TRUTHOUT: The Student Loan Crisis and the Debtfare State

Career College Central Summary:

Educational debt has become a ticking time bomb. With over $1 trillion in outstanding loan balances, the student loan industry has a lot in common with the sub-prime mortgage industry, which went into a devastating crisis in 2007-8. Both rely on a financial innovation called “asset-backed securitization” (see below) to raise capital and to hedge risk—in other words, to raise money for loans and to reduce the likelihood that investors will lose their money. Student loans asset-backed securitization—or SLABS—means student loan agencies package student debts and sell them to investors who expect to get their money back, plus interest, as students pay back their loans. In theory, selling off nicely bundled packages of debt to investors allows these institutions to turn around more quickly and make new loans. For this reason, SLABS is touted as the main channel through which the lending industry moves funds from investors to students—and so is supposed to be of mutual benefit to students, lenders, and institutional investors such as hedge funds and pension funds.
Like the sub-prime housing industry, however, SLABS ultimately depends on the ability of borrowers to meet their debt obligations. Herein lies the rub. Since as far back as the recession of 2001, the majority of student debtors have not been able to get decent paying jobs upon leaving college.
Poor job prospects, as well as mounting costs of basic needs such as health care and housing, mean many college graduates have not been earning enough to pay back their loans. Default rates on student loans have been climbing since 2003. By 2012, student loans registered the worst delinquency rates in consumer credit, worse than even mortgage debts and credit cards. Despite the uneasy relationship between the profitable student loan industry and growing student debt defaults, students continue to borrow to pay for college, and educational loans are the only form of consumer debt to increase markedly since 2008. The industry has grown steadily over the past several decades in lockstep with rapidly rising tuition and fees—and with the government’s prioritization of loan-based funding over grants. To understand the growth of this risky business, we need to first grasp the basic alliance between government and finance in the profitable world of student debt.

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TRUTHOUT