A Wake-Up Call for Students
Guest Author: Alan Collinge, StudentLoanJustice.Org,Both Alan and I have written various posts on the student loan crisis. Alan has been featured on Angry Bear Blog from time to time.
If you are in college and looking for something worthy to fight for today; as a student, you should consider the student loan issue. Student loans and how they are administered are the national injustice of our time reaching threatening proportions and impacting the livelihood of young adults going forward. While at first glance, the problem appears complicated, confusing, and overwhelming; it is actually quite simple and its debt genesis hearkens back to the creation of this country. This problem transcends partisan and cultural divides and could serve to bring together those on the left and right on campus.
George Washington, Thomas Jefferson, and others were in debt up to their eyeballs to British banks and merchants. They came to understand how a lending system could be used against the citizens. Of course it was not just the Founders who were being exploited, many early settlers were indebted to English banks as well. John Adams famously remarked;
“There are two ways to enslave and conquer a country. One is by the sword. The other is by debt”
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When the Founders created the Constitution, they made it a point to reflect on bankruptcy rights prominently. Few people realize that a uniform bankruptcy system is called for before the power to raise an army or a navy, ahead of the power to coin currency, and even ahead of the power to declare war in Article I, Section 8 of the Constitution.
Obviously, bankruptcy rights were very important to these men.
Free men are not forced into any type of behavior by the government that We The People established and ordained. The government is to serve the people – not to force them into servitude and obedience. The people are sovereign, as the people came before the government and the Constitution that gave rise to the government.
Adam Smith, the founder of free market economics provided the basis for western economic theory, was compelled to advocate for bankruptcy protection as a means to encourage entrepreneurship, risk taking, and also a means to compel good faith in a lending relationship.
When an individual or firm goes bankrupt, a legal process is instigated to discharge debts that cannot be repaid. In former times such debtors might have been put into a debtors’ prison and languished there for years. The process weighs assets against liabilities and allows the debts to be discharged at some fraction of their nominal value, leaving the debtor free of the burden, albeit subject to rules of financial behaviour and with a blemish on their credit record which can last for years.
Student loans violate longstanding economic principles and as such the beliefs of the Founders. Today, Congress has placed conditions on student loan bankruptcy so severe; that of 169,000 people with student loans who filed for bankruptcy in 2014, fewer than 20 received relief. When our legislators first restricted the right to student loan bankruptcy in the 70’s, some members warned that such a move had dire constitutional implications, but their concerns went unheeded. As one University of Connecticut expert Philip Schuhman testified to Congress:
” students should not be singled out for special and discriminatory treatment. I have the further very literal feeling that this is almost a denial of their right to equal protection of the law. Nor do I think any evidence has been presented that these people, these young people just beginning their years on the whole should be singled out for special, and as I view it, discriminatory treatment. I suggest to you that this may at least in spirit be a denial of their right to equal protection with the virtual pole star of our constitutional ambit.”
Today, student loans are the only type of loan in this country from which bankruptcy rights have been removed leading to consequences so severe as to result in a form of peonage. Despite peonage being made illegal after the civil war in 1867, it still flourished in the form of sharecropping with former slaves and poor farmers farming plots of land owned by others. Sharecroppers supposedly received a percentage of the profits from sale of grown crops. The sharecroppers were forced to take out relatively large loans just to get by and meet daily expenses, buy seed, rent land, and pay the interest rates imposed on them by landlords.
Also in the past African Americans could be accused of falsely owing money or trivial sums, given sham trials and quickly sold off by the courts into a privatized system of debt slavery to pay back debt. The peonage contracts contained enslaving terms and conditions, allowing the employer to trade, confine, whip and beat workers as long as the debt was deemed unpaid, which could practically last forever.
While not as severe as peonage, students in default are denied access to federal programs and unemployment benefits. Social Security and employment wages can be garnished leading to diminished lifetime earnings and poverty. All of these conditions have a severe impact upon the overall economy as younger workers do not achieve their full earning potential.
The student loan industry is willfully predatory and profitable for the banks who lobbied intensely for the removal of bankruptcy protections and work hard to keep their monetary advantage. As Mr. Potter would say; “The bank always get paid” and this comes no matter what the terms or conditions of the loan are.
(run75441) In my own discussion with a former University of Michigan lobbyist who was regaling me after I dared to make a statement to Michigan Senator Debbie Stabenow about what her stance and actions were with regard to student loans. “There is IBR and Repaye which are programs allowing payment back on student loans based upon income.” Many students struggle to make money while they study so they sell notes to make some money to help them pay their student loans. These programs are mostly failing because of one rule requiring the yearly application to the program rather than an automatic re-up into the program. The re-up is required to report income a factor which is automatically done for Medicare via computer systems. The manual yearly application for the programs was bound to be a failure just by this alone.
It was not just the banks cashing in on the removal of consumer protections. In 2012, the federal government booked over $50 billion in profit on the lending system and this has increased in more recent years. What is disturbing is White House Budget data showing a profit being made on defaults. Think about this: where a credit card company is thrilled to get back a dime on the dollar for their defaulted accounts; the federal government is actually getting back more than a dollar in return. This is a defining hallmark of a predatory lending system and unfortunately for the students, the Department of Education sits on top of it all doing everything it can to perpetuate this situation. Department of Education lawyers fight tooth-and-nail behind the scenes to deny legitimate bankruptcy. This form of government enforced peonage spans many presidents and Congresses and both political parties going back to the seventies.
In 1998, when Congress made bankruptcy permanently unavailable for the overwhelming majority of borrowers, the nation owed roughly $100 Billion in student loans. Today that has exploded to $1.5 Trillion. By the end of this year, nearly one in four borrowers will have defaulted on their loans. People’s lives are being devastated. Families are being torn apart, particularly where cosigners are put on the hook for their kid’s exploded loans. People are fleeing the country, and some are even committing suicide as a result of their student loan debt.
If you think you don’t need to worry because there are forgiveness programs in place, you are wrong. With 57% already kicked out of them income based repayment programs are failing misrably. Assuming the programs are not ended by Secretary of Education Betsy DeVos, I estimate only 10% will be successful and have their loans forgiven and still potentially taxed as income. The rest will be disqualified from the program and left owing far more than when they graduated.
Alan Collinge is the Founder of Student Loan Justice Org and author of “The Student Loan Scam” (Beacon Press).
Perhaps the entire problem is that loans of these amounts are required to go to college now, rather than the fact loans are uable to be repaid without massive increases in debt.
Is it that public universities and private ones now charge fees and tuition and housing that’s a much greater proportion of “median family income” than it used to be?
Is it because there’s less public funding of universities relative to median family income?
Is it because incomes no longer increase at rates significantly greater than inflation, so incomes are relatively less in real terms?
Or is it perhaps that a far greater proportion of students with lower means (parental or self funding) are now entering advanced education?
I’d have to say that since now more than 33% of the workforce has a 4 year degree or more where-as in the late 1960’s and early 1970’s it was on the order of 10% – 12%, that about 3x the proportion of our population are entering advanced educational institutions than used to be the case — thus perhaps a larger proportion are also coming from lower income groups (and lower self-funded capabilities).
I put myself through collage (no scholarships or outside help) with part-time work at pittance wages and ended up with a $300 “student loan” when I graduated… in relative terms tuition, fees and books at that time (per semester) was ~ $500 at the outside max, so roughly my $300 debt was less than ~ 30% of one year’s cost for tuition, fees, and books.. Amortized over the 5 years it took me to finally graduate, it comes out to no more than 6% of costs per year of school.
So I’m not sure but what the real problem is more related to relative change in the relationship between one’s means and college costs.
What I don’t know is whether it’s that college costs have increased by far more than the general college entrant’s means or that the means are reduced relatively by more lower income entrants &/or lower self-supporting methods to provide the means now than before.
It’s hard for me to fathom that my own means of self support to pay for college with no outside help — not a penny from my parents, nor clothes “gifts” either, isn’t equally the case today unless advanced education costs have increased at far greater rates than inflation, especially for low level part-time jobs. Of course I lived in dumps, ate hot-dogs with butter on a slice of bread, and a pan of rice-a-roni every few days, and mooched off my girl-friends… once in a great while i could afford a cheap steak from he super-market… huge improvement over a hot-dogs folded between a slice of bread. But I admit I spent lots of money I could have spent on real food for liquid carbs in the form of beer. Choices, choices.
So though the loan terms and foregivenss and bank-ruptcy issues are a serious problem, I doubt it’s the actual source of the problem. Oh.. my $300 BofA student loan was a 3% interest for the first year after graduation, and then at double that untilil paid off. I paid it off the month after I graduated and had a full time real job (~$12k/year plus full health benefits (no costs from my salary, no co-pays, fees, & $0 to $1 for any drugs, full hospitalization and operations, covered no matter what the costs were or time in hospital involved).in 1971).
oh, and I paid taxes every year, though I always got most of withholding back, and SS (FiCA) was taken out of my income from part-time ultra-low paying jobs as well. One small but constant income source was from my Army Reserve duty (2 days/month on week-ends + 2 weeks of training in “summer cam” they called it) Not much in terms of income, but every little bit helps and it was a constant for the last 3 years of my educational endeavors..
I looked up current costs for tuition, fees, and books at San Jose State per academic year which comes to $7316 (for State Residents) for tuition and fees, plus $1860 for Books and supplies.. a total of $9176.
The ratio of tuition and fees t books and supplies is ~ 4:1.
When I started at SJS my tuition was $400/academic year for a full load (15.5 semester units x 2 semesters) ~ $60 for fees,, and $100 max for books and supplies or $560 / academic year.
The ratio of tuition and fees to books and supplies was ~4.6: 1
CPI-U inflation since I started to the present has been 6.7 times so in present 2016 costs my costs were ~$3760 / year.
Actual present day cost relative to my costs adjusted for inflation is. $9176 / $3760 = 2.44 times greater.
Thus in order to pay for collage today, even in-state tuition and a pubic university, the general collage attendee’s source of incomes would have had to increase by 2.44x the rate of inflation to have the same relation of income means to college attendance cost since I attended and worked my way through.
Since the general attendees income source today didn’t increase by 2.44x the rate of inflation since I attended, then college tuition costs have increased by 2.44x the rate of inflation
There’s no reason for this other than a lower level of funding by the public to subsidize the costs at public universities .. at least in CA. Basically it means taxes applied to education for advanced educational facilities & costs didn’t keep pace with the rate of inflation… being on average lower by ~ 40% (=1/2.44) overall than public funding used to be. Over that period of time (~47 years) then the annual rate of underfunding relative to inflation was rate at ~ 1.0%/year on a.CAGR basis. Interestingly that little average -1% per year just creeps up on you.. or stated differently perhaps the paying public isn’t made aware that costs of higher education are increasing at a greater than the rate of inflation by this “creeping” 1% / year… but they do see that their taxes aren’t increasing as much.
So I would have to conclude that the student “loan” problem Run is describing is actually a direct outgrowth for the real problem which is that the public isn’t paying as much to subsidize higher education than it was nearly 50 years ago and has been continually under-funding it by ~1%/year (compounded) elative to inflation.
This even be worse in many states than in CA. I can’t say.
For reference here’s quite a bit of information about various nationally known university costs in 1980-81.
http://www.nytimes.com/1981/02/19/nyregion/the-10000-a-year-college-education-has-arrived.html?mcubz=3
But then this brings up another question. By how much have Private University’s prices increased? I’m not sure, but I recall Stanford’s annual tuition / books costs were on the order of like $6k/year when I was attending SJS. At a 6.7x increase due to CPI-U inflation then present inflation adjusted prices would be ~ $40k / year. In fact Stanford’s present tuition, books and fee’s costs is $49.4k/year So it’s roughly in -line with the costs of inflation — since my recollection has come uncertainty — or perhaps a bit higher but nothing like the public universities costs have risen above the rate of inflation (in the same few square mile region of the State).
So this seems to support that the primary problem isn’t the loans, but the reductions in public sources of funding for higher education, thus the general attendee is required to is pay far more now then their means allow relative to the costs and their means in the past. .
Another way of saying this is that we’ve significantly “privatized” public universities by forcing attendee’s to fund the tuition and fee’s by borrowing which simply transfers a huge proportion of the price paid to private lending institutions in the form of compounding interest costs, while at the same time incomes haven’t increased by as public university prices (due to loss in public funding) relative to inflation..
The above linked NYT article from 1981, suggests that both Federal and State funding for universities was being cut (beginning of Reagan’s administration… surprise, surprise).
This places the graduate with a huge debt to pay off but with a relatively lower income to do so.
It’s not that borrowing or loan repayment terms and conditions are he problem… it’s that public funding for advanced education has been reduced dramatically. This is fully in-line with conservative orthodoxy… shifting the burdens from gov’t (and general public) to the individual.. which in the final analysis means higher education should remain in the realm and privilege of the wealthy… it’s no place for the masses.
…” I suggest to you that this may at least in spirit be a denial of their right to equal protection with the virtual pole star of our constitutional ambit.”
Out of 169,000 cases of bankruptcy filing, less than 20 were granted relief. I’d like to know how many corporate bankruptcies were filed in the same year, and how many were denied relief. Seems like more than an at least in spirit denial of equal protection when it comes to corporations v. actual individuals. No?
I attended a state school back east, my grand niece now attends the same school. I could work 500 hours a year at minimum wage and pay for one year’s tuition. She would have to work more than 2500 hours a year at minimum wage to pay her tuition.
Meanwhile, I have a solution to this problem. Have the FED buy up every student loan in the US. Call it Schooled QE. They can then lower the interest rates; extend the terms; reduce principal; etc.
The demand effect on our economy would be startling and immediate.
It’s insane how wide the double standards between individual bankruptcy protection and corporate bankruptcy protection is:
Student loans are non-dischargable in bankruptcy but corporate liabilities are dischargable (e.g. Trump’s many carousels to bankruptcy court).
The system is rigged against the middle class: if the minimum wage kept up with inflation the wage floor MIGHT be robust enough to provide the kind of succour necessary to supplement the rising cost of tuition. And even then, I suspect it wouldn’t the macro-dynamics of a global economy are creating an environment wherein skilled labor no longer commands the wage-value it used to. Law school graduates are making 15$/hr.
There should be state controls on the kinds of tuition fees schools are allowed to charge; education shouldn’t be a corporate feedback loop. It’s a moral necessity in any republic to have a well-educated citizenry – unfortunately the kleptocrats are running the asylum.
Oppenheimer:
Welcome to Angry Bear. First comments always go to moderation to weed out spammers and advertisers. I agree on the regulation of tuition costs.