Sunday, August 16, 2015

Student Loans as Wealth Transfer

By Professor Doom

     With tens of millions of people now being victims of student loans, the country is finally starting to ask “Who created the victims?” A recent article examines how the student loan scam has transferred wealth from human beings that can’t afford to lose their wealth, but fails to manage to find any human beings responsible for it:

     Hmm, the higher education industry is getting rich? Come again? If it’s so rich, why am I going to pay more for parking this semester? I’m an employee…outside of education, is there any other industry where employees are charged to park on company property? If it’s so rich, why is it such a hassle to get a light bulb replaced? I could be at this a while, but, for a “rich” industry, it sure doesn’t act like it.

     Yes, there are some very wealthy ivy league schools (I’ve never taught at Harvard and the like, so my rants don’t include such places), but these schools are wealthy through endowments. “Endowment” is one of those $10 words you hear in education. It means “gift.” These gifts came from alumni who believe the school really helped them, and they want to help the school, years after they’ve graduated and seen the benefits of the education they’ve received. 

     On the other hands, most institutions don’t get gifts, and get their money primarily through tax dollars and the student loan scam. I strongly suspect that, after decades of paying off those student loans, many students won’t be so eager to make endowments to the institutions that buried their graduates in debt. I guess we’ll find out about that in the years to come.

 The transfer results from loans being issued to students at rates below a proper risk-adjusted market interest rate. However, on examining the market more closely, we see that the reality is that taxpayers and students are both being used in a much larger transfer of wealth. The ultimate beneficiary in this government-led cartel is the higher education sector.

     While mostly you just hear about the students trapped in debt as the victims, please realize that everyone who pays taxes is part of this transfer of wealth. But is it really going to the higher education sector per se?

      If this was the truth of the matter, then why are so many institutions constantly complaining that they’re running out of money? A more careful analysis would show that, yes, the student loan scam is transferring wealth into the higher education sector…but then that wealth is being transferred to the people at the top of the sector, where it apparently vanishes into a black hole of ever increasing salaries and strange real estate deals.

What we see is that these loans are largely priced like personal loans, with rates ranging from 5 – 25%.  Many large and reputable banks do have private loan programs, but the high interest rates draws in all sorts of players. One example was the “non-profit” EduCap, which focused on making loans to students from upper-income families that didn’t qualify for financial aid.

The company bumped into unwanted attention when Tom Daschle was criticized for hitching a ride to Bahrain on the non-profit’s corporate jet.

     The whole structure of the student loan scam is bizarre. I’ve often touched on how bogus accreditation facilitates the scam, but now’s a good time to introduce another bogus aspect:

     The whole reason these loans are made to anyone and everyone that can click a box is because the government guarantees the loans, often provides the money, and generally facilitates the extraction of the money from the students after they graduate.

     Doesn’t that sound like a government-run enterprise from start to finish? Why then does any other organization need to be involved? There are massive profits to be made from these loans. As Donald Trump points out, the government makes plenty of money off student loans, and that’s pretty disgusting.

     I don’t like the government profiting from the screwing of our children like this…but I really hate that banks and other organizations get to profit as well from making these loans, even though every aspect of the loan can only exist with government support, protection, and money. “You didn’t build that” seems to apply far more to these organizations than to most business owners.

     I expect that we’re too corrupt to have “free education” like other countries, but such would still be far better than the “loan education” structure we use today.

     The most important feature of student loans is shared by both types – non-dischargeability in bankruptcy. Thus, even for privately offered loans, bankruptcy laws give strong lender protections. This gives the loan a premium value above a standard yield calculation. The exceptions are that, in the case of Federal loans, loans can be forgiven after working in education, public safety or the military for a specified period.

Also, with income-based repayments, the percentage of income used for student loan payments is capped at 10%.  In addition, if you stay poor for 25 years, the loans are forgiven.

     Allow me to again connect the dots and ask the obvious question here, since the article doesn’t do it. If higher education is so fiscally valuable that going deep into debt is reasonable, why would there be a clause about what happens if you get an education and yet stay poor for 25 years? That should be impossible if education were so valuable.

     It’s very clear that higher education isn’t by definition very fiscally valuable, and thus our children are being sold a grotesquely overpriced product, paid for with tax dollars. Toss in that about half of graduates have objectively worthless degrees, and we have some real problems here.

“…we can see that in federal student loan delinquencies are at a disturbingly high level…Many citations of student loan delinquencies erroneously include 46% of borrowers that are either in school or the grace period – these borrowers are not required to make any payments and thus cannot be delinquent. When we exclude these borrowers we get a much higher delinquency rate.”

     The article shows that 50%, probably more (as justified above), of borrowers are either in full on delinquency (not paying anything) or that their balances are growing (not paying enough to even cover the interest, and so the loan grows…).
     Does anyone really believe that loans with 50% failure rate would be made without the government backing it all? After showing very clearly how the student loan scam works, the article finally starts to answer the question of who benefits. It’s a little hit and miss here:

The leftward bias of the American higher education system has been widely reported and anecdotally this writer has experienced the bias first-hand.

     Definitely, the leftward bias is well documented, well known, and I’ve certainly been bullied by leftists on campus. It happens, as conservatives (more accurately, non-leftists) are not welcome on campus. There are even ideological litmus tests for those that want a real career in academia, at least on some campuses. So, insofar as leftists are in control of campuses, yes, they benefit, and so the ideology benefits. I suppose.
     The next claim is a bit off the rails, however:

First, we must remember that nobody ever made a name in academia advocating for the status quo.

     Wait, what? Does the author not know about Keynesian economics? Krugman? Seriously? Good luck as an economist if you argue against the status quo of today’s fiat monetary system.

     Wait, what, again? Does the author not know about Lincoln worship, the incredibly pro-Federal government representation of the Civil War? Seriously? Those ideas came from academic historians advocating for the status quo in the post Civil War society.
     Wait, what, yet again? I’ve seen so many, many, spineless sycophant faculty (I so dearly want to link those words to specific examples) advocate for more of the status quo advance in higher education I can’t hardly count them all. The easiest way to advance your career is to suck up to admin by selling out academic integrity in the name of higher retention. On the other hand, I’ve seen plenty of faculty outright destroyed for trying to change the status quo in higher education today, by asking to have standards and integrity.

     I could go on here, too, but the author claims “nobody” and that’s simply not true.

      The author is a little off the rails, but I do like his example of something-or-other all the same:

An excellent case-in-point is Senator Elizabeth Warren. Until being elected to the Senate, the Senator was a professor at Harvard…Professor Warren taught one class and received an annual salary of $350,000., we point to her campaign for Senate, which was drenched in anti-capitalist rhetoric.

Parts of her campaign-launch speech were taken almost directly from Marx….Basically, the derisively delivered message is “you didn’t build that.”  Interestingly, President Obama then drew inspiration from Warren in his “You Didn’t Build That” speech.

   I maintain this example really points out where the wealth transfer is going. $350,000 to teach one class? Meanwhile, most professors (the ones not politically connected) get around $2,000 for teaching a class…while students for that class collectively shell out $100,000 or more to listen to that professor.

     The big wealth transfer isn’t really going to higher education in the end. Ultimately, it’s going to certain people. While much of it goes to a bloated and overpaid administration, certainly, if you have connections, some of it goes to you.

      But if it was going to higher education, then the 1.2 trillion dollars of student loan debt would be able to keep our universities open without ever louder cries of “we need to raise tuition because the school is running out of money.” It really is that simple.



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