Tag Archives: student loans

The Job Probably Didn’t Go To China

The U.S. has lost 5 million factory jobs since 2000. And trade has indeed claimed production jobs – in particular when China joined the World Trade Organization in 2001. Nevertheless, there was no downturn in U.S. manufacturing output. As a matter of fact, U.S. production has been growing over the last decades. From 2006 to 2013, “manufacturing grew by 17.6%, or at roughly 2.2% per year,” according to a report from Ball State University. The study reports as well that trade accounted for 13% of the lost U.S. factory jobs, but 88% of the jobs were taken by robots and other factors at home.  [Fortune 11/8/16] (emphasis added)

For all the palaver expended, and rhetoric spewed – 88% of the manufacturing jobs lost in the US were lost to “robots and other factors.”  The Ball State University study (pdf 2015) clarifies:

“Three factors have contributed to changes in manufacturing employment in recent years: Productivity, trade, and domestic demand. Overwhelmingly, the largest impact is productivity. Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories. Growing demand for manufacturing goods in the U.S. has offset some of those job losses, but the effect is modest, accounting for a 1.2 percent increase in jobs beyond what we would expect if consumer demand for domestically manufactured goods was flat.” 

For “productivity” read Robotics and technological changes to production.  If any workers had cause to complain – they might be Chinese, since a factory opened in Dongguan which is fully automated.  However, since it takes Homo Sapiens to develop ideas about how to improve processes and products, the robots alone can’t take over manufacturing.  So, get ready for a new word: Cobotics.

“Cobotics is rapidly gaining momentum, and successful implementations to date have focused largely on specific ergonomically challenging tasks within the aerospace and automotive industries. But these applications will expand as automation developers introduce more sophisticated sensors and more adaptable, highly functional robotic equipment that will let humans and machines interact deftly on the factory floor.” [PWC.com]

Robotics, cobotics… both are associated with new processes in manufacturing; processes which have direct impacts on the number of people hired by manufacturing firms, and the training required for those who are hired.  Thus, before ranting about the Chinese – it’s important to remind ourselves that manufacturing no longer means smoke stacks and simple assembly lines.  It’s 3-D printing, robotics, cobotics and other “productivity” factors as well.

If the job of wrenching the Wadjets to the Widgets has been taken over by the Gimcrack Special 300A, how to increase employment in the manufacturing sector? We might want to start with DEMAND. Demand for civilian aircraft (Boeing specifically) helped a 4.8% increase in durable goods manufacturing in 2016. [WSJ]  However, since most people aren’t inclined to purchase their mode of transportation from Boeing, let’s consider something more realistic – automobiles.

“And while new-car prices continue to rise, the underlying demand has softened.“We don’t have a lot of pent-up demand now like we did coming out of the economic crisis,” said Bryan Bezold, an economist for Ford Motor.

Ford was among several automakers that posted sharp reductions in sales during August compared with 2015. General Motors, the nation’s largest automaker, said that it sold 256,000 vehicles during the month, which represented a drop of 5.2 percent.

G.M. has taken some criticism on Wall Street for scaling back on less profitable sales to rental-car companies and other corporate fleets. Instead, the company has focused on retail sales to consumers, which generally produce healthier profits-per-vehicle.” [NYT]

What softens “underlying demand?” The obvious response is that people will not buy what they cannot afford.   However, they may be induced to buy what they can’t afford if the financing is sold along with the vehicle. [ADM] Someone has been selling something since 1976 – granted the downward spike during recessions, witness the FRED trends in vehicle sales.

Auto Sales 2016 FRED Which probably has something to do with the trends in financing vehicles, also conveniently calculated and graphed by FRED for Finance Rates on Consumer Installment Loans at Commercial Banks: (New autos, 48 month loan)

Auto Finance Rates FRED

It certainly is easier to see one’s way clear to signing the loan agreement if the rate isn’t the 17.05% it was in 1982, and it’s closer to the 4.25% in April 2016.  And, as a nation we’ve been borrowing, as reported by the NYFRB:

Household Debt 2016

The fly in this ointment is the reported default rate – indicating people who bought, on credit, that which they ultimately could not afford. Again, from the NYFRB:

Loan Default Rates 2016 So far, so good.  For a look at the compilations on household debt between 2015 and 2016 the NYFRB has that information here.  What’s the point?

If we are looking for factors which impinge on the consumer purchases of durable manufactured goods, like cars and trucks, it’s prudent to look at what other forms of indebtedness are also at play in household finances.  Mortgage debt is still the first draw on the households in this country, however, student loan debt was the only form of household debt that continued to increase through the Great Recession and now has the second largest balance after mortgage debt. [NYFR]

While it would be nice to discuss manufacturing policy in terms of imports, exports, and employment – if we maintain that people will not buy what they cannot afford, and if mortgage and student debts hold priority in household bookkeeping, then it isn’t too difficult to see where at least some of the “underlying softness” in such markets as motor vehicles might reside.

Further, as consumer indebtedness increases financial institutions have more fodder for the securitization market, a positive prospect for the financial markets. However, as we learned in 2007-08 there is a limit to the burden the American consumer can bear.

Those manufacturing jobs aren’t just disappearing into China and Mexico, they’re disappearing literally into the waiting “arms” of the Gizmo 9870B robot; and, if demand doesn’t increase above the rather paltry level noted above, then all the credit rate drops in the world won’t keep already overburdened consumers from “softening their demand.” 

Wait. Watch.

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SLABS: How to make money off someone else’s private student loan


SLABs, and no we aren’t talking about the stuff of which patios are made, or the tiles that can be laid on kitchen floors. Nor, are we talking about some Silicon Valley laboratory firm.  Let’s focus on Student Loan Asset Based securities.  Yep, “securitized” assets – like mortgages, auto loans, credit card receivables, etc.  We do remember the mortgage thing? Right?

SLABs were hot in 2013. [WSJ]  In fact, see if you can make sense of the following description:

“Student loans are souring at a growing rate—and investors can’t seem to get enough. SLM Corp., the largest U.S. student lender, last week sold $1.1 billion of securities backed by private student loans. Demand for the riskiest bunch—those that will lose money first if the loans go bad—was 15 times greater than the supply, people familiar with the deal said.” [WSJ]

Why would investors be banging on the doors for those loans which are the most likely to go into default?  I think we’ve seen this movie before, and the ending (2007 – 2008) wasn’t pleasant for anyone.

The Basic Materials

Once upon a time Sallie Mae or SLM, was a government sponsored lending firm specializing in student or educational loans.  That was the case until 2004 when Sallie Mae went private and it’s now a publicly traded private sector corporation. SLM securitizes private education loan by selling them to the SMB Private Education Loan Trusts. The Loan Trusts (2014 and 2015) show “issuance details” online (here’s 2014-A)  There was $382 million in the August 7, 2014 records; divided into five categories with varying rates of return. Scrolling down we find the ‘master servicer’ as Sallie Mae Bank, the sub-servicer as Navient Solutions, Inc., the indentured trustee being Deutsche Bank National Trust Company, and the underwriters Credit Suisse and the Royal Bank of Scotland. [SLM]   Navient Solutions, Inc. is simply the name adopted in 2014 for Sallie Mae’s loan management, servicing, and asset recovery operation. [Bloomberg]  An ‘indentured trustee’ is:

“A financial institution with trust powers, such as a commercial bank or trust company, that is given fiduciary powers by a bond issuer to enforce the terms of a bond indenture. An indenture is a contract between a bond issuer and a bond holder. A trustee sees that bond interest payments are made as scheduled, and protects the interests of the bondholders if the issuer defaults.” [Investopedia]

The underwriters, in this instance Credit Suisse and RBS, are the firms which act as sales personnel for the bonds bases on securitized private student loans.  So, we have SLM issuing the bonds, Deutsche Bank National Trust acting as the agency responsible for bond registration, transfer, and payment of bonds, while Credit Suisse and RBS are the ones selling the bonds.   Sounds impressive, however those private loans comprise only about 8% of the total student loan market – the remaining 92% are Federal Stafford and PLUS program loans.  But – the numbers are still sufficiently high to interest SLM, Deutsche Bank, Credit Suisse and RBS, because there’s about $92 billion involved in the private student loan market. [PSL]

Slabs without much mortar

Recall for the moment what got Wall Street in major trouble during the Housing Bubble.  Investment firms issued bonds, and then played with derivatives based on those mortgage based bonds, without being all that sure the loans were going to be paid off.  Thus, it was extremely difficult, and in some instances impossible, to calculate what the bonds were actually worth. Enter the credit rating agencies who (for a nice fee) stamped AAA+++ on what should have been recognized as piles of garbage; the investors couldn’t get enough of these, so even more garbage piled up as the investment houses bet on whether or not the assets were worth anything.  Enough garbage was included in the piles of paper that the whole pillar of paper crashed.

What’s saving us from the prospect of another bubble of epic proportions is that the market in private student loans is very small – that $92 million is a drop in a very large bucket of corporate and commercial debt. [Atlantic]  Another bit of good news is that because of the Dodd-Frank Act there is more transparency required in dealings in asset based securities.  [SEC]  [WSJ] The bad news is that Republicans in Congress have been wailing for the repeal of the Dodd-Frank Act as “burdensome regulation” of the banking industry.  Or, “make the SEC back off and let us get back to trading asset based securities like we used to in the Good Old Days.”

Who’s holding up the scaffolding?

Another bit of bad news is that while lenders are looking for new customers (students willing to take on private loans) we’re not tracking some important information about those loans.  For example, the default rate for Harvard is less than 2%, while the default rate for the Arizona Automotive Institute is nearly 42%.  [Bloomberg] Interestingly enough, there’s a long list of for-profit educational institutions with default rates higher than 28%. What we don’t need to see are more for-profit training schools encouraging more private student loan debt, debt which someone somewhere hopes will be hedged with private loans more likely to be paid off – because at bottom the funds to pay investors have to come from students paying off the loans.

Don’t panic yet, yes – there’s a hungry market for student loan asset based securities (perhaps in part because some old Federally backed loans were in the pipeline originally) and the market is relatively small albeit subject to some of the valuation mistakes of the Old Investment Houses – the ones who went bust in 2007-2008.   There’s another reason for hope: The Consumer Financial Protection Bureau – the agency the Republicans can’t seem to wait to dismantle. [DB 7/30/14]

One of the provisions of the Dodd-Frank Act was the creation of an ombudsman for student loans which is part of the CFPB.  In the 2014 annual report (pdf)  it’s of interest to note that the biggest problem area was NOT repaying student loans but in getting financial institutions to cooperate with repayment programs and dealing with servicers and lenders (57%). If this sounds like a reprise from the Mortgage Meltdown Days it might be because some of the same actors are involved, at least in terms of complaint volume: JPMorganChase up 56% from 2013; Sallie Mae Navient up 48%; Wells Fargo up 8%.  The annual report indicates problems in the following areas: (1) There is no clear path to avoid default. (2) Proactive outreach from borrowers was too often unsuccessful. (3) When repayment options are made available they are too often too little too late. (4) In some cases repayment options were allowed only after the loan went into default. (5) Short term forbearance options were often associated with processing delays, unclear requirements, and unaffordable fees. (6) Many lenders force a choice between staying in school and repaying the loans.   There is a reason for the Ombudsman’s concern. The Sallie Mae Settlement.

The FDIC announced a settlement with Sallie Mae on May 13, 2014 in which Sallie Mae was charged with (1) inadequately disclosing its payment allocation methodologies to borrowers while allocating borrower payments across multiple loans in a manner that maximizes late fees; (2) misrepresenting and inadequately disclosing in its billing statements how borrowers could avoid late fees; (3) unfairly conditioning receipt of benefits under the SCRA upon requirements not found in the act; (4) improperly advising servicemembers that they must be deployed to receive benefits under the SCRA; and (5) failing to provide complete SCRA relief to servicemembers after having been put on notice of the borrowers’ active duty status.

The Structure

As long as the private student loan market remains a small part of the total structure we can breathe a bit easier about its effect on capital markets. Secondly, the private student loan market has relatively low yields and thus doesn’t get included in most structured derivatives.  Third, the old ‘recourse loans’ (for those with really low credit scores) are a thing of the past, most private loans now take higher scores into consideration. [QuoraWhat will continue to keep investors whole?

  • Continued monitoring of the private student loan market by the CFPB so that loans taken out will continue to be loans paid off, even if this means some reduction in the revenue streams for the bankers.
  • Continued oversight by the SEC and FDIC under the terms of the Dodd-Frank Act so that we don’t return to the Wall Street Casino of old should there be changes in the private student loan market.
  • Improvement in the servicing of private student loans such that there are clear pathways to avoid default; effective and efficient communication between borrower and lender regarding repayment options; and, that this communication happens in a timely manner.
  • Requiring lenders to make all the term of the private student loan clear at the outset including forbearance conditions, and any and all fees associated with deference, late payments or defaults.

The Foundation

From a Wall Street perspective private student loan asset based securities are a niche market, with some revenue potential – enough to keep the big banks interested – however, not with enough total clout to cause major financial displacement should the Quake happen.  And yes, there are some institutions making nice fees for making student loans, selling student loans, securitizing student loans, servicing student loans, and collecting payments on student loans.  Capitalism works, the trick is to keep free market capitalism from becoming casino capitalism and/or financialism.

A more existential question is how to maintain a system in which students are burdened with so much debt (Federal program/Private loan program) that they are deferring consumer purchases which would contribute to the growth of the overall economy.  Deferred student loans can impact mortgage qualifications. [credit.com]  We know this because the  rate of homeownership among those with student debt is 36% below that of unencumbered home buyers, and we’re losing about $6 billion annually in new car buying capacity.  [Forbes]  And, this is not an inconsequential problem:

“Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.” [NYFed]

Given some of the trends reported by the NY Federal Reserve’s study of educational loans, how do we make sense of an economic system in which wages and salaries are stagnant while it is taking those from lower and middle income backgrounds longer to repay student loans?  How do we sustain an economy when 29% of borrowers are paying off their loans, while 34% are making regular payments but the balance is increasing, and 20% have reported credit related problems, with another 6% delinquent and 11% in default?

These are not simply economic issues, they are also political as well. Is there the political will to make post secondary education more affordable for more people?  Are we headed toward the privatization of our public institutions of higher education and post secondary training, and is this trend combined with the rising level of student indebtedness creating cracks in our economic foundations?

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Filed under consumers, Economy, education, financial regulation, privatization

Grand Old Ivy Gets More Expensive

Grand Old Ivy

When Shepherd Mead published “How to Succeed in Business Without Really Trying” in 1952 tuition at Harvard University was $600.00.  When the Loesser & Burrows musical rendition was produced on Broadway in 1961 Harvard tuition was about $2,370, and the tuition for a four year public institution was about $1825.00.

As the following chart demonstrates it was a whole lot easier to sing the Alma Mater 50  years ago than it is for middle income students today:

Tuition increases chartNote that the precipitous climb begins around 1984.   One factor involved in this fiscal situation is that from FY 1980 to FY 2011, with only two exceptions (Wyoming, North Dakota) all the states have reduced their financial support in a range from 14.8% to 69.4%. Colorado reduced support by 69.4%, South Carolina by 66.8%, Rhode Island by 62.1%, Arizona by 61.9%, Oregon by 61.5%, Minnesota by 55.8%, Virginia by 53.6%, and Vermont by 51.3%.  [ACEnet]

The Bottom Line: “Based on the trends since 1980, average state fiscal support for higher education will reach zero by 2059, although it could happen much sooner in some states and later in others. Public higher education is gradually being privatized.” [ACEnet]

“Down At the Bottom of the Heap, Where The Mud Is So Very Very Deep”

There are various and sundry explanations for this, and most critics start by contending that without showing inflation adjusted amounts the argument can’t be made that state support has been dwindling, or in some cases spiraling downward.  This would be a valid argument except that when inflation adjusted figures are used the results are essentially the same. [ChronHE]  State support is dropping and tuition and fees are increasing.

The next common refrain from the privatizers is that the universities are full of “administration bloat.”  This, too, fades when the numbers are crunched.  There’s a chart for that too:

College Admin What the actual numbers show is that for research universities what’s increased is the category of part time faculty. What’s decreased is the category including “executives and administrators.”  The same holds true for non-research based institutions. [Demos]  A rational explanation for the increase in professional positions might be found in additional numbers of individuals involved in information technologies, health care services, and security services.

One of the more self-serving arguments is that if you give students more student aid, the colleges and universities will simply raise their tuition to absorb more of the financial benefits.  This notion was popularized by Reagan appointee William Bennett, and while it’s been debunked almost entirely since, it’s an argument which simply won’t disappear.  The GAO was the most recent research to debunk the Bennett Hypothesis:

“The most recent, conducted by the Government Accountability Office (GAO) in 2011, took advantage of a unique “natural experiment” to test the Bennett hypothesis: the substantial increases in Stafford Loan limits between 2007 and 2009.22 In 2007, the yearly loan limits, adjusted for inflation, ranged from $2,925 for freshmen to $6,125 for upper classmen. By 2009, they had risen to $5,750 and $7,825, respectively. All told, the yearly borrowing limit for all undergraduates increased by an average of $2,340. However, average tuition at public 4-year universities rose by just $540 over the same two years, in line with recent historical averages, leading the GAO to reject the possibility of a relationship between the two. Additionally, these increases in borrowing limits were the first since 1993, meaning that the inflation-adjusted value of the limit had declined for more than a decade during which tuitions rose steadily. All told, both the empirical evidence and academic consensus deem the Bennett hypothesis false.” [Demos] [original GAO pdf]

Actually since the Demos Report there have been some more recent studies by the GAO.

The GAO looked at the possibility of increased tuition caused by the reforms made to the federal student loan programs and reported in February 2014: (pdf)

“Although college prices went up, we were unable to determine whether or not these increases resulted from the loan limit increases because of the interference of various economic factors occurring around the same time these loan limit increases went into effect. Specifically, when the loan limit increases went into effect, the nation was in a recession which created one of the most tumultuous and complex economic environments in recent history, affecting families’ employment, income, and net worth (see fig. 4). As shown earlier, the availability and types of federal and institutional financial aid available to students increased around the time the new loan limits went into effect (see table 1), also making it difficult to discern any effect those loan limits may have had. For example, the dollar amounts of Federal PLUS loans, federal tax benefits, Pell grants, and federal veterans grants all increased. Further, the amounts of state and institutional grants and loans also increased, while the amounts of state appropriations for colleges and college endowments decreased.”

In short, a direct cause and effect relationship cannot be discerned because there are simply too many other economic and demographic factors which have to be considered in the mix.  Not only is there not a way to establish causality, it isn’t possible to even propose a correlation.

Perhaps the most ear drum splitting whine from those who advocate for the eventual privatization of American public colleges and universities is the whinnying that those institutions are accepting people who “should never have gone to college in the first place.”  The inference is clear, these young people are a “waste.”  The American Enterprise Institute offers a softer, albeit more verbose, rendition of this complaint.

Brookings, more interested in BLS statistics on education and the labor force than in compiling survey based impressions of the value of education, offered this rejoinder:

“… it is indisputable that workers with more education typically earn significantly higher wages and are far more likely to be employed than workers who have no post-secondary education. For example, the latest figures from the Bureau of Labor Statistics show that workers with only a high school education are twice as likely to be unemployed as those with at least a bachelor’s degree. Among the employed, the median college educated worker earns 84 percent more than the median worker with only a high school education. Even those with just some college and no degree or an associate’s degree earn 16 percent more. College educated workers are also much more likely to be in the labor force.” [Brookings Edu] (emphasis added)

The correlation between education and employment thus secured, we can probably dismiss this complaint from the Conservatives as simply another layer of the anti-intellectualism all too common in that sector.

One thing that makes the Conservative arguments against increased funding for colleges and universities yet more incredible  is their interminable reference to “liberal elites;” note the Santorum jabs at President Obama for being a “snob” because he wants more young people to go to college, or charging that colleges are simply a form of “indoctrination.”

It appears that the one way to bring college tuition levels down, or at least to stabilize the situation, is to support increasing levels of state funding for both the research based and teaching oriented public institutions of higher education.   However, this advocacy will be faced by the forces of privatization (not an inconsequential element in Austerity Politics and Economics) and those who have found a way to increase their wealth through investments in SLABs (student loan asset based securities) – a topic for a post down the road.

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They’re Back: Banks, SLABS, and the Opponents of Dodd Frank

bankerThere are several reasons the Banker’s Boys in the U.S. Congress would like to rip the guts out of the Dodd Frank Act.  There’s a reason they fought the creation of the Consumer Finance Protection Bureau, and more reasons why the 113th Congress has tried to grab control of the agency, strip the agency of funding, or otherwise make the Bureau a hollow shell of protective camouflage for the bankers.  Here’s one of those reasons:  The Securitization of Student Debt.

Flashback: On August 29, 2012 the Consumer Finance Protection Bureau issued a report on student debt. (pdf)  One section of the Executive Summary contained information which ought to have triggered some alarms:

“From 2005–2007, lenders increasingly marketed and disbursed loans directly to students, reducing the involvement of schools in the process; indeed during this period, the percentage of loans to undergraduates made without school involvement or certification of need grew from 18% to over 31%. As a result, many students borrowed more than they needed to finance their education. Additionally, during this period, lenders were more likely to originate loans to borrowers with lower credit scores than they had previously been. These trends made private student loans riskier for consumers.”

Sound familiar? Have some of the tonal qualities of the Subprime Mortgage Debacle? Over-extending credit, to the less credit worthy, placing them at greater risk of default, and doing it during the Great Housing Bubble?

Flashback 2005: Indeed, by 2005 there was a new bit of jargon in the world of fixed income investments — SLABS, or Student Loan Asset Based Securities.  The definitions can be illustrated by this information from one part of the securities industry:

“Student Loan ABS (SLABS) can be appealing to fixed income investors because they offer high credit quality, credit stability, and low spread volatility. SLABS backed by federally reinsured loans command tight spreads, in roughly the same range as deals backed by credit card receivables or auto loans. SLABS backed by other loans (so-called “private” student loans) command somewhat wider spreads, reflecting incrementally greater perceived credit risk.” [Nomura 2005 pdf]

Not to oversimplify too broadly, but there it was in 2005, a description of asset based securities (packages of student loans securitized into financial products) divided into two parts, the products based on guaranteed student loans and the less secure private student loans.  Note, please, that the advice on offer in this report doesn’t apply to the students who took out the loans — it is advice for “fixed income investors.”

Have we mentioned, at least a gazillion times, that one man’s debt is another man’s asset?  And so, the student loans were packaged (just like the home mortgages) by such dealers as Nelnet Student Loan Trust, Sallie Mae Student Loan Trust, Northstar Education Finance, Collegiate Funding Services, Access Group Inc., Education Funding Capital Trust, College Loan Corporation Trust, and others. [Nomura 2005 pdf]  Here we meet our old friend, the Tranche.

“A piece, portion or slice of a deal or structured financing. This portion is one of several related securities that are offered at the same time but have different risks, rewards and/or maturities.”

Perhaps it was that SLABS were sold as somehow being “safer” investments than their home mortgage cohorts, and maybe safer than the consumer credit securitized assets.  After all, the borrower couldn’t walk away from a student loan in most instances.  What could go wrong?

Flashback 2012:  What, indeed, could go wrong?

“Meanwhile banks have been slicing and dicing student loans into derivative financial instruments called “SLABS” — student-loan asset backed securities. We’ve seen this movie before — the one where big banks mass-market loans to a population with stagnated wages and dwindling economic prospects, then bundle them and sell them to investors who haven’t reviewed the way they were underwritten and sold.” [Eskow, HuffPo]

And, it all worked really well … until it didn’t.  There are those “derivative financial instruments” (read financial paper products) again, and again, and again.  In the wake of the derivative debacle of 2007-2008 the financial sector did some belt tightening and the CFPB was able to report underwriting and marketing changes which were far more responsible.  Additionally, the CFPB ‘autopsy’ of the student loan situation revealed some of the previous practices associated with economic issues:

#1. Some of those who took out private student loans did not understand that they had fewer repayment options than if they had assumed Stafford loans.  This sounds remarkably similar to the mortgage sales which didn’t quite lead to an understanding  about balloon payments, interest rate changes, etc.

#2. The private student loans were most commonly sold to people who were attending for-profit institutions.  While private loans were taken out by only 14% of the total undergraduates, students at for-profit schools held 42%.

And, to make matters even more murky, many of the loans were tied to LIBOR, which was perhaps not as above the board as one might have assumed before 2008. [TP]

July 28, 2014: If a person were thinking the provisions of the Dodd Frank Act, and the activities of the Consumer Financial Protection Bureau may have put more than a damper on the financial sector proclivity to create ways to peddle paper in order to create more ways to peddle paper — please think again.

Enter So-FI, Lending Club, and Prosper. “SoFi’s niche is refinancing student loans. But not just any loans. The kind of schools that are most represented in the program are selective colleges like Harvard, New York University and Northwestern. Their alumni provide the money — The students must also have a job lined up after graduation.” [CNN]  But wait, here comes the packaging. Compliments of Eaglewood Capital which securitized loans from Lending Club.

This time is slightly different. Did we notice that the packaged loans aren’t from the for-profit educational sector? Or, that most undergraduates won’t get re-financed via this new securitization scheme?  Low risk, coupled with above average returns and who might be interested in this newly peddled paper?  If you’re thinking we have the rich bailing out the rich for the benefit of the richer, the conclusion might be close to the target. Fitch explores the prospects:

“In our view, most future securitizations are likely to be concentrated with large non-bank servicers, who are also the traditional FFELP buyers. Of the 13 Fitch-rated FFELP deals that closed in first-half 2014, 10 were issued by Navient Corporation, Nelnet Inc. and the Pennsylvania Higher Education Assistance Agency (PHEAA). As some portfolio acquisitions include servicing transfers, we believe some small NFPs could experience lower account volume and profitability. These servicers are already facing sustainability issues, as some may not have the scale to weather the pressures brought by the Budget Control Act of 2011 and the termination of FFELP. They may also be pressured in the near term by rules proposed by Congress that would establish a common set of performance metrics, incentive pricing for servicers and allocate accounts to NFPs that meet the requirements.” [Reuters] *NFP = not for profit servicers

Those major players from 2008 (Nelnet, PHEAA, etc.) are still playing, and some of the newer participants in the game may not be so profitable in the long run because someone might be watching over their shoulders. “Under a law that took effect in March 2010, the government stopped making student loans through private companies that funded themselves in the market. The government now issues loans directly. Lenders sold $20 billion of student-loan securities last year, down from $62.2 billion in 2005, according to Wells Fargo.” [BloombergNews]

The good news may be that there is less Casino Activity among the bankers in the securitization of student loans, or the creation of SLABS. The bad news is that the bankers are going full bore to get rid of those pesky regulations and the CFPB which serve to put a lid on the Bubble Behavior of the recent past.

The July 23, 2014 session of the House Financial Services Committee took testimony from all the usual suspects on “Dodd Frank: Four Years Later.”  Rep. Hensarling’s Committee heard from the CEO of First State Bank, a partner in Treasury Strategies, an FMC representative on behalf of the Coalition of Derivative End Users, and a ‘resident scholar’ of the American Enterprise Institute.  The counter-balance? Former Representative Barney Frank.  The AEI testimony is instructive, [Pdf] if predictably repetitive.  A summary:

Regulation creates uncertainty, discourages investor due diligence, increases regulatory burdens, gives too much power with too little Congressional oversight, promotes a ‘naive strategy for promoting financial stability, and doesn’t solve the Too Big to Fail problem.

There is nothing new here, merely the recital of every anti-regulation talking point since the dawn of time.  However, redundant as the arguments may be, the  Republicans in the House of Representatives would very much like to repeal the Dodd Frank Act.  During the 112th Congress H.R 87, H.R. 1062, H.R. 1539, H.R. 1082, H.R. 1610, H.R. 1573, H.R. 1121, H.R. 1315, H.R. 836, H.R. 1223, @. 746, and  S. 712 were all introduced intending to either repeal or diminish the regulations in the Dodd Frank Act. In the 113th Congress, H.R. 46 is an outright repeal bill coming from Rep. Michele Bachmann (R-MN) Rep. Ted Yoho (R-FL) and Rep. Adrian Smith (R-NE)

The prospect of a wholesale repeal is dim, but not the notion that the statute could be ‘nibbled to death by ducks.’ [Hill]  House Republicans did manage to get one bill passed in June 2013 to restrict SEC and CFTC rule making capacities — arguing ironically that the agencies had 3 years to get the rules done and had not made enough progress — in the face of nearly overwhelming stalling tactics by financial sector interests and their litigators.

While the CFPB attempts to alleviate the more obvious abuses perpetrated by unscrupulous or unethical lenders, and issues annual reports (most recent 2013) noting that there were 3,800 consumer complaints about student loans, 87% of which were directed at 8 companies. The House Republicans persist in attempts to subject the agency to Congressional micro-management, if not outright dissolution.

We should expect the mid-term election rhetoric to mirror the testimony of the AEI in the most recent House Financial Services Committee hearing.  The Dodd Frank Act will be attacked “in general.” It’s reasonable to predict much will be made of the Too Big To Fail Argument, as if the consolidation of the financial sector is a function of federal statute rather than processes associated with the cyclical nature of financial enterprises.  It will be attacked as “too burdensome” for small banks.  It isn’t. It will be attacked as “big government.” Any attempt to reign in the Bankers will always be so characterized.

What opponents of financial regulatory reform won’t discuss is how the Consumer Financial Protection Bureau is attempting to guide the lenders and by extension their secondary markets into the construction of a more equitable, operable, less volatile, and more sustainable student loan sector.

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The Old College Try: The Student Loan Bill Part II

Mortar BoardSenate Majority Leader Harry Reid, D-Nev… said that the mounting student loan burden – more than $1 trillion across the economy – prevents college graduates from being able to otherwise move on with their lives by getting married or purchasing homes. [CBS]

And so, the Senate GOP filibustered the Student Loan Bill. Let’s delve a bit deeper. There were two items from Republicans on the topic in the article quoted above.  (1) Senator Mitch McConnell said the bill was a campaign publicity stunt.   This implies two things. First, that Senator Elizabeth Warren (D-MA) wasn’t really serious about her piece of legislation.  Somehow, this doesn’t sound like a legislator who wasn’t serious about her bill: “Mitch McConnell is there for millionaires and billionaires,” Warren said. “He is not there for people who are working hard playing by the rules and trying to build a future for themselves.” [HuffPo] Nor does the fact that Senator Warren is about to take her umbrage on the campaign trail for McConnell’s opponent lead a person to believe she didn’t want that bill to at least get a vote.

Secondly, the process of getting legislators of all stripes on the record is as time honored as the republic.  Members of Congress were vilified for voting for, and against, the Alien and Sedition Acts of 1798.   The charge that the bill was merely a publicity stunt allows the opponent to denigrate the value of the measure without addressing any of its provisions or the problem it attempted to address.

(2)  There was the side-step ploy attempted by Senator Lamar Alexander (R-TN):

“This is not a serious proposal. It’s not going to help people. College graduates don’t need a dollar a day tax subsidy to pay off their loan. They need a job…and they’re experiencing right now the worst situation for finding a job that they’ve seen in a long, long time,” Alexander said.” [CBS]

This isn’t a serious rebuttal either.  His response ignores the fact that the students aren’t the ones being “subsidized” — it’s the lenders who agree to issue student loans because the federal government will guarantee repayment.  The subsidy, as the former Education Secretary in the George H.W. Bush administration should know, goes to the lenders not the youngsters.   Yes, we do need some legislation which would improve the job market — but changing the subject still doesn’t respond to the needs the bill sought to mitigate.

There are some options, ranging from probable to problematic, but options nonetheless.

I. Skip the “pay for” requirement.  It’s not like this hasn’t been done. For example, the bill to allow veterans to secure private health services if the VA cannot schedule their care on a timely basis passed the Senate — without a pay for element attached. [USAT] In fact, H.R. 3230 (Sanders/McCain) passed 93-3. Only Senators Corker (R-TN), Johnson (R-WI), and Sessions (R-AL) voted against it. [roll call 187]  Within the space of 24 hours one group (students) was told that a pay-for was absolutely necessary, while another (veterans) was told it wasn’t.  So, what about students who are veterans?

II. If the older Republican argument is resurrected that the more the federal government subsidizes college costs the higher the colleges and universities raise their tuition and fees, then how can higher education be made more affordable without necessarily increasing subsidies for the lenders?

As noted yesterday, one of the major problems for public institutions is the dis-investment in higher education in the last quarter of a century.   One approach to this might be to apply an Effort Test.  If a state doesn’t support its institutions of higher education, why should the federal government necessarily pick up all the slack?

The last Nevada budget, for example, included $750 million for higher education, including seven institutions.  [Bloomberg] Applying the plastic brains, we’ve agreed to spend some 11.36% of the total state budget on higher education.  There are numerous options for implementing an Effort Test. There’s the ‘deadline’ approach in which if state funding totals don’t meet a particular standard the subsidization of loans offered by lenders to its students isn’t guaranteed.  In the Nevada example, if the deadline were set to 12%, would that have met objections that the state wasn’t adequately funding some northern institutions and given the federal government more assurance that the state was serious about appropriate adequate funds for its institutions of higher education?

There are all manner of ways in which ‘deadlines’ can be approached, and these can range from solid to sliding scale.  It would take some thinking outside the box, but we’re boxed in already.

We might also think in terms of differentiation.  The College Board reports that the average level of student indebtedness for a four year degree at a public institution is about $26,500.    The average for Nevada is approximately $20,568 with about 41% of students using student loans. [PSD.org] (Debt averages for UNLV = $21,126, and for UNR = $19,500) These figures put Nevada in the “low” debt category in comparison with other states. [PSD.org pdf]

High debt public colleges and universities range from indebtedness levels of $33,650 to $41,650. The Project on Student Debt provides some comparisons with ‘high debt’ private non-profit schools: “The 20 high-debt private nonprofit colleges listed here have average debt ranging from $41,500 to $49,450. The tuition and fees at these colleges range from $12,350 to $40,450, with six charging less than the national average for this sector.” [PSD.org pdf]

As painful as it might be, it is possible to suggest that we differentiate between public institutions and non-profit private ones.  We are, after all, speaking of back-stopping student loans with tax dollars, and if so, then why are we guaranteeing the loans to students at private non-profit institutions at the same level as the taxpayer funded public ones?   We also know that more high debt  public institutions accept students from low income areas, contrasting with high debt non-profit institutions at which this acceptance rate is lower.  [PSD.org pdf]

When we get to the graduate degree level the numbers become more complex.  For example, graduate degrees in the health sciences represent about 5% of the total graduate degrees conferred by educational institutions in this country, and 87% of theses graduates owe student loan debts. Those graduates in the 50th percentile in terms of indebtedness owe $161,772.  [NAF pdf] Now we’re between a rock and a hard place in terms of differentiation — we need physicians, dentists, and pharmacists.  If we suggest that we will back stop student loans at the bachelor’s degree level but offer less to lenders to make graduate school loans, we’re treading on our own acknowledged needs.

Law degrees are expensive as well, the 50th percentile rate being $128, 125 in debt.  But try telling a municipal or local judicial department that we don’t need more lawyers.  Public defenders offices are chronically understaffed, witness the Missouri example, and often seek to refuse cases because there simply isn’t anyone with the time available to do a decent job.  Local prosecutors have to balance the demands on their staff with restrictions intrinsic in their budgets.

When discussing graduate level student loans we need to factor in such things as the Public Service Loan Forgiveness Program.  If a person’s employment includes emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly, then he or she might qualify for loan ‘forgiveness’ after making 120 ‘regular payments.’

There’s a balancing act in this differentiation realm as well — Do we want to reduce loan guarantees at the graduate level, or do we want to continue to offer the loans at the going educational cost rate and then ‘forgive’ them if the person is employed in an area of acknowledged national need?  This question addresses the issues regarding the medical, legal, and educational professions, but what about those who want an MBA? Or an MS in computer technology?

One of the obvious problems with differentiating at the graduate degree level among all the possible graduate level programs offered by educational institutions is that no one has a crystal ball.  How many graduates in computer sciences do we really need? How many in the bio-technology field?  What if we find out that members of the U.S. military who have MBAs make better procurement officers?

Of all the differentiation proposals made during the student loan indebtedness debate, the issues surrounding guaranteeing graduate school loans is potentially the most problematic.

We do know what won’t solve the issues — anti-intellectual biases spewed forth about pointy-headed academics and ivory towers isn’t going to get us more archivists, public defenders, assistant district attorneys, computer system engineers, civil engineers, dentists, doctors, special education teachers, registered nurses, geneticists, and veterinarians.

Bemoaning the level of pay necessary to hire and retain professors and research specialists; and, demanding to know ‘just how much’ these ‘parasites on the body politic’ are earning isn’t going to help either.  The hard sad fact of life is that grandma’ was right: You get what you pay for.   The education and training of the next generation of public defenders, civil engineers, special education teachers, and all those other specialties we need, doesn’t come cheaply and never has.  Those harboring the delusion that they can get “something for nothing” — that we can bellow we’re Taxed Enough Already and still get an emergency dental appointment really is hallucinatory.

Recommended Reading: Student Debt and the Class of 2012, Project on Student Debt, December 2013. (pdf)  The Graduate Student Debt Review, Policy Brief, New America Educational Policy Program, 2014 (pdf). “How much student load debt is from grad students?” US News World Report, March 25, 2014.

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What can you get for under 6.8%?

What can you get for 6.8%?  That would be the rate for a student loan as of July 1, 2013.

As of July 7, 2013 rates for other kinds of loans are:

30 year fixed rate mortgage     4.40%

15  year fixed rate mortgage     3.45%

5/1 ARM                                             3.55%

30K FICO based home equity loan     5.19%

48 month new car loan                              2.57%

In fact the only thing worse than the student loan rate is the average rate for credit cards, at 15.27%.

Now, here’s some information from the Federal Reserve about what it costs for banks to use the “discount window:”

“Federal Reserve Banks have three main lending programs for depository institutions — primary credit, secondary credit and seasonal credit. Under the program enacted in 2003, Reserve Banks establish the primary credit rate at least every 14 days, subject to review and determination of the Board of Governors.

Primary Credit Rate: 0.75%Primary credit is available to generally sound depository institutions on a very short-term basis as a backup rather than a regular source of funding. Depository institutions are not required to seek alternative sources of funds before requesting advances of primary credit.

Secondary Credit Rate: 1.25%Secondary credit is extended on a very short-term basis to depository institutions not eligible for primary credit. It is available to meet backup liquidity needs when its use is consistent with a timely return to market sources of funding or the orderly resolution of a troubled institution.”

Now, what bank wouldn’t want to borrow at 0.75% to make student loans available at 6.8%?

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Student Loans: Deregulation, Debt, and a Drag On The Economy

Mortar BoardPost secondary students, in Nevada and elsewhere, should have been on notice as of July 20, 2012 that the student loan “business” was showing some remarkable — and disturbing — similarities to the subprime mortgage patterns developed before the housing debacle.  Now that the interest rate for student loans is back up to 6.8% it’s time to revisit this territory.

In summary: “A large portion of the student loan boom that took place from 2005 to 2008 was financed by Asset-Backed Securities (ABS), and because more money could be made off such loans, lenders became more aggressive in their lending practices. Increased profits gave lenders “an incentive to increase loan volumes” with “less incentive to assure the creditworthiness of those loans.” [ThinkProgress]

If this reminder sounds eerily familar, it should.  On August 29, 2012 the Consumer Financial Protection Bureau — the agency the banking lobby loves to hate — issued its report on the student loan sector. (pdf)  There have been some improvements, but not necessarily in the eyes of the banking establishment:

(1)  Professional investors fed the boom in student loans backed by asset based securities from a $5 billion industry to a $20 billion giant from 2001 to 2008.  This amount has contracted back to about $6 billion as of last August.  This does represent an improvement because the aggressive marketing of the ABS/student loans created the potential for yet another bubble which would inevitably burst.  Left to their own devices and deregulation the banking lobby was pleased to expand their bubble from 2001 to 2008, and the contraction indicates they’ve pulled back from some of the more egregious practices.

(2) One indication that the bankers were all too anxious to take advantage of the deregulation of student loans appeared between 2005 and 2007 when the percentage of student loans made without financial aid office involvement or certification of need increased from about 18% to over 31%.

As of the CFPB report publication the banking sector has pulled back in this realm.  Underwriting and marketing practices have changed, and for the better.  For example, between 2008 and 2009 the percentage of co-signed student loans increased from 67% to 85%.  In 2011 approximately 90% of private loans were co-signed and 90% of the loans made to undergraduates required the certification of need.

If we allow for the veracity of the old saw, “Past performance is the best predictor of future performance, ” then it appears immediately evident that the past behavior of the financial sector during deregulation was at least borderline egregious.  Arguments that the Consumer Financial Protection Bureau constitutes an “onerous burden on financial institutions” falls flat when the student loan practices are compared before and after the institution of more oversight and publicity… not to mention the Mortgage Mess.

As the relative merits of traditional student loans and private student loans are debated it’s well to remember that there is a crucial difference between the two: “A key distinction between federal student loans and many PSLs is interest rate risk. Today all federal student loans have fixed rates. Most PSLs are variable-rate loans with risk-based pricing, where pricing varies from consumer to consumer based upon an assessment of the creditworthiness of the borrower.” [CFPB pdf]  This is key to understanding how  formerly  6.8% fixed rate loans can be transformed into  potential 8.5% loans in a variable rate scheme.

There are some powerful reasons for the Congress of the United States of America to move from its individual and collective duff and address the issues surrounding student loans.

(A) Student Loan Debt is a drag on the national economy.   The NY Federal Reserve provides the following chart —

Student Loan Debt 1The NY FED offers a couple of explanations regarding the deleveraging of younger consumers.

“The decline in participation in nonstudent debt markets by those with a history of educational debt may be driven by a number of factors. First, a weakening in the labor markets since 2007—near the peak of consumer debt—has likely lowered graduates’ expectations of their future income. The decline in participation in the housing and auto debt markets may be a result of graduates decreasing their consumption, and thus debt, levels in response to these lowered expectations.”

While lowered expectations may be at the heart of declining consumption, what’s lowering those goals?  The NY FED observes,

“Consumers with substantial student debt may not be able to meet the stricter debt to income (DTI) ratio standards that are now being applied by lenders. In addition, delinquency in repayment has become more prevalent among student borrowers. Lee finds that delinquent student borrowers are extremely unlikely to originate new mortgages.”

The rock now meets the really hard place.  Those who incurred student loan debt during the boom times for the financial sector are now saddled with debt levels which disqualify them from getting home mortgages or other forms of consumer credit.   The NY FED has charts for this —

Here’s the increase in student indebtedness —

Student Loan market increasesAnd  here’s what happens to mortgages and automobile loan markets —

Student Loan Debt Home MortgagesThere’s an explanation for  the changing relationship between ownership rates and student debt levels which is supplied in summary form by the NY FED analyst:

“However, this relationship changed dramatically during the recession. Homeownership rates fell across the board: thirty-year-olds with no history of student debt saw their homeownership rates decline by 5 percentage points. At the same time, homeownership rates among thirty-year-olds with a history of student debt fell by more than 10 percentage points. By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors.  Now, for the first time in at least ten years, thirty-year-olds with no history of student loans are more likely to have home-secured debt than those with a history of student loans.”  (emphasis added)

Logical conclusion?  The higher the level of student debt the less likely a person is to buy a home — or a vehicle — of much of anything else.  (See also: Washington Post, April 17, 2013)

(B) Student loan debts are a constraint on future economic expansion.   Economic expansion in general requires savings.  As savers build up reserves the funds are not merely for their individual retirement or for household emergencies, the funds become part of the overall finances required to grow the U.S. economy.  And, Wells Fargo is worried … (now it’s worried?)

“Millennial Americans entered early adulthood in the wake of the Great Recession and know all too well the effects of a struggling economy. More than half (54%) of millennials say debt is their “biggest financial concern currently,” surpassing day-to-day expenses, according to a new Wells Fargo Retirement Survey (NYSE:WFC) focused on millennials’ attitudes toward savings and retirement. Forty-two percent of millennials say their debt is “overwhelming,” twice the rate of boomers who were also surveyed for comparison.”  [WellsFargo]

Those 42% who find the student loan indebtedness “overwhelming” are not only unlikely mortgage seekers and car buyers providing impetus for immediate economic growth, they are also less likely to be able to save for retirement, the education of their own children, or for household or medical emergencies in the future.

Wells Fargo analysis continues with the following observation:

“Paying off student loan debt is the top concern of millennials. More than half of millennials (64%) say they financed school through student loans as compared with only 29% of boomers who financed through loans. According to the Consumer Financial Protection Bureau, total student debt outstanding is over $1 trillion at the end of 2012. Other ways that millennials say they paid for school was through grants/scholarships (59%) and working while attending school (46%). About half of millennials (49%) say if they had $10,000, the “first thing” they’d do is pay down student loan or credit card debt.”

Notice the number of graduates who financed educational aspirations with student loans more than doubled between the Boomers and the Millennials?  And, notice that it’s not consumption or savings which would be done with that imaginary $10K bonus — it’s deleveraging.

While a person is deleveraging he or she is not developing new businesses.  If the priority is to repay old indebtedness, and this is combined with more stringent commercial lending standards, then we have a recipe for a decline in entrepreneurial activity.  After all, in order to form a new business a person needs to develop, market, and invest in products or services — not something that’s going to happen if funds are diverted for deleveraging. [CFPB May 8, 2013 pdf]

(C) Student loan indebtedness constricts economic growth in underdeveloped parts of the country.   Consider, for a moment, the impact of that “overwhelming” student debt on economic development in rural America.

An individual may wish to take a teaching job in a rural area, but when indebtedness combines with the lack of any public transportation in most rural areas, and the individual lacks the credit score necessary for a vehicle loan, we have a formula in which the prospective applicant to fill a position in a rural school district has to say “Thanks for the offer, but I can’t afford to take it.”  This situation not only leaves an educational position vacant — it also reduces by at least one the number of consumers in a given community.

Or, think of an individual seeking to pursue a career in a health related field?  Can a young physician afford to take a position in a small rural health clinic — much less consider opening a new practice — when his or her need to discharge student loans far surpasses the ability of the community to provide financial resources to do so?  Since most private student loans do not provide a “public service” reduction component, those with that type of loan burden are a further disincentive to take positions in rural areas.

Finally, we might consider the newly minted graduated in a technology based field of study.  The person might very well be able to advise and serve communities in need of more and better Internet access — However, if there is a serious shortage of rental property, as is the case in many rural areas, can the individual find affordable and adequate rental housing without having to address the issue of getting a mortgage for which he or she might well be ineligible?  [More at CFPB, May 2013 pdf]

In its avaricious quest for ever more profitable streams of gratifying revenues, the financial sector, churning out  those private student loans financed by asset based securities, did damage not only to the immediate overall economy and its consumers, but managed as well to hog tie our future capacity to expand our ‘real’ economy and placed already under-developed areas in even more constrained circumstances.

Given this sad state of economic affairs, it is extremely difficult to shed anything but crocodile tears for the wheelers and dealers on Wall Street when they whine about regulations and bemoan their reduced “opportunities.”  There’s no way to elutriate their sins or expiate their former behavior.


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