Tuesday, July 18, 2017

Student Loan Debt Erased! A Better Solution than Debt Servitude

Over the years I've seen students pay more and more for their college tuition. I recall my tuition at San Diego State was $265 dollars a semester in the early 1980s. I received a great education. I was grateful because I came from a working class home with parents ill equipped to support my college education.

Today, college tuition is much higher, even when accounting for inflation. States are paying less to support public education and so students must pay more. Although other factors are driving tuition, I believe lack of public support is the number one factor

The consequence of rising tuition is that student debt loads are becoming excessive and are likely hurting the economy as millennials strain under low-incomes (see here) and high debt loads.

People who went to "private" colleges, especially for-profit private colleges, often struggle the most (see here). For profit private colleges emphasized student recruitment over graduation, leaving poorly prepared students with especially excessive debt loads.

It is in this context that I read the following headline and news excerpt:
Stacy Cowly and Jessica Silver-Greenberg (2017, July 17). As Paperwork Goes Missing, Private Student Loan Debts May Be Wiped Away. The New York Times,

Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing.

The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments.

Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.
The article states that the National Collegiate Student Loan Trusts is at the center of this lending crisis for private tuition:
National Collegiate is an umbrella name for 15 trusts that hold 800,000 private student loans, totaling $12 billion. More than $5 billion of that debt is in default, according to court filings. The trusts aggressively pursue borrowers who fall behind on their bills

I found this interesting website (http://www.consumerhelpcentral.com/national-collegiate-student-loan-trust/) that explains the process for originating and servicing student loans that end up in the National Collegiate trusts.

That process is very, very similar to the process that was used to originate, service, and generate derivatives from mortgages resulting in the 2007-2008 financial crisis, which resulted in a government bailout of too-big-to-fail institutions including risk-seeking private banks and insurance companies, such as AIG.

The U.S. Federal Reserve and Treasury responded to that crisis by bailing the financial and insurance industries. In 2008 the U.S. Government launched the $700 billion Troubled Asset Relief Program (TARP), which provided funds to insolvent and distressed banks and financial corporations, including AIG and Fannie Mae (“Cash Machine,” 2009). In the spring of 2009, the newly sworn in President Barack Obama launched the Term Asset-Backed Securities Loan Facility (TALF), which may expand to $1 trillion (Cho & Irwin, 2009).

Federal bailout money to AIG, which "insured" the bonds and derivatives created from mortgages, totaled $163 billion by March 2 2009.

By framing the solution to the financial crisis in relation to the “problem” of insolvent financial and insurance institutions, the U.S. Government elected to provide these institutions (which were responsible for the crisis) with financial liquidity in a period of significant asset deflation.

These government-advantaged private institutions were therefore able to purchase assets whose prices had collapsed in a context of little competition because of the constriction of credit. In particular, investment banks, such as Goldman Sachs, proceeded to buy up housing, stocks, bonds, and now government insured mortgage-backed assets. A Goldman Sach’s executive had the audacity to describe his company’s operations as “God’s work” (quoted in Arlidge, 2009). In contrast, smaller banks and non-financial based industries struggled to access credit for basic operations. Smaller banks and businesses began to fail in significant numbers.

Naomi Klein concluded that the 2007-2008 financial crisis created by deregulated capitalism created a public sector crisis as its costs were socialized (Klein, 2009). The costs of the financial crisis would have been better contained if the too-big-to-fail banks and financial/insurance institutions had been forced to absorb losses.

Absolving student loan debt holders of excessive debt, which can never be re-payed, will avoid repeating the mistakes of the financial crisis.


  1. What makes you think, a guy like Donald Trump, would ever do that? For goodness sakes! The man is a pathological and, sadistic liar.

    His, and his handlers aim, has always been three things.

    1.To decrease democracy in america.

    2.To strengthen the power of the oligarchs further, here and abroad.

    3.To make it easier, for the kleptocracy to plunder America.



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