How Wall Street Profits From Student Debt
It’s perverse policy — bankers are pampered because student debtors are hounded and pounded. To help borrowers, the government should facilitate bankruptcy reform and expand federal relief programs. But we have deeper problems: Lenders, servicers, collectors and investors prosper while students suffer because schools increasingly rely on private tuition rather than public funding.
The Higher Education Act, which governs the administration of many federal student aid programs, has expired. Its reauthorization is a crossroads. Elites want to cut federal lending in favor of private lending, but that’s no good for borrowers or the economy overall, especially when one factors in private loan securitization. Private SLABS, or P-SLABS, are even more harmful than their counterparts. They’re especially enticing to investors precisely because the underlying loans are even worse for debtors than federal loans — they have higher rates and stiffer terms. Coupled with grim changes to the bankruptcy code, demand for P-SLABS has already spiked total costs for students. The P-SLABS market is currently worth only $37 billion, but it’s hot enough to include start-ups. If the market expands and explodes, things will worsen for borrowers; governments tend to stabilize financial markets by suspending the force of law for creditors and further tightening the screws on debtors.
As Mike Konczal has argued in Rolling Stone, rather than privatizing higher education finance, we should simply replace federal lending with stable federal spending. A public option of free college would not only fend off a SLABS nightmare, it would decrease student debt and lower tuition by pressuring the private sector to compete.
There are many ways to reprioritize funding to pay for free college. Above all, though, the myth that Washington is broke holds us back. The federal government doesn’t have to balance its budget like states or schools, so it certainly doesn’t have to profit from students. It can afford to simply spend money it’s already lending, and absent inflation, it needn’t increase taxes to do so. Even if you disagree with this increasingly popular perspective, higher education ultimately “pays for itself.” In the long run, educated people tend to stuff public coffers by paying more in income and payroll taxes, and relying less on welfare programs.
We need free public universities, community colleges and historically black colleges and universities (or HBCUs). Those truly concerned with a swelling education sector should recognize why it’s engorged. Most people pursue college because they want decent jobs. A true commitment to full employment and living wages would curb matriculation at schools that don’t deliver — like for-profit colleges, the major sources of defaults and fiscal waste.
Most Americans agree that education is the great equalizer — everyone’s climb to security and further opportunity. Yet our current policies kneecap students while giving financial firms a leg up. If we truly value learning, we’ll stop bankrolling profiteers and put our public money where our mouth is.