Sub-prime Student Loans

Student Loan Protestors
[courtesy Google Images]

Bloomberg’srather be saving toward a home

But, not to worry, since, “Under legislation sponsored by U.S. Senator Elizabeth Warren of Massachusetts, Miss Day would save about $75 a month on her payments.”

Gee, that’s great! $75 a month! $2.50 a day! $900 a year! Surely, that extra $900 will be more than enough to help those crazy kids buy their first homes!

Senator Warren’s bill would let 25 million borrowers with federal and private loans refinance their balances at lower interest rates, according to Education Department estimates.

The bill proposes to cut the interest rate on student loans, but not the principal. The government won’t repudiate any part of the original debts. They’ll only let the college kids “refinance” those loans a slightly lower monthly payments.

Why? Probably because the financial system needs that $1.2 trillion in college education debt as collateral to justify trillions more in additional loans.

Under fractional reserve banking, if you put $1 trillion in debt-instruments in a bank vault as collateral, the bank can then loan up to another $10 trillion that it just “spins” out of thin air as consumer loans to help stimulate the economy.

The banks use mortgage notes as collateral. They use car loans as collateral. They use college loans as collateral.

So, the college kids shouldn’t complain much about their student loans. They’re functioning as wage slaves who are paying off some kind of loan. If they weren’t paying off on the college loan, they’d still be working as wage slaves to pay off their car loans or their new home loans. In the larger scheme of things, they’re doing their job by working as wage slaves to make a paper debt instrument (their college loan or mortgage) a valuable, performing debt-instrument suitable for use as collateral to justify making more loans to others who go into debt and thereby also become wage slaves.

(Some readers may suppose my persistent references to “wage slaves” is too cynical. Well, stick around. As you’ll read, I’m not alone in equating debt to slavery.)

However, the fact that Senator Warren is sponsoring legislation to reduce college loans payment by a whopping $75/month is evidence that the government fears that more and more college loan recipients are sensing their “wage-slave” status, may say “To hell with it!” and simply stop repaying their student loans.

If that happened, much of the $1.2 trillion in college loans would become worthless, much of the additional loans made bases on the $1.2 trillion in college loan debt instruments might have to be called in and our $17 trillion economy might suffer a several trillion dollar loss.

Thus, even though much of this “currency” that the college kids borrowed was intrinsically worthless and “spun out of thin air,” in our debt-based monetary system, those illusory debts can’t be repudiated without risking a serious jolt to the economy. Therefore, Congress, in its infinite wisdom, has tried to mitigate the student’s growing impulse to simply repudiate their debts by reducing those debts by a whole $75 a month. Who knows? By cutting the students’ loan costs by $75/month, the students may accept their status as wage slaves.

On the other hand, it may well be that if America’s college kids decided to chant, “Hell no! We won’t pay!,” their collective refusal to pay much or all of the $1.2 trillion debt might be enough to badly damage or even collapse the US economy.

The Bloomberg article continues:

“Alleviating the burden on student-loan borrowers, who have amassed more than $1.2 trillion in debt, has been a focus this week for Democrats such as Sen. Warren, concerned about the drag on the economy as young people avoid buying homes or cars or starting a business.

“‘That makes this an emergency situation,’ Warren said on Bloomberg TV.”

You bet it’s an “emergency,” alright. But not because our college grads can’t afford to buy their own homes, cars or start a business. It’s an emergency because the kids are talking about simply refusing to pay any more on their student loans. If the kids bail on their student loans, the economy may take a serious shot—and that’s the “emergency” that has Senator Warren’s knickers in a knot.

Note that the total student loan debt is about $1.2 trillion.  In order to understand the magnitude of this “emergency,” note that China holds about $1.2 trillion in U.S. Treasuries.  It’s been a common fear for several years that if China sold off all of its US bonds at one time, the impact on the US economy might be devastating.  It follows that if many or most of the college kids who’ve run up the $1.2 trillion student loan debt repudiated that debt, the adverse effect on the US economy might be comparable to China selling off its $1.2 trillion in US bonds.

Interesting, hmm?  America’s student borrowers may be as potentially dangerous to our economy as China’s holders of US Treasuries.

Apparently, President Obama also sees the “emergency” potential in the student loan problem because he’s endorsed Senator Warren’s bill and issued an executive order to expand a program that eases student loan payments.

“The bill . . . would be paid for by imposing new taxes on wealthy individuals. It would let borrowers refinance using 2013-2014 interest rates set for their type of loan. For example, someone who took out an undergraduate Stafford loan in the 2011-2012 year at a 6.8 percent interest rate could refinance at the 2013-2014 rate of 3.86 percent.

“[But] Senate Republican Leader Mitch McConnell advised members against supporting the bill, calling it a ‘tax increase styled as a student-loan bill’.”

Thus, we can bet that Senator Warren’s proposed bill may not clear the Senate and probably won’t clear the House. That means the college-kids/wage-slaves probably won’t even get the proposed $75 a month reduction in their student loan payments.

If so, we can expect the movement to default on student loans to grow.

“Jennifer Day, the consultant, is already enrolled in one federal program that lets her pay less each month by stretching out her payments to 25 years.”

Well, thank yew Mister Government! Given this new “federal program,” Ms. Day might not even be 50 years old when she finally finishes repaying her student loan for five years of college.

Q: Is this a great country, or what?!

A: “or what”.

“[Jennifer Day’s] loans have interest rates of 6.8 percent and 7.9 percent. She’s rarely missed a payment, yet her balance of $46,749 has barely budged from when she graduated four years ago because most of her payment goes toward interest.

“You can get a mortgage for half of that interest rate,” said Brunell, who wants to pay off her debt before starting a family. “It definitely impacts decisions, big and small.”

“While I don’t regret the decision to go to school, my student loans constitute long-term financial slavery,” Brunell said. “I don’t think any 18-year-old is fully prepared for the daily impact of actually paying them off.”

Exactly. First, my reference to “wage slaves” is virtually synonymous with one student loan recipient’s reference to “financial slavery”.   What some readers might regard as cynicism in me, is regarded by at least some student loan recipients as an objective description of the truth.

Second, and more importantly, how can a society reasonably impose a loan on an 18-year old kid that might take 25 years to repay? This isn’t a loan. It’s very near to the involuntary servitude that’s prohibited by the 13^th Amendment.

Congress knows that, one way or another, sooner or later, a significant percentage of student loan debtors are going to repudiate their loans. Some will choose to do so. Some will be forced to do so by by economic circumstances. But whenever the moment comes that much of that $1.2 trillion in college loans is repudiated, there could be several trillion dollars’ worth of consumer loans that may have to be recalled from our $17 trillion annual GDP economy.

As Senator Warren implied, the threat of default on student loans is an “emergency”.

It’s also an inevitability.

It’s going to happen. Just as surely as we were guaranteed to see a housing debt collapse back in A.D. 2007 & 2008 when the sub-prime mortgages were repudiated, we’re going to see a student loan collapse in the next couple of years.

After all, what is a loan made to an 18-year old high school graduate at an excessively high rate of interest, which debt might last for 25 years—if not a “sub-prime” loan?

The student loans were, in many instances, just as much “sub-prime” as the mortgages made to unqualified borrowers from A.D. 2000 through A.D. 2007.

At 18 years old, high school grads don’t have jobs, don’t even know what kind of work they’d like to do, won’t have a “real” job until they graduate at least four years later (if then). These kids are taking out student loans because they hope to eventually find work in an economy where government hasn’t shipped many of our industries, factories and jobs to foreign countries and encouraged illegal aliens to enter this county to take some of the remaining jobs and depress our average wages and standard of living.

But given the outflow of American jobs and influx of illegal aliens into an economy that’s been in recession for six years and may still be teetering on the edge of depression, how many of these college students have a realistic chance to repay their college loans? How many students do not?

Nevertheless, the banks have said, “Well, we’ll just loan $50,000 to 18-year old kids who won’t even have a job until four years after the loans begin.”

What could possibly go wrong?

In the end, the kids will realize that they’ve been played. They’ve been taken advantage of. They’ve been exploited by unscrupulous universities that want to over-charge for education and banks that want to lend money at excessive interest rates that most college kids can’t reasonably be expected to repay—and by a government that has severely damaged the US economy.

Those college kids who took our student loans were “sub-prime” borrowers and they will follow the same trajectory as the previous mortgage sub-prime borrowers.

The $1.2 trillion in student loan debts will be significantly repudiated.  The adverse impact on the US economy will be significant.

How else could it be?