Boston and

Heather Ehmke of Oakland, Calif., renegotiated the
terms of her subprime mortgage after her home was
foreclosed. But even after filing for bankruptcy, she
says she couldn't get Sallie Mae, one of her lenders,
to adjust the terms on her student loan. After 14 years
with patches of deferment and forbearance, the loan has
increased from $28,000 to more than $90,000. Her
monthly payments jumped from $230 to $816. Last month,
her petition for undue hardship on the loans was

Indebted Students' Job Prospects

Most of those affected by the meltdown of 2008 had
completed their education and were either employed or
retired. The student loan debt bubble signals a
generation that enters the work of paid work saddled
with debt and earnings prospects poorer than what job
seekers could expect during the period of the longest
wave of sustained economic growth and the highest wages
in US history, 1949-1973.

According to the National Association of Colleges and
Employers more than 50 % of all 2007 college graduates
who had applied for a job had received an offer by
graduation day. In 2008, that percentage tumbled to 26
percent, and to less than 20 % in 2009. And a college
education has been producing diminishing returns. For
while a college degree does tend to correlate with a
relatively high income, during the last eight to ten
years the median income of highly educated Americans
has been declining.

Every two years the Bureau of Labor Statistics issues
projections of how many jobs will be added in the key
occupational categories over the next ten years. The
projected future jobs picture indicates that the grim
employment situation is not merely a temporary
reflection of the current unusually severe downturn.

BLS releases two job projections, on the Fastest
Growing Occupations and on  Occupations With the
Largest Job Growth. BLS focuses on the former, where
the two fastest growing occupations, biomedical
engineers and network systems and data communications
analysts, require a college degree.  BLS  comments that
occupations requiring postsecondary (a bachelor's
degree or higher) credentials will grow fastest.

But we need more information, about  the degree
requirements of the total number of job categories
listed in both projections, and about the number of new
jobs expected to materialize in each projection.

Of the total jobs listed, only one of five require a
postsecondary degree. By far the fastest growing
category is biomedical engineers, projected to grow
72.02 %, from 16,000 in 2008 to 27, 600 in 2018. That's
11,600 new jobs. Is that a lot? Well, compared to what?
The percentage figure, 72.02, is high, but what about
the number of new jobs? Let's compare that Fastest
Growing occupation with retail salespersons, the fifth
occupation on the Largest Growth list. Retail sales
workers will grow by a mere 8.35 %. But that amounts to
almost 375,000 new jobs, an increase from 4,489,000
jobs in 2008 to 4,863,000 jobs in 2018. Compare that to
the 11,600 new jobs at the top of the Fastest Growing
list. Just do the simple math on all the categories on
both lists: the majority of new jobs are projected to
be low-paying.

Most new jobs will offer the kind of wage we would
expect from an economy in which, according to one of
president Obama's most repeated phrases, "we" will
"consume less and export more". BLS avers as much when
it projects that fewer than 12 million of the 51
million "job openings due to growth and replacement
needs," will require a bachelor's degree.

The dire situation of this generation of college
students sends a clear message regarding the
responsibility of a democratic government. Infusions of
liquidity supposedly intended for working people are
presently mediated by banks, which are the direct
recipients of the funds. This policy has had virtually
no effect on the fortunes of wage earners, even as it
has enabled a windfall for the banks. What is needed is
New-Deal-style direct aid to working people, in the
form of wage supports (e.g. living wage legislation),
direct aid to students at low interest rates,
government creation of jobs in education, health care
and infrastructure improvement, and strict regulation
both of the recruitment practices and tuition of for-
profit colleges and of the predatory practices of
private lenders.

Elizabeth Warren's brainchild, the Consumer Financial
Protection Bureau, is a good place to start. The Bureau
promised to address student loans, and has mentioned
setting rules regulating advertising and
creditworthiness. But should the Bureau decide to
regulate usury rates, it will encounter the same kind
of opposition that insurance companies displayed toward
the regulation of premiums, co-pays and deductibles
prior to the March 2010 health care legislation.

Progressives can begin to counter this opposition, and
address the overall debt crisis, if we organize to
press this agenda, and refuse to support at the ballot
box candidates who are deaf to our demands. Alan Nasser
is professor emeritus of Political Economy at The
Evergreen State College in Olympia, Washington. He can
be reached at [log in to unmask] Kelly Norman is an
independent researcher, a graduate student in Public
Administration, and works for Admissions at Evergreen.


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