Student Loans: The Other Killer of Our Economy


Standing ovation to Yves Smith from Naked capitalism and Moe Tkacik for his article on the 40 year war on students. It is like eating our young. We want a country that is vibrant, that offers hope for advancement, and that provides superior services and products. But we alone make it impossible for most students to justify the cost of higher education.
As Graeber points out in his wonderful book DEBT: The first 5,000 Years, debt is a moral and political issue and has no precise meaning because it refers to money which has no precise meaning. Those dots on a screen are not money. They are representations about comparative wealth. The bullying atmosphere of this country has turned morality on its head. Those that commit the most atrocious acts in dealing with the unsophisticated consumer are allowed to roam free while the lives of their victims are turned into chaos and despair.

We have transformed morality into something that only applies to ordinary folks and not to people who achieve unspeakable wealth. A businessman walks away from building a home because he sees no possibility of profit or even breaking even and there is no stigma against him, he is not prevented from doing so and the bank is stuck with the result. Then along comes the myth of securitization and the bank is not stuck with that result or any other result. And the ordinary person who wants to walk from the the home because there is no hope for profit or breakeven is said to violating some code of morality — even some say a sin against humanity and God.

We want the quality and productivity but we are not willing to pay for it. We did very well when the cost of education was affordable and easily financed and paid for with reasonable assumptions about employment. We are doing terribly now because we got away from that and made education a profit seeking venture for the finance sector.

The banks had a field day when they were allowed to act as intermediaries in the government backed student loan market. All the same things that happened with mortgages were happening with student loans, including the non-dischargeability of a debt.

In my opinion, the government backing should be construed as a non-transferable guarantee to the loan originator. Government backing (i.e, our tax dollars) should not be the vehicle for making money multiple times on the same loans. Nor should the government backing be tacked on as an inducement for investment where diversification addresses the risk of loss. In this case, like the mortgage market, people were encouraged, even pushed into loans they either could not afford or didn’t need.

Just like the mortgage market, with the originator not exposed to any risk, the goal was to move as much money as possible to justify the fees and “trading profits” the investment banks were taking. And just like the mortgage market the only proper remedy is to reduce rates and principal to correctly reflect the value of the loan at origination instead of enforcing the false and fraudulent value of the loan as represented by the originator and its agents.

This may turn out to be a parallel source of litigation and legislation as the country struggles with over $1 trillion in student debt, much of which cannot be paid because the students are unemployed resulting from a recession that was and remains so deep that it rivals the great depression.

Reality check: you can keep those loans and mortgage bonds on the books as long as your accountants and regulators are willing to play the game, but eventually they must be written down to real value. The same holds true for government backed loans. The government must take the hit here because they are the pocket of last resort.

And anyone arguing for “unchaining” restraints on Wall Street is speaking in code to those in the 1%. He is saying “we don’t have to settle for most of the country’s wealth, we can have it all.” But such people ignore history when income and wealth disparity becomes so severe that people cannot keep a roof over their heads or food on the table, things change. My message to those anti-regulators is be careful what you wish for — if you get it, the people might turn around and get you.

Moe Tkacik: Student Debt – The Unconstitutional 40 Year War on Students

Yves here. I’m featuring this post not simply because the student debt issue is coming to serve as a form of debt servitude, but also because the backstory is so ugly. Student debt is the only form of consumer lending where the obligation cannot be discharged in bankruptcy. This story chronicles how persistent bank lobbying, including disinformation portraying student borrowers as likely deadbeats, led to increasingly draconian treatment of student loans. A second reason for posting it is that due to technical difficulties at Reuters, the original ran without the hyperlinks, which are of interest to serious readers.

By Moe Tkacik, a Brooklyn-based journalist who writes at Das Krapital. First published at Reuters.

Lobbyists’ trillion dollar revenge on nerds  

You have probably mentally catalogued the student loan crisis alongside all the other looming trillion dollar crises busy imperiling civilization for the purpose of enriching the already rich. But it is different from those crises in a few significant ways, starting with the fact that the entire student loan business is arguably unconstitutional.

You don’t have to take it from me: a preeminent bankruptcy scholar made precisely this argument under oath before Congress. In December 1975, when Congress was debating the first law that made student loans non-dischargeable in bankruptcy, University of Connecticut law professor Philip Shuchman testified that students “should not be singled out for special and discriminatory treatment,” adding that the idea gave him “the further very literal feeling that this is almost a denial of their right to equal protection of the laws.”


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