to many Americans, higher
education in the United States has been slowly, over time
"financialized" and transformed from a public service into a
lucrative cash cow for private investors.
This is the second in an important two-part article by Ellen Brown on
burden that this country's students face. The first part ran Dec. 28,
the Sky Valley Chronicle and can be found here.
& opinion by Ellen Brown
The lending business is heavily stacked against student
Bigger players can borrow for almost nothing, and if their investments
work out, they can put their corporate shells through bankruptcy and
Not so with students.
loan rates are high and if they cannot pay, their debts are not
dischargeable in bankruptcy. Rather, the debts compound and can dog
life, compromising not only their own futures but the economy itself.
should not be asked to pay more on their debt than they can afford,”
Donald Trump on the presidential campaign trail in October 2016. “And
should not be an albatross around their necks for the rest of their
But as Matt Taibbi points out in
a December 15 article, a number of proposed federal changes will make
harder, not easier, for students to escape their debts, including
some existing income-based repayment plans, harsher terms for graduate
loans, ending a program to cancel the debt of students defrauded by
diploma mills, and strengthening “loan rehabilitation” – the recycling
defaulted loans into new, much larger loans on which the borrower
up paying only interest and never touching the principal.
agents arranging these loans can get fat commissions of up to 16
example of the perverse incentives created in the lucrative student
market. Servicers often profit more when borrowers default than when
smaller amounts over a longer time, so they have an incentive to
pushing students into default rather than rescheduling their loans.
has been estimated that the government spends $38 for
$1 it recovers from defaulted debt. The
other $37 goes to the
If you have a
student loan, you
may be part of a SLAB
securitization of student debt has compounded these problems. Like
student loans have been pooled and packaged into new financial products
are sold as student loan asset-backed securities (SLABS).
a 2010 bill largely eliminated private banks and lenders from the
student loan business, the “student loan
complex” has created a $200 billion market that allows banks to cash in on
student loans without issuing them.
80 percent of SLABS are government-guaranteed. Banks can sell, trade or
these securities, just as they did with mortgage-backed securities; and
create the same sort of twisted incentives for loan
servicing that occurred with mortgages.
to the Consumer Financial Protection Bureau (CFPB), virtually all
with federal student loans are currently eligible to make monthly
indexed to their earnings. That means there should be no defaults among
abuses of the home
foreclosure fraud era
one in four borrowers is now in default or
struggling to stay current. Why? Student borrowers are
mishandling of accounts, unexplained exorbitant fees, and outright
they are bullied into default, tactics similar to those that homeowners
in the foreclosure crisis.
The reports reveal a
repeat of the abuses of the foreclosure fraud era: many borrowers are
obtain basic information about their accounts, are frequently misled,
surprised with unexpected late fees, and often are pushed into default.
Servicers lose paperwork or misapply payments. When errors arise,
find it difficult to have them corrected.
and fraud in handling student loans have brought the Education
loan contractors under fire.
January 2017, the Consumer Financial
Protection Bureau sued Navient, one of the
alleging that the company “systematically and illegally [failed]
every stage of [student loan] repayment.”
a Fair Deal
federal government could relieve these debt burdens, given the
A stated goal of the changes being proposed by the Trump Administration
simplify the rules. The simplest solution to the student debt crisis is
tuition free for qualified applicants at public colleges and
it is in many European countries and was in some US states until
the federal government has the money to lend to students, it has the
spend on their tuition (capped to curb tuition hikes). It would not
on defaults and collections but could turn a profit on the investment,
demonstrated by the seven-fold return from the G.I. Bill. (See Part 1
the government could fund tuition costs and debtor relief with a form
for the people.” Instead of buying mortgage-backed securities, as in
QE1, the Fed could buy SLABS and
return the interest to students, making the loans effectively
were the $16+ trillion in loans made
the largest banks after the 2008
that targeted the real economy could address many other budget issues
including the infrastructure crisis and the federal debt crisis; and
be done without triggering hyperinflation. See my
earlier articles here, here and here.
tool for students:
know your rights
to say, however, the government is not moving in that direction. While
for the government to act, there are things students can do; but first
need to learn their rights.
to a new survey reported
in November 2017, students are often in the dark about key details of
student loan debt and the repayment options available to them. To get
see here and here.
the Borrower’s Defense to Repayment program, you can get your loans completely
discharged if you can prove they were
based on deception or
fraud. That is one of the alternatives the Administration wants to take
so haste is advised; but even if it is taken away, fraud remains legal
for contract rescission. A class action for treble damages against
institutions could provide significant financial relief.
also have greater bankruptcy options than they know. While current
law exempts education loans and obligations from eligibility for
discharge, an exception is made for
test normally used is that paying the loan will prevent the borrower
sustaining a minimum standard of living, his financial situation is
change in the future, and he has made a good faith effort to pay his
According to a 2011 study,
at least 40 percent
of borrowers who included their student loans in their bankruptcy
some or all of their student debt discharged. But because they think
no chance, they rarely try. Only about 0.1 percent of consumers with
loans attempted to include them in their bankruptcy proceedings.
knowledgeable attorney is advised.)
relief as a class, students need to get the attention of legislators,
means getting organized. Along with degree mill fraud and contract
cause of action ripe for a class action is the student exclusion from
bankruptcy protection, a blatant violation of the “equal protection”
the Fourteenth Amendment. If enough students filed for bankruptcy under
“undue hardship” exception, just the administrative burden might
legislators to change the law.
to the Rescue?
the federal government won’t act and individual action seems too
however, there is a third possibility for relief – state-owned banks
out private middlemen and recycle local money for local purposes at
substantially reduced rates.
country’s sole model at the moment is the Bank of North Dakota, but
states now have strong public banking movements that could mimic it. A
2014 article in the Wall Street Journal reported that the BND was more profitable even
J.P. Morgan Chase and Goldman Sachs. The profits are used to improve
and public services.
According to its 2016
annual report, the BND’s
second largest loan category after business loans is for education,
a third of its portfolio going to student loans.
of December 2017, the BND’s student loan rates were
variable and 4.78% fixed, or about 2% below the federal rate (which
4.45% to 7% depending on the type of loan), and about 5% below the
(currently averaging 9.66%
fixed and 7.81% variable
interest). The BND also acts as the
servicer of these
loans, bypassing the third-party servicers abusing the system in other
2014, the BND launched its DEAL One Loan program, which offered North
residents a unique option to refinance all student loans, including
into one loan with a lower interest rate and without fees. DEAL loans
guaranteed by the North Dakota Guaranteed Student Loan Program, which
administered by the BND.
BND also makes 20-year school construction loans available at a very
interest. Compare that to the Capital
Appreciation Bonds through
which many California schools have been forced to borrow to build
infrastructure, on which they have wound up owing as much as 15 times
BND’s loan programs have helped keep North Dakota’s student default
overall student indebtedness low. As of January 2017, the state had
the second lowest student
default rate in the
country and was near the bottom of the list in student
indebtedness, ranking 44th.
that to its sister state South Dakota, which ranked number one in
public banking movement is now gaining ground in
states across the country. A number of cities have passed resolutions
their money out of Wall Street banks that practice fraud as a business
New Jersey, Governor-elect Phil Murphy has made a state-owned bank the
basis of his platform, with student loans one of three sectors he
focus on. If that succeeds, other states can be expected to follow suit.
need to free our students from the system of debt slavery that has
financialized education, turning it from an investment in human capital
tool for exploiting the young for the benefit of private investors.
banks can make the loan process fair, equitable and affordable; but
creation will be fought by big bank lobbyists. An organized student
could be an effective counter-lobby.
debt and austerity have been used as control mechanisms for subduing
people. It is time for the people to unite and take back their power.
An earlier version of
this article was first
published on Truthdig.org.
Brown is an attorney, chairman of the Public
Banking Institute, and author of twelve books
including Web of Debt and The Public Bank Solution.
thirteenth book titled The Coming Revolution in
Banking is due
out soon. Her 300+ blog articles are posted at EllenBrown.com.