Rajiv
07-26-08, 06:16 PM
Pilfered Dreams: The Story of Student Loans and Sallie Mae (http://www.peakoilblues.com/blog/?p=262)
The post you are about to read is a horror mystery, a tragedy, a calamity just about to happen. It is a story about young people who have been burdened with huge amounts of debt on the promise of a future career that will enable them to pay it off. They complete two or three years successfully at their chosen college, and can’t return in September, because they can’t find another year of student loan tuition funding. Suddenly, they have a debt of $50-100,000 and no way to complete the education that they’d hoped would secure them the job they’ll need to pay off that debt burden.
The story reveals the gutting of a corporation recognized as one of the “100 Best Corporate Citizens,” according to Business Ethics magazine, on Fortune 500 and Forbes 500 lists. It owned, operated, or was affiliated with 15 different companies. It was just the sort of stock your pension fund manager would buy, your town official would invest in, you yourself might pick to own if you did pick stock. It was a “sure thing” backed 100% by US Government monies. It was just about to be bought for $25 billion dollars, and $60 per share, it had made 18 million dollars only last year, when suddenly, inexplicably, it suffered a loss of good fortune. It is inches above a junk bond worth about $16, running up $135 million in losses and other fees.
This is a story about how to shackle the best and brightest young people of a generation into crippling debt, before they’ve even become financially independent, and this debt they cannot escape with bankruptcy, nor disability, whether medically or emotionally crippling. The Government (via private lenders) must be paid, and will tap their unemployment or disability funds. There is no escape. This debt, like taxes, or the mob, can only be skirted by retreating underground for the rest of their financial life.
.
.
.
.
.
Two Ways to Get Into Student Loan Debt
Students have two options for finding monies guaranteed by this 1965 Act:
Public- Federal Direct Student Loan Program (FDSLP, also known as Direct which is how I’ll refer to it here.) or Private - Federal Family Education Loan Program (FFELP I’ll call Private), which is handled through private banks & lending institutions.
They can also seek totally private funds through lending institutions, directly.
This “Private” funding may be called that but“It’s not private at all. Frankly it’s a socialist-like system. It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”.
.
.
.
The pump and dump is now complete.
What remains are empty holes in our pension funds, foreign investor’s portfolios, and private retirement funds, where a profitable stock used to be. Sallie Mae, a stock once courted less than a year ago by seven major bank willing to pay $60 a share, now sells in the mid- to low-teens. A company that once was praised for its innovation, administering more than $18 billion in college savings accounts for nearly 10 million customers, now bears junk bond status.
The horse has escaped, the barn door has been locked, and the stockholders are locked outside while their sons and daughters, the students, owing unmanageable student loan debts, have been left to burn inside.
Heading off to College: The Longer & Longer Winding Road
It should be no surprise that those with a college education have traditionally made more income than those without one. What has been surprising, however, is that the minimum qualifications for those jobs have continued to climb. What previously required a high school diploma, now requires an associates degree; an associates degreed job now requires a bachelors degree; and so on.
Even worse, as the economic conditions continue to deteriorate, students are horrified to find that even the jobs they’ve trained for aren’t hiring anymore, or now require more college education, or have been outsourced, or “in-sourced” through H-8 workers imported by employers for a fraction of the previous salary. They then return to college to “retrain,” hoping against hope that this next job will still be available by the time they leave school again. Each time, their student loan obligations continue to pile on.
Another notable difference in this current recession is that parents, who were once able to refinance their homes to help their sons and daughters meet rising tuition costs, are no longer able to do so. They can’t put in the overtime they had planned.
College during the Great Depression was only mildly impacted by the sinking economy, as, for the most part, only a tiny percentage of the population attended, and those that did were of the “upper crust” of society. This next one, however, will not be your Grandmother’s depression.
.
.
.
A Stacked Deck
When Direct Government lending was created, the initial assumption was that the bank-based Private program would be quickly overwhelmed (http://www.commondreams.org/archive/2007/04/15/544/)by the government program. No one counted on the strength of the reaction from the lending industry.
Armed with “no lose” loans, promising interest rates at least 2.34 percent higher than rates paid on commercial loans, and guaranteed by the full faith of the US Government, private lending institutions and banks set out to stack the deck in their favor. Special regulations first were put in place by The Department of Education that prevented colleges and universities from offering both Direct and Private loans. Once these institutions were forced to choose–Direct or Private–gag rules were put in place to prevent government employees from promoting Direct student loans. This was despite the fact that President Bush’s own budget report said that the Direct program was cheaper to fund. In 2006 for every $100 loaned by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85.
When Richard W. Riley, then the Secretary of Education, tried to make the direct lending program more competitive in 1999 and 2000 by reducing origination fees and interest rates, the private lenders sued, saying Mr. Riley had no authority (http://www.commondreams.org/archive/2007/04/15/544/) to do this because these rates were set by Congress under the loan legislation.”
Despite budget savings, Republicans were against Direct loan programs, and slashed its budget from just over $7 billion in 2006 to $509 million budgeted for 2008, while being only slightly kinder to the Private funds. These they decreased from just over $28 billion in 2006 to just under $4 billion budgeted for 2008.
The effort was successful: the government’s share as a direct lender (http://www.commondreams.org/archive/2007/04/15/544/) has declined and now amounts to less than a quarter of the total loans distributed. Therefore, while students took on $85 billion of student loans in 2005-6, governmentally insured loans shrank in 2008 from 35 billion to a bit more than 4 billion, with the vast majority being Private government insured loans–if they’ll be willing to participate. As you will learn, quite a few no longer want to loan money under the terms of this new law, scheduled to go into effect this year. They don’t think they’ll make enough money.
.
.
.
(contd)
The post you are about to read is a horror mystery, a tragedy, a calamity just about to happen. It is a story about young people who have been burdened with huge amounts of debt on the promise of a future career that will enable them to pay it off. They complete two or three years successfully at their chosen college, and can’t return in September, because they can’t find another year of student loan tuition funding. Suddenly, they have a debt of $50-100,000 and no way to complete the education that they’d hoped would secure them the job they’ll need to pay off that debt burden.
The story reveals the gutting of a corporation recognized as one of the “100 Best Corporate Citizens,” according to Business Ethics magazine, on Fortune 500 and Forbes 500 lists. It owned, operated, or was affiliated with 15 different companies. It was just the sort of stock your pension fund manager would buy, your town official would invest in, you yourself might pick to own if you did pick stock. It was a “sure thing” backed 100% by US Government monies. It was just about to be bought for $25 billion dollars, and $60 per share, it had made 18 million dollars only last year, when suddenly, inexplicably, it suffered a loss of good fortune. It is inches above a junk bond worth about $16, running up $135 million in losses and other fees.
This is a story about how to shackle the best and brightest young people of a generation into crippling debt, before they’ve even become financially independent, and this debt they cannot escape with bankruptcy, nor disability, whether medically or emotionally crippling. The Government (via private lenders) must be paid, and will tap their unemployment or disability funds. There is no escape. This debt, like taxes, or the mob, can only be skirted by retreating underground for the rest of their financial life.
.
.
.
.
.
Two Ways to Get Into Student Loan Debt
Students have two options for finding monies guaranteed by this 1965 Act:
Public- Federal Direct Student Loan Program (FDSLP, also known as Direct which is how I’ll refer to it here.) or Private - Federal Family Education Loan Program (FFELP I’ll call Private), which is handled through private banks & lending institutions.
They can also seek totally private funds through lending institutions, directly.
This “Private” funding may be called that but“It’s not private at all. Frankly it’s a socialist-like system. It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”.
.
.
.
The pump and dump is now complete.
What remains are empty holes in our pension funds, foreign investor’s portfolios, and private retirement funds, where a profitable stock used to be. Sallie Mae, a stock once courted less than a year ago by seven major bank willing to pay $60 a share, now sells in the mid- to low-teens. A company that once was praised for its innovation, administering more than $18 billion in college savings accounts for nearly 10 million customers, now bears junk bond status.
The horse has escaped, the barn door has been locked, and the stockholders are locked outside while their sons and daughters, the students, owing unmanageable student loan debts, have been left to burn inside.
Heading off to College: The Longer & Longer Winding Road
It should be no surprise that those with a college education have traditionally made more income than those without one. What has been surprising, however, is that the minimum qualifications for those jobs have continued to climb. What previously required a high school diploma, now requires an associates degree; an associates degreed job now requires a bachelors degree; and so on.
Even worse, as the economic conditions continue to deteriorate, students are horrified to find that even the jobs they’ve trained for aren’t hiring anymore, or now require more college education, or have been outsourced, or “in-sourced” through H-8 workers imported by employers for a fraction of the previous salary. They then return to college to “retrain,” hoping against hope that this next job will still be available by the time they leave school again. Each time, their student loan obligations continue to pile on.
Another notable difference in this current recession is that parents, who were once able to refinance their homes to help their sons and daughters meet rising tuition costs, are no longer able to do so. They can’t put in the overtime they had planned.
College during the Great Depression was only mildly impacted by the sinking economy, as, for the most part, only a tiny percentage of the population attended, and those that did were of the “upper crust” of society. This next one, however, will not be your Grandmother’s depression.
.
.
.
A Stacked Deck
When Direct Government lending was created, the initial assumption was that the bank-based Private program would be quickly overwhelmed (http://www.commondreams.org/archive/2007/04/15/544/)by the government program. No one counted on the strength of the reaction from the lending industry.
Armed with “no lose” loans, promising interest rates at least 2.34 percent higher than rates paid on commercial loans, and guaranteed by the full faith of the US Government, private lending institutions and banks set out to stack the deck in their favor. Special regulations first were put in place by The Department of Education that prevented colleges and universities from offering both Direct and Private loans. Once these institutions were forced to choose–Direct or Private–gag rules were put in place to prevent government employees from promoting Direct student loans. This was despite the fact that President Bush’s own budget report said that the Direct program was cheaper to fund. In 2006 for every $100 loaned by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85.
When Richard W. Riley, then the Secretary of Education, tried to make the direct lending program more competitive in 1999 and 2000 by reducing origination fees and interest rates, the private lenders sued, saying Mr. Riley had no authority (http://www.commondreams.org/archive/2007/04/15/544/) to do this because these rates were set by Congress under the loan legislation.”
Despite budget savings, Republicans were against Direct loan programs, and slashed its budget from just over $7 billion in 2006 to $509 million budgeted for 2008, while being only slightly kinder to the Private funds. These they decreased from just over $28 billion in 2006 to just under $4 billion budgeted for 2008.
The effort was successful: the government’s share as a direct lender (http://www.commondreams.org/archive/2007/04/15/544/) has declined and now amounts to less than a quarter of the total loans distributed. Therefore, while students took on $85 billion of student loans in 2005-6, governmentally insured loans shrank in 2008 from 35 billion to a bit more than 4 billion, with the vast majority being Private government insured loans–if they’ll be willing to participate. As you will learn, quite a few no longer want to loan money under the terms of this new law, scheduled to go into effect this year. They don’t think they’ll make enough money.
.
.
.
(contd)