Wednesday, April 24, 2013

Student Debt and the Stalled Recovery

As many people now know, student loan debt has surpassed $1 trillion, but few people understand the structure and effects of this type of educational mortgage system. First of all, a recent New York Federal Reserve report shows how recent college graduates have contributed to the recession by not buying cars and homes like they once did. Due to their high level of student debt, low employment rates, and bad credit ratings, college grads cannot afford to contribute to the consumer economy.

More importantly, while students with debt graduate with on average $26,000 in loans, this amount soon balloons once these students fail to make their payments. The New York Fed reports that 31% of federal student loans are in default, and only 56% of all student loans are in repayment (the rest are in forbearance or deferral). Of course one of the major reasons why students are not able to pay back their loans is that they cannot find jobs, and the jobs they are finding often come with low wages. In fact, according to a recent Pew survey, only 42% of college grads have jobs requiring college degrees. For the most part, only students with diplomas in medicine, engineering, and computer science are finding jobs that match their education.

Meanwhile, as a record number of students default on their loans, these debts are being sliced and diced and sold on the secondary market, just like mortgages. In this toxic brew of debt, speculation, and federal guarantees, we may be seeing the roots of the next big financial meltdown. Student loans are a great target for speculation and exploitation because unlike most forms of debt, they are exempt from bankruptcy protections, the Truth in Lending Act, the FDCPA, state consumer protection laws, state usury laws, and the statute of limitations. Yes, student loans are ripe for a speculation bubble due to the fact that they are backed by the federal government, and there is virtually no way for the debtors to escape from their escalating debt.

Stepping back, we can now see that perhaps the most devastating result of the state defunding of higher education is the creation of a generation of indentured students who will never be able to use their education in a productive manner. (many of the sources and ideas for this blog entry come from the blogger and avid commenter Unemployed_Northeastern)


  1. Second to last paragraph is wildly misleading. You surely know almost all recent student loans are Direct Loans held directly by the federal government right? That stuff is not being securitized. Private debt that could be securitized or speculated on is a small fraction of actual student debt being pumped out there.

  2. A minor point: I'm quite sure that all student debt is considered consumer debt under the FDCPA and hence is covered by it. At any rate, the FTC, who has regulatory oversight over enforcement of the FDCPA, thinks so. I don't know whether there is federal case law on this, but I would be surprised if it wasn't covered.

    Of course, of the statutes you list, the FDCPA is the least helpful, since it only regulates collection activity, and the damages consumers can recover under it are relatively small. The carve-outs in the bankruptcy code and the lack of a statute of limitations for federally guaranteed loans are the real killer here.

    1. Here is some details on the way student loans have and are being securitized: "Former government entity turned student loan originator, collection agent and debt seller Sallie Mae (SLM) announced that it had sold $1.1 billion worth of new student loan debt securities. The publicly traded firm also noted there was a whopping 15 times more demand for the highest-risk, highest-return batch than there was supply.
      The Wall Street Journal commented that “boom times may be back for the student loan market” as “investors’ hunger for risky loans shows the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.” Since the announcement of the Obama administration’s quantitative easing (QE3) last September, there has been a decided uptick in the purchase of student loan securities. In 2012, SLM sold $13.8 billion worth of these bonds, making $514 million in the fourth quarter, a 12.5 percent increase over the previous year."
      "The market in securitized loans known as SLABS (Student Loans Asset-Backed Securities) was first created in 1992 by the Sallie Mae Marketing Association. SLABS rocketed in popularity with the asset-backed security scam, growing from $75.6 million in 1990 to $2.67 trillion at their height. While overall securitization levels have diminished, private student loans (with generally higher interest rates than government direct loans) from such lenders as Sallie Mae and Discover are still packaged into bonds and sold to institutional investors.
      About $11 billion worth of SLABS were created in each of the last three years. This year through February, dealers sold $5.6 billion of student-loan-backed securities, more than triple the figure for the same period in 2012, according to Asset-Backed Alert.

      Of the $1 trillion in student loan debt, between a quarter and a third is now securitized into SLABS. As with the subprime racket, SLABS are often bundled with other kinds of loans for trading purposes."

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