There is a prolific and particularly destructive scam being perpetrated on the American people. The bad guys are well known to us all — the banks, Wall Street and large corporations — and the victims are the average American family. Surprisingly, the smaller your family income, the greater your losses will be if you get caught up in this scam and 71 percent of last year’s college graduates were victims of this scam.
Here is how it works:
The banks and loan companies are repeating the tactics used in the sub-prime mortgage debacle, but instead of offering homeownership, they are hawking a college education. As they did with homeownership, they create the idea that you can’t survive without a college education and then hook students and
parents with low and delayed payments that are appealing when the family is faced with years of schooling and a salaried income can be expected. As in the sub-prime mortgage scandal, the banks and loan companies expend their greatest marketing efforts directed toward those least able to take on all that debt.
It would seem contrary to financial common sense to make large loans to such high-risk people. The banks are well aware of the statistics that 30 percent of these loans are in default and a further 20 percent are 90 days past due or longer. Despite this, the banks are rushing to hand out these loans.
What most people do not realize is that the banks have almost no risk of default. A federal program called the Family Federal Education Loan Program provides government guarantees on the full amount of the student loans made by banks. Taxpayers will pick up the tab for those assets if students start defaulting en masse.
In 2013, there was an estimated $970 billion in outstanding student loans, and that is expected to top $1 trillion this year. America’s student loan debt is growing at an estimated rate of $2,853 per second.
Wall Street is also getting its grubby little hands in on this scam with a repeat of what it did back in 2006-2008 that resulted in the Great Recession. Despite being assets loaned to high-risk borrowers, Wall Street is buying these student loans from the banks and bundling them into packages of derivatives that it then sells to investors and pension fund managers. Despite the expectation that many of these loans will default, the government guarantee means the actual risk of loss is relatively low because the taxpayers will always be there to pay off any defaults.
With all this potential for massive profits from a new financial scam, the financial institutions that stand to gain the most are working overtime to market these student loans to as many people as possible. There are kickbacks to colleges for getting freshmen hooked on these loans. There are salesmen, working on commission, who use fancy ads and fake statistics in their marketing to high school seniors while offering low interest rates and delayed payments that initially seem very attractive but quickly accumulate into large debt. The national average for student loan debt was $29,400 in 2012. For Vermont students, the average debt is $28,299.
In contrast to the immediate profits realized by the banks when they sell these loans to Wall Street and the massive compounded profits gained by the sale of the derivatives, the student is faced with making mandatory payments of a percentage of his or her salary for up to 25 years after graduation from college. The poor economy and depressed employment situation combined with the high competition for jobs means that many of these loans will never be paid or will be paid off when the student is in their 40s.
Unlike the sub-prime mortgage and derivative crisis in 2008, this particular scam is unlikely to create a bubble that will threaten the entire economy. In 2011, the student loans that were being packaged by Wall Street totaled only $140 billion, which is a tiny drop in the bucket compared with the trillion-dollar corporate loans in that year. This particular scam is not going to hurt the economy of the entire United States, but it also probably will not go away anytime soon. As long as the government guarantees these loans, then the banks have no fear of defaults and have everything to gain by giving a loan to anyone who can and will sign on the dotted line.
The real harm will be to the people who take these loans. In a recent survey, about 20 percent of the graduates with loans said that having the loan made a difference in their choice of where they worked and what job they took. Many took jobs that promised more income rather than the profession they wanted to work in. As many as 33 percent of the graduates with loans will live at home with their parents in order to be able to make their student loan payments. Nearly 40 percent said their loan changes their decisions about spending and buying — often causing delays in purchases of cars and homes, as well as getting married and having kids. This delayed spending on such a large percentage of the population does have the potential for changing the total U.S. economy by slowing the recovery and growth and reducing the total consumer spending.
Tom Watkins lives in Montpelier. He can be reached at KeepitReal@21vt.us.MORE IN Commentary
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