Now is the Time to Refuse Student Debt (Part 1)

Later on today, the #OWS Empowerment & Education Working Group will launch a national campaign that will challenge and draw attention to the growing problem of student debt.

Student loan debt represents the largest portion of all "consumer" debt, and will exceed 1 trillion dollars by the end of the year. Currently, about 67% of students incur debt at the college level. In 2008, approximately 1.4 million seniors graduated with an average of about $26,000 dollars of student loan debt.

In spite of widespread use of loans to finance education, most Americans are unaware of the true nature of these loans, and some of the important issues around our pay-for-diploma education model. The layperson views student loans as a benevolent government program designed to help citizens move into the middle class by attending college. Unfortunately, the sad reality is that student loans have helped to create an education industry that now operates at the expense of our society.

Student Loans are Predatory

When the economy collapsed, we began a lengthy conversation about the lending industry. Student loans were rarely discussed in this context. Yet, student loans have all the hallmarks of predatory lending, the same lending practices that were at the root of the 2007 economic crisis. Students are a population incredibly vulnerable to bad lending practices. For one thing, many are not even of legal drinking age at the time they saddle themselves with a lifetime of debt. For another, students are optimistic about their future and believe that without a college degree, their future would be bleak. Countless studies have shown that we are all overly optimistic about our future, and students are even more so.

Yet, there are virtually no consumer protections for students. Usury laws do not apply. Disclosure is not legally required. Bankruptcy protection does not exist. Assets can be seized without any legal proceeding. And regardless of any circumstance you may find yourself in, from sickness to disability to unemployment, these loans not only stick with you, but can increase exponentially in short periods of time. Once again, we find that lenders are incentivized to act against the best interest of their customers, because they make tons more money on loans the longer that it takes for them to be paid.

So, how is this scam run? You borrow 30K, get out of school and if you can find a job on average you’ll be earning about 27K. On 27K you have to make rent, eat, pay for utilities, clothe yourself, pay for transportation and deal with miscellaneous expenses. So, you can’t pay the $300 dollars a month for the loan. Your friendly lender offers you the ability to defer. At the end of the year, you’re offered the choice of paying the interest, but you can’t afford to on a salary that only allows you to live from paycheck to paycheck. So, you make the only rational choice and allow them to add the interest to the principle. The principle grows, the interest fees increase, and your lender makes more money. A few deferments early on can easily snowball. Further, although there is no risk to lenders, they charge currently charge higher interest rates than on real estate. They continually reduce their risk by adding interest to principle, and increase the interest they earn by increasing the principle. Of course, this makes your monthly payment grow, frequently out pacing any growth income.  If you start out unable to pay, it can easily become increasing impossible to pay, even if your financial situation improves. Of course, this is not dissimilar from the mortgage lending practices that led to the collapse of the economy. Loans are made that far exceed the ability of recent graduates to pay, mushrooming out of control, continually growing beyond the borrower’s ability to pay.

Unlike a mortgage, where an appraiser determines the value of the property, student loans are not appraised based on the field of study. One reason for this is that banks make more money, when they are not paid. Another is that any statement of the relationship between field of study and future financial life would stand in opposition to the American mythology of endless middle class opportunity. We would have to face the reality that our liberal education may no longer be effective in relationship to the realities of our labor market. We would have to ask important questions about the value of education, in and of itself. Of course, it is this very mythology that leads to students willingness to incur excessive debt, and is a boon to banks.

One other important way of perceiving the predatory nature of this lending is by looking at the results: 41% of the loans made to the class of 2008 are currently in delinquency or default.  In fact, only 37% of students are able to pay back loans without deliquency or delay. The industry relies on predatory lending practices and sells loans that are likely to be unpayable to the most vulnerable population, who have to live with the consequences of being scammed through much, if not all, of their adult lives.

 

Education Costs are Not Constrained due to Student Debt

One of the more subtle effects of the growth of the student lending industry is the rising cost of education. The cost of education is contingent on the ability of student to pay for it. The cost of education in the United States has increased by 600% since 1980, far outpacing any other market sector. The money used to pay for these increased costs is student loan debt. There are many more “private” colleges than public. Yet, although we consider private institutions to be outside the purview of public scrutiny, in reality these institutions are largely funded through government backed debt. How “private” are they really? Yet, because they are able to make claims to our collective ideals of privacy, they do not have to disclose the way in which they allocate funds.

The impact is that there is no financial check on rising costs and institutional policies that cause students to go deeper into debt. Here, I can speak personally. When I was a graduate student at Columbia in the mid 90s, a policy change was made that would have caused me either to pursue a different course of study than the one offered at my time of entry or remain a student for at least an additional year in hope that the course of study I planned to pursue would be reestablished. In either case, Columbia would have continued to benefit from the federally backed funds I used to fund my education. Because student debt was financing my education, the typical buyer/seller relationship did not apply. The school had all the power and I had only the power to cut my losses. At 26 years of age, it seemed easier to imagine paying off the debt I had incurred, than fighting an institution like Columbia.

If you buy a product or service with a credit card, and the product is defective or service not provided, you can contact your credit card company and file a claim. Because student debt has to be paid under any and all circumstances, there is no filing of a claim, and so there is no institutional accountability. Instead of receiving a refund, I received a massive debt burden, which doubled in a matter of a few years.

But Columbia is not alone. More recently, as a student at The New School, I was informed that because one department has decided not to honor credits from another department, I would receive far fewer credits toward my degree than promised at the time that I entered. As a result, I would have to pay more money to the institution and incur more living expenses. Or I could leave without any restitution. I am fortunate that I am able to continue, but I will do so at significantly greater expense.  Of course, the longer a student stays, the more money generated by the school. Whether this is a pervasive strategy or simply bureaucratic failure is of little matter. It is a lack of accountability, directly related to the expectation that students are able to pay more through debt financing.

The combination of predatory lending practices and lack of institutional accountability has created a system where students are forced to pay more and more at worse and worse terms, and with no consumer protection.

To be continued...