Student loans for higher education has become a very profitable racket. From Wolf Richter at wolfstreet.com:
The University-Corporate-Financial Complex is going to squeal.
OK, I’m going to wade into this debate. And I’m going to do it with my boots on.
The student loan fiasco – the pile of debt that has ballooned to $1.6 trillion – and what to do about it – particularly how much of that student debt to forgive at the expense of taxpayers – has now entered the list of presidential campaign promises.
These promises of student-loan forgiveness are efforts to buy votes at the expense of the rest of the taxpayers, whose money this is, on the principle that whoever proposes the biggest debt-forgiveness will get the most votes from those graduates and their parents.
I can’t blame them. It’s just too juicy a low-hanging fruit. If I were a politician running for office, I’d promise the same damn thing, and that’s why I’m not running for office.
But this $1.6 trillion is an asset on the government’s books. It was funded by tax receipts and debt that the government issued. If hypothetically, all students paid off their federal student loans today, the gross national debt would drop by 7%, from $22.5 trillion to $20.9 trillion.
Forgiving these student loans wipes out that asset, but the national debt that funded these student loans remains. That’s how that would work. There are no freebies, when it comes to debt.
But ultimately, any proposal of student-loan forgiveness is merely another massive giveaway by taxpayers to what I’ve come to call the University-Corporate-Financial Complex. Because students – who’re not yet aware of the financial shenanigans they’re being drawn into – are merely a pass-through conduit for that money from taxpayers to the ultimate recipients.
How much money are we even talking about here?
A lot more than meets the eye. Currently there are $1.6 trillion in student loans outstanding. That is only the debt that has not yet been paid off or been written off.
But most graduates work hard to pay off their student loans, and they’re making progress. Each time one of these graduates makes a payment, it reduces the pile of student loans outstanding. And when that graduate has finally paid off all their student loans, those loans are no longer part of the outstanding balance.
The thing is, there is a lot more new loans being taken out than old loans are being paid off.
So that $1.6 trillion in outstanding student loans is just what is currently owed. It’s not the total amount in money that students borrowed and turned over to the University-Corporate-Financial Complex. That total is trillions of dollars over the years. It’s a huge flow of money.
It’s debt-financed consumption pure and simple. But this branch of debt-financed consumption is guaranteed by the taxpayer, no questions asked.
You don’t have to have good credit to get a student loan, and you don’t have to have income, you don’t even have to prove that you will have income that will allow you to pay back the loan. You just need to be a student – and you don’t even need to be preparing for a profession that would earn you enough to where you could pay back the loan.
And then you spend every penny of this borrowed money. Some of it goes to the school for tuition, and perhaps room and board, and fees. Other students use it for off-campus housing, and these rent payments go to private landlords.
Everyone is forced to buy textbooks – and that is one of the worst rip-offs out there with a monopolistic structure. Often, textbooks are “updated” and changed in such a way that used textbooks become hard to deal with or useless. Electronic textbooks are designed so that they cannot be transferred to others. They’re ridiculously expensive. The textbook publishers are getting rich and fat. And the student pays for them with student-loan money.
Everyone needs a computer these days because a lot of work is done on a computer and submitted electronically. And they need software. And everyone needs a smartphone. Etc. And all these things are paid for with student-loan money. Apple is better at sucking up this moolah than any other company in America.
Then there are the fast-food chains on and around campus, and you have to eat, and so more student loan money goes to corporate America.
And the grocery stores, the ticket vendors, the apparel vendors, the airlines when you go back home, or when you go on spring break. And you may need a car and gasoline, and so on.
Then there are the universities themselves. They’re now vast properties with expensive buildings, enormous parking lots and parking garages, huge athletic complexes, and astonishingly beautiful administrative buildings.
Lower-level instructors and associate professors don’t get paid a lot, but top administrators, university hospital doctors, and coaches do get paid a lot – often well over $1 million a year, going up into the multiple millions of dollars.
Campuses are constantly expanding as universities buy new properties. And new buildings are being built, and the whole real-estate and construction industry is profiting from this.
And Wall Street has its fingers in this pie because these places need to be funded and the loans for the properties need to be securitized. And the companies that supply the students need to issue bonds and stocks and so on. And the whole educational system needs to be financialized.
Everyone is trying to get their slice of this pie – this being government money that is being handed out to students, no questions asked, so that they can pass it on to the enormous University-Corporate-Financial Complex.
The students are just the pass-through conduit. Much of the time, they don’t even understand what’s going on here. They’re just trying to obtain an education and pursue their dreams of becoming the greatest scientist or the best history teacher in the world or the most glorious dweller in a cubicle farm out to change how we live.
But they have become essential cogs in the profit machine of Corporate America.
Federal student loan money is sent to the financial aid office at the university, which uses this money to cover tuition that other financial aid does not cover. And for students who live on campus, the student loan money is applied to room and board. The rest of the money is handed to the student to pay rent if they live off campus, and to buy what they need, such as text books or laptops or that sandwich or concert ticket.
Every dime in student-loan money that gets spent is a transfer of taxpayer money to the University-Corporate-Financial Complex. This has three consequences:
- Corporate America took the money and the profits;
- Students are stuck with the debt;
- And taxpayers are left twisting in the wind, praying that students will eventually pay them back.
Those prayers will come to naught if student loan forgiveness becomes the law of the land. It will rip off taxpayers, whose money this is. And it will further enrich corporate America because now these debt-free graduates can spend more money on Apple products, rent, and other stuff.
In addition, student-loan forgiveness is patently unfair, in two ways:
One, it’s unfair to former students that are now taxpayers that sacrificed other pleasures in life to pay off their student loans and now have to pay off the student loans of others;
And two, more importantly, it’s unfair to a subgroup of students: Kids that took out the biggest loans to go to the most expensive schools, rather than a junior college, and that partied the most and spent the most and worked the least, if at all, to cover part of their expenses, will get the royal treatment because their debts from all this will be forgiven, and they got this stuff for free.
But kids who decided that they couldn’t afford to go to university and didn’t get a higher education, or went to a junior college for a couple of years instead, and who worked their butts off with side jobs during that time to minimize their reliance on student loans, or to avoid them altogether, well, they’re going to get shafted.
Sure, student loans can put a lot of pressure on college graduates. After the student graduates and finds a job, loan payments start. If the student has $50,000 in debt, with payments spread over 10 years, as student loan payments typically are, at the current interest rate of 4.5%, the monthly payment is around $520.
But the median asking rent of a one-bedroom apartment in the US is about $1,200. In San Francisco it’s over $3,000. So that $520 loan payment is not huge, compared to the other cold showers of reality that await our college graduates, in a world where central banks have seen to it that nearly everything is overpriced for them.
If the government really wants to do something about the soaring costs of education, it should reduce the amount students can borrow. This will force universities to offer better deals, or run out of students.
Undergraduate enrollment is already down 7% from the peak in 2010, according to government data. Universities are not in a position of strength here.
Now imagine what the threat of a 10% or 20% drop would do to the industry. Instead of jacking up tuition from year to year, and charging ever more for room and board and fees, and for textbooks, and the like, universities would have to go back to the drawing board, perhaps sell some land and buildings and stadiums, and focus on offering the best education at the lowest price, because student loans just won’t be big enough.
Universities, Corporate America, student housing landlords, and Wall Street are going to squeal, because they’re the recipients of this student loan money, and it’s their revenues and profits we’re talking about here. They will squeal because they want that gravy train to continue. And any reductions in student-loan limits will cut into their revenues and profits.
But heck, proposing anything that takes a bite out of corporate revenues and profits, even if they’re funded by taxpayers, is too tough a sale in America, and no candidate has had the balls to even bring it up.
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