Wall Street’s new student loan scheme: Subprime loans are coming to financial aid - Salon.com:
Wall Street’s new student loan scheme: Subprime loans are coming to financial aid
Slimy new loan options proliferate, as Wall Street looks to do for education what it did to the economy
(Credit: Sean Pavone, Krivosheev Vitaly via Shutterstock/Salon)
Wall Street wants to own your education destiny.
To the old saying about “death and taxes,” you can now add another: debt.
In fact, in contemporary America, debt is likely becoming at least as all-encompassing as the other two.
An increasingly powerful force behind the debt explosion is not what you might expect: not cars, not homes, not healthcare. It’s education.
So the burden of financing education has increasingly fallen on local governments and individuals, who have responded by borrowing money to pay for schooling.
With edu-debt levels mounting higher and higher at every turn, cash-strapped parents, municipal governments and education institutions have turned to solutions from Wall Street.
According to at least one
investment news source, banks are increasingly reluctant to back infrastructure investments like schools, so the financial industry is rushing in to fill the void. “The severely restricted capacity of banks to provide long-term debt for infrastructure deals comes at a time when the need for infrastructure spending across the globe is soaring,” the report notes. “A great deal of debt will go to the bond markets. But they will not be the full solution by any means.”
Instead, an emerging “private loan space” is introducing “a number of new vehicles.”
An alphabet soup of new financial vehicles – SLABS, CABS, PPPs, ISAs – that’s been created in the edu-debt sphere spells disaster, as Wall Street tightens its control of how – or even whether – the nation educates its future workers and citizens.
Turning Students Into SLABS
A lot has been written about college student loan debt, now nearly $1.2 trillion and counting. But too little attention has focused on Wall Street’s role in the run-up.
Recall, when Wall Street speculators wanted a market for subprime mortgages, they created high-risk derivative securities that bundled the mortgages to sell as investments. The speculators have done the same for student loans.
These student loan asset-backed securities, or SLABS, have a performance history that has “been very good, and investors’ rate of return has been excellent,” according to an article in Wikipedia.
A post on the blog for left-leaning advocacy Demos explains, “Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent.”
It’s not hard to see the allure of SLABS. Student loans seem to be an endless stream of revenue as colleges and universities continue to increase tuition, economic conditions and employment transience feed the unemployed back into continuing education, and political leaders urge everyone to attend college. The income stream is nearly guaranteed to pay off because the loans are next to impossible to discharge in bankruptcy.
A Huffington Post article by Chris Kirkham states, SLABS offer “seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default.”
Indeed, any attempt to write off the massive student debt would not only have to contend with government reluctance to lose such a profitable revenue source, but would also meet deep-pocketed opposition from the financial industry.
But SLABS are only a subset of Wall Street’s continuously expanding
man spread in the edu-debt sector.
Selling Schools on CABS And Charters
Much less attention has focused on how government and education institutions are becoming more and more saddled with debt.
According to the website
Governing.com, “Many local governments across the U.S. face steep budget deficits as they struggle to pay off debts accumulated over a number of years. As a last resort, some filed for bankruptcy.”
School district bankruptcies are occurring with alarming frequency,
USA Today reported last year. “
California saw a record number of school districts in fiscal distress in 2012; currently, eight school districts have negative certifications, meaning that based on current projections, the school districts will not meet their financial obligations for fiscal 2014 or 2015. Another 41 school districts may run out of money by fiscal 2016.”
California schools trying to stave off insolvency have increasingly turned to the financial sector for help. Writing at the Web of Debt blog site,
Ellen Brown explains how financial brokers have promoted “something called ‘capital appreciation bonds’ (CABs) as a tool. … CABs have now been issued by
more than 400 California districts, some with repayment obligations of
up to 20 times the principal advanced (or 2,000 percent).”
