Late yesterday, I was writing about the Occupy movement’s second stage, and a group called Occupy Student Debt.
My initial read of the group was that it was one that was in favor of student loan relief, but shading towards outright cancellations, and maybe even supporting the default group. (The defaulters strike me as the same kind as those who say “let’s all hang ’em!” about the politicians. Everyone can feel the sentiment, but it’s not a practical answer.) Occupy Student Debt is NOT on the defaulter’s side.
As I dug deeper, though, I discovered that Occupy Student Debt is more about the serious problems that so-called “private” student loans are causing to people who attended college.
Let me backtrack a bit for my overseas readers.
In America, most colleges rely on debt financing for at least part of their operations. This started in the 1950’s, but grew and grew, to where, in 2011, it’s a one trillion dollar ($1 000 000 000 000) “industry”.
The loans made in the 1950’s and ’60’s were small, and on favorable terms. But as the concept radicalized into some kind of debt-servitude, the favorable terms began to disappear. First, the loans used to be exclusively at a “subsidized rate”, usually zero percent. Then–because it was the era of high inflation–Congress allowed rates like 9% or 10%. Next, private industry was allowed to get into the act. At first, they could raise capital and make federally-backed loans. If the students defaulted, those companies would be made whole. Then, it came to where they could offer their own loans, which weren’t federally backed.
People might ask why a company would be so stupid as to lend out money to young people who have no assets to secure the loan. That takes its own explaining.
Early on in the student loan era (early 1970’s), borrowers discovered that they could go graduate, and then the next day, go bankrupt on the loans. Or, if not that, then just not pay and see what happens. Now, this is the kind of thing that makes a nasty political talking point. Sure enough, some Congresspeople said, “we have to tighten up the discharge rules on these student loans!” So around 1976, it became harder to discharge a student loan.
Throughout the programs’ existence, there has been a significant default rate–something like 10% or 20%. So Congress also sought to penalize people who default, mostly by holding back refunds, but sometimes even parts of social security checks. Of course, the main weapon is debt collector harassment. Since it was a Congressionally-created problem, Congress has been great at manipulating it to keep it going. The default problem never goes away, because Congress never addressed what happens when the students go to school, and then can’t find jobs. Or they can’t find jobs that pay sufficient money to support themselves AND pay. Congress never addressed it. It’s like the end of Civil War between the North and the South. The North won, but then had no way to compel the South to guarantee the rights of newly-freed black people. So they ended up in a de facto serfdom/slavery there until about 1970.
Congress’ answer was simply to keep tightening the screws on student borrowers who defaulted. This was partially done at the urging of a company called Sallie Mae, which had been a government sponsored entity, like Fannie Mae and Freddie Mac of the contemporary Financial Crisis notoriety. But Sallie Mae took itself private around 1997. The Sallie Mae corporation’s lobbyists basically wrote student loan rules from then until about 2009. They are still highly influential in Washington.
There has been some pushback against Sallie Mae, on the non-Southern (Democratic) sides of both houses–especially in 2006 and 2008–but Occupy Wall Street has really put this issue out there again. And the strongest and loudest of the protesters of the current system are those with these “private” (i.e. non federally-backed) loans.
[Update PM: I, of course, support the gist of the Occupy Movement. But that doesn’t mean I am 100% for everything anyone does under its name.
I like the fact that these folks are getting together, and RE-emphasizing that there are BIG problems in American higher education finance. BIG problems. But the current presentation is too “niche”. When I first visited the site, I saw a couple of things that suggested “default”, and I didn’t have the time to go searching around to get a sense of what the program actually is. So my first Twitter comments go to the issue that you don’t default. Or you default as the final, catastrophic option. You get deferment or forbearance instead, which is “paid as agreed”.
Trying to tie the federal loans with the privates is not a good strategy. They have to be separate, even if it means that the activists who are worried about the privates feel that they will be ignored. It is one step at a time, and it can only be that way. The federally backed loans have to go to Direct, and then it’s much easier to argue that the private loans should be given pure consumer loan status again.
IBR repayment is still, of course, too stringent. But there isn’t enough of a constituency to get that fixed in 2012. Soon enough, though, there will be. You should recall that loans made by the Department of Education are coming out of the same pool of debt as U.S. treasury bonds. So if these bonds cost the government 0% or 1% in the short term, then that should be the charge to the student borrower—not 6.8% or 8.25%. Moreover, if the government is going to expect a pay-by-income health care program to work in January 2014, they are going to have to be more reasonable about what can be paid for what. This is all a future fight, though. First, government backed loans have to be separated out of privates.
The government needs to create a plan to buy out the private lenders, similar to how the government buys out the federally-backed loans. Except the privates will have to be bought out at cents-on-the-dollar, because Congress would be making these the equivalent of consumer loans–which they always should have been. (By the way, when I say “consumer loans”, this is shit-style consultant’s talk for saying they are immediately dischargeable in Chapter 13 or Chapter 7 bankruptcy. So, if Occupy does this right, you see where this would go.)
An ideal IBR program is 7% of disposable income, over 15 years. That’s fair. There should be some numerical goal.
The Occupy Student Debt group has to understand what they are up against. Private entities are still making vast fortunes off the fact that the government hands out student loan money. Look at what the New York Times reported on December 9 about how the for-profit “colleges” fought the Obama Administration—using former Obama officials and friends and so-and-so–in order to get THEIR proposed weak rules as the regulations, not the ones that Bob Shireman and the Project on Student Debt crowd proposed. Read the article. It says a lot about why this issue is such a recurring problem.
I appreciate that so many people are in a bind. But the approach of telling stories about how compound interest makes $40,000 into $100,000 is not going to be enough juice to get the story over the numerous hurdles that anti-reform people will put up. When you are the 99%, you have to make the problem and the story understandable to the 99%, and the proposed solutions fit what the 99% can see as reasonable and fair.]