Banking on Student Debt

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Student debt is the new growth zone for banking revenues. With no student bankruptcy permitted, this is akin to a low risk revenue stream for the financial industry, now second in size to mortgage debt.

Solution to Student Debt is to Get the Banks Out of the Education Business

Michael Hudson: Crippling student debt, which is also a drag on the whole economy, developed as governments pushed the burden of higher education costs onto students and pushed them into the arms of the banks –

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

A recent New York Times editorial about the student debt says this:

“The Federal Reserve Bank of New York recently released a study showing just why many young people are beingstrangled by student loans. It found that 43 percent of 25-year-olds had student debt in 2012, an increase from 27 percent in 2004.”

Further on in the editorial, they say:

“According to the new study, student debt almost tripled between 2004 and 2012, and isapproaching $1 trillion, while the percentage of borrowers who were more than 90 days delinquent had risen to 17 percent, from 10 percent in 2004. In addition, student loan debt was the only kind of household debt that continued to rise through the Great Recession, and it is now the second largest aftermortgage debt.”

Further on:

“The Federal Reserve study estimates that nearly 18 percent of borrowers now have student loan debts of $25,000 to $50,000, and nearly 4 percent have balances greater than $100,000.”

Now joining us to talk about the underlying causes of the student debt, possible solutions to it, is MichaelHudson. He was a Wall Street financial analyst and is now a distinguished research professor of economics at the University of MissouriKansas City. His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us, Michael.

MICHAEL HUDSON, RESEARCH PROF., UMKC: Thank you, Paul.

JAY: So let’s get into the sort of underlying systemic reasons why there was so much student debt, and thenlet’s talk about what could be done about it.

HUDSON: Well, one reason there’s so much student debt is the educational system has been transformed in the last generation. When I went to school at the University of Chicago, it cost about $500 a semester for me to go there in the 1950s. Now it’s about $25,000 a semester.

JAY: Twenty-five thousand’s a deal compared to some schools.

HUDSON: To some schools. People had thought that getting a higher education was going to be their way into the middle class. But now it’s become a larger burden on them than the mortgagedebt, and especially now that the lower fifth of Americans can’t get mortgage debts. Student loans can absorb 25 or 30 percent of their income, as much as housing used to do.

So the problem is that education has been financialized. Just like roads are being turned into toll roads and sold off to Wall Street firms, you’ve had the school system basically become an appendage of the commercial banking system.

When The New York Times or Wall Street Journal talk about student debt, they write from two perspectives. One, how can politicians save the banks from losing money on the debt? The answer is, by tightening the screws on the debtors. Banks got the government to guarantee these loans, and now politicians say, “We’ve got to protect taxpayers and make these deadbeat students to pay.”

Today’s Wall Street Journal wrote that student loans are just another example of Obama’s socialism. But it’s certainly not socialism when you don’t have the state running the education system and providing the financing. It’s privatization and financialization. The past ten years have seen much less public support for education, less revenue sharing from the government, less state support, and so tuition rates have risen.

At the same time, you’ve had an increasing financialization of the organization of the schools. University presidents, their cronies and middle management with no-show jobs have proliferated. The top administrators, people like the newTreasury secretary, Jacob J. Lew, was at NYU and and there is now a big to-do over $900,000 salary (even more than the university president), essentially to make sweetheart deals with banks to make exorbitant student loans to finance the highest tuition rates in the country. Lew then got $700,000 in severance when he left voluntarily to cash out with an even-higher paying job at Citigroup.

This week New York University’s tenured faculty is holding a no-confidence vote in the president of the university, John Sexton, because they say that he turned a school into an adjunct of the bank to make a killing in government-guaranteed student loans.

In New York City, the second- and third-largest real estate owners were Columbia University and New York University. So in essence, New York University was a real estate company that got tax exemption on its holdings in exchange for holding classes in some of its universities. When New York University bought a spaghetti company some years ago, it tried to claim that this was part of the educational process and wanted tax exemption for its earnings. The case went to court and NYU wasn’t allowed to pull that trick.

Despite the fact that the university has raised the tuition sharply, this hasn’t been reflected in hiring quality professors. The university is run like a financial manager would run a company that’s been raided. It has steadily been replacing full-time tenured professors with part-timers, paid only a fraction of the full-time salary. Dr. Sexton said last week that NYU is in business to make money, basically, and if it can save money by hiring part-time professors at one-tenth the rate of tenured professors,it’s going to do it. This is happening across America.

The rising tuition has been used mainly to hire administrators. So many are cronies with no-show jobs that Sociology Professor Jeff Goodwin has led a faculty complaint to the New York State Attorney general accusing Dr. Sexton of paying “extravagant salaries.” He has written a New York Times op-ed (“The War in Washington Square,” March 21, 2013) pointing out that “Some experts believe there may even be something illegal in the way Dr. Sexton has rewarded them.”

So the question is, how are schools going to make the students pay for the education they need as a kind of union card to get a job in today’s world? In 2005 the credit-card companies and banks rewrote the bankruptcy law so that the government would guarantee student loans. This nurtured a vast $1 trillion market for the banks in making student loans. This market is now bigger than the banks’ credit card business. And at the same time, the Republicans in Congress – or the Democrats got the Republicans to pressure them to say – that if the Treasury is guaranteeing these loans, politicians have to make sure that the students who borrow cannot wipe out this loan by bankruptcy.

This is a radical distortion of the more humanitarian treatment of debtors for the past eight centuries. In America, and indeed normally in every country, people who go into debt that they can’t pay are allowed to wipe out the loan by declaring bankruptcy. But today’s students are graduating with a $200,000, $300,000 worth of student debt. Many are unable to get jobs in today’s debt-ridden economy, and are obliged to live at home with their parents. They cannot afford to marry and form new households.

JAY: In fact, there was a recent study that the majority of new jobs won’t even require a high school diploma, never mind a university education.

HUDSON: That’s right. But all the same, getting a university education is the entry price to the middle class. But instead of assuring entry, it’s become a road to debt peonage.

JAY: Okay. So if you look at the New York Times editorial I was quoting, when it comes to solutions, it’s a public-private partnership for refinancing. It’s not about breaking the chains between students and banks.

HUDSON: That’s right. The result is to raise the cost of living tremendously.

A hundred years ago everybody thought of education as a public service, much like roads and other basic utilities. The idea was to keep down the price of public services, so that you lower the cost of living. That lowers the cost of business, because companies don’t have to pay new employees so much that they have to pay for these free or subsidized public services. The idea was to make the economy more competitive.

When people are talking about de-industrialization of America, you look what an engineer, doctor, dentist or lawyer has to pay to get through school and see why American labor is being priced out of the global market. So much of theincome – 25 to 30 percent – goes to pay the student loan debt, and up to 43 percent now under government guarantees just for mortgage debt. After paying 15% FICA withholding for Social Security and Medicare, along with other income and sales taxes, you’ve earmarked about 70 percent of income even before people are able to try to buy the goods and services they produce. The income they have to pay the banks is causing debt deflation and shrinking markets, causing unemployment and de-industrialization.

So what the banks and their Washington politicians have done by insisting on tight credit standards for the debtors – by not letting them wipe out the debt through bankruptcy, and by not reducing the student loans to the real ability to repay – is contributing to depression.

The public sector no longer is running schools like a public utility. If they regulated them like an electric or gas company, they wouldn’t let the uppermanagement be taking more and more money. They wouldn’t let Mr. Lew, Dr. Sexton and their cronies siphon off tuition at the top, press down the professors,lower teaching standards and tell the students, in effect, that the university is not here to give you education as such, but to charge for the privilege of giving them a diploma to get a middle class job. They’re saying, “It.s going to cost you. Your money or your life.”

JAY: The demand that came out of the Quebec student strike last summer, with hundreds of thousands of people out in the streets, is a demand you can see in student movements in different parts of the world: that a university, as all education, should be a right, and there should be no tuition. Is that what it means when you’re saying education should be a public utility?

HUDSON: Yes, and that’s how it used to be 100 years ago. For instance, in New York City it now costs more money to get your child into kindergarten and grade school than it does to go to college in most universities throughout the whole country.

JAY: Private. Private. Private.

HUDSON: Private school. America originally was divided into squares for local school districts. Lewis HenryMorgan’s Ancient Society described how the American tax system shaped the nation’s geography by public education. Each city or school district financed its public schools by local property taxes. Higher taxes meant better (or at least, more expensive) schools.

The federal government sought to even things out by making national grants to localities. But now there’s been a disconnect between property taxes and education. Property owners object to paying taxes, and schools themselves don’t have to pay property taxes. The government is refusing to pay, and is pushing the cost of education onto the students. And because students haven’t yet got ajob, they’ve got to borrow the money.

This obviously is the opposite of socialism. It has turned the educational system into an adjunct of the banking system and the real estate system, just to make more money for a vehicle for banks to make money that is guaranteed. They’re guaranteed at a markup, making student loans their most profitable area of lending. That’s not really a compensation for risk, because the government bears it – and the students take a risk of not being able to find a job. The only risk that banks take is that they can’t give enough money to pay their pet politicians to guarantee to pay for the defaults that you mentioned at the beginning of this interview.

If you graduate and the economy’s shrinking and there are no jobs, of course you’re not going to be able to pay. Of course you’re going to live with your parents unless your parents give you a trust fund. And you’re not going to be able to buy a new apartment. The student loan debt is part of the overall financialproblem that’s depressing the economy right now.

JAY: Great. Thanks very much, Michael.

HUDSON: Thank you.

JAY: And thank you for joining us on The Real News Network.

End

Comments/ Discussion:

Don Casey thank you for that report. I would like more light shed on this. I was a student of university, and borrowed $8000,000 for my education in the early 90’s. Now that loan has been sold four times to different banks, and each time they notify me that they sold it they charge me with $1200 -$1500 in various fees. They say I now owe them $42.000. How does a $8000 loan go to over $40.000 so quickly? I gave the banks the finger a decade ago when I saw what was happening. Now I suspect my loan isowned by some super computer in Indonesia. It’s criminal what’s occurring out there, and no one does the real story on it.

Ashli Hilton same here- somehow mine has doubled!

F this College is a scam. I got a higher quality education at my high school than college. The plan is simple make debt slaves out of everyone, and lock theminto low wage service jobs. You will spend your whole life now paying back money you borrowed when you were 18 – 30 and unlike before you cannot use bankruptcy to eliminate this debt. It’s all BS.

Don Casey student loans are a criminal enterprise, retarding the lives of the young.

Don Casey P.S. Dr. Michael Hudson is absolutely right about his insinuation that a college degree is like pass to the middle class. The Banks know this, and play off this. They are scoundrels. The notion that you can’t declare bankruptcy on student loans (how draconian) reveals how unbalanced unfair this debt game is.

Flick Paid over $6K for an initial loan of $1.2K in ’74 from Citibank. Current balance owed – $5K+. Fed loan program over – now with some outfit called Aspire… 3rd or 4th vulture firm so far I believe middle manning me to death. Won’t tell what bank is behind them. It will never end. Lord help kids today.

TeeJae Yet another attempt to privatize everything public. The same is occurring in the K-12 system. State legislators across the country are defunding public education (using the corrupt standardized testing program as the tool) to the point of forcing districts to either desperately accept corporate sponsorship just to survive, or shut down and enabling private schools to pop up in their place. Switching gears, I’m curious to know where credit card debt falls in all of this. The article says mortgage debt is #1 and student loan debt is #2. Before the recession, the majority of people were living well beyond their means and racking up enormous credit card debt, and I can’t see how the recession would’ve changed that way of thinking. And when taking the population as a whole, since the recessionhit, it seems logical that there would be less people going to college and buying homes, and more people using their credit cards just to get by; hence, making credit card debt #1.

Melissa Schraiber Not only our student loans terrorizing graduates, but it’s not healthy for our economy. It actually puts less in our pockets and then the inability to purchase bigger ticket items like houses, cars, and delays marriage. And what most fail to realize, as I did, is that they should stay away from private loans. I learned the hard way as mentioned in my post http://www.fatwallet.com/blog/…. I hope this continues to come to light and students and parents of studentsunderstand this!

gregorylkruse: A very sobering report for a person who’s daughter is a senior and headed to college next year.

William: Michael Hudson is the best. Really appreciate his work. Any time the Real News can have him own it’s a great thing.

Abha Khabar: If you think Diana`s story is something,, 3 weaks-ago my aunts step daughter recieved a check for $8480 just sitting there a fifteen hour week from there house and their friend’s sister-in-law`s neighbour did this for nine months and recieved a check for over $8480 parttime from a mac. follow the guidelines on this address… snap11.comisthe link

Don Casey • a day ago: thank you for that report. I would like more light shed on this. I was a student of university, and borrowed $8000 for my education in the early 90’s. Now that loan has been sold four times to different banks, and each time they notify me that they sold it they charge me with $1200 -$1500 in various fees. They say I now owe them $42.000. How does a $8000 loan go to over $40.000 so quickly? I gave the banks the finger a decade ago when I saw what was happening. Now I suspect my loan is owned by some super computer in Indonesia. It’s criminal what’s occurring out there, and no one does the real story on it.

F this • a day ago: College is a scam. I got a higher quality education at my high school than college. The plan is simple make debt slaves out of everyone, and lock them into low wage service jobs. You will spend your whole life now paying back money you borrowed when you were 18 – 30 and unlike before you cannot use bankruptcy to eliminate this debt. It’s all BS.

Don Casey • a day ago: student loans are a criminal enterprise, retarding the lives of the young.

P.S. Dr. Michael Hudson is absolutely right about his insinuation that a collegedegree is like pass to the middle class. The Banks know this, and play off this. They are scoundrels. The notion that you can’t declare bankruptcy on student loans (how draconian) reveals how unbalanced unfair this debt game is.

Flick • a day ago

Paid over $6K for an initial loan of $1.2K in ’74 from Citibank. Current balanceowed – $5K+. Fed loan program over – now with some outfit called Aspire… 3rd or 4th vulture firm so far I believe middle manning me to death. Won’t tellwhat bank is behind them. It will never end. Lord help kids today.

TeeJae • a day ago: Yet another attempt to privatize everything public. The same is occurring in the K-12 system. State legislators across the country are defunding public education (using the corrupt standardized testing program as the tool) to the point of forcing districts to either desperately accept corporate sponsorship just to survive, or shut down and enabling private schools to pop up in their place. Switching gears, I’m curious to know where credit card debt falls in all of this. The article says mortgage debt is #1 and student loan debt is #2. Before the recession, the majority of people were living well beyond their means and racking up enormous credit card debt, and I can’t see how the recession would’ve changed that way of thinking. And whentaking the population as a whole, since the recession hit, it seems logicalthat there would be less people going to college and buying homes, and morepeople using their credit cards just to get by; hence, making credit card debt #1.

Melissa Schraiber • a day ago: Not only our student loans terrorizing graduates, but it’s not healthy for our economy. It actually puts less in our pockets and then the inability to purchase bigger ticket items like houses, cars, and delaysmarriage. And what most fail to realize, as I did, is that they should stayaway from private loans. I learned the hard way as mentioned in my post http://www.fatwallet.com/blog/…. I hope this continues to come to light and students and parents of studentsunderstand this!

gregorylkruse • a day ago: A very sobering report for a person who’s daughter is a senior and headed to college next year.

William • 3 hours ago: Michael Hudson is the best. Really appreciate his work. Any time the Real News can have him own it’s a great thing.