Charles Morris on Student Lending

Charles Morris in The Trillion Dollar Meltdown (the 2nd edition paperback at the printer's now reads "Two Trillion") covers the gambit of financial woes generated by the free hands of financial wizards. Don't read this book at bedtime: it is one long nightmare. Beyond the discussion of spurious new financial instruments, national debt and foreign investors and the unraveling of the markets, Morris asks some questions about human values that don't fit so neatly into the all-encompassing free-market ideology, including such social benefits as health and education.

Morris titles the section on college lending "Class Warfare" because of the correlation between education and economic opportunity. Sallie Mae, originally a government entity for offering student loans, became SLM Corp. and was privatized in 2004, a year in which it made a 37% profit.

Why are its profits so high? Because it is the beneficiary of extraordinary privileges. For one thing, 90 percent of the loans it makes are guaranteed by the taxpayer... Student lenders are exempted from all state usury laws; if a student defaults, fees, penalty interest, and collection charges skyrocket. Loan servicing by the student lenders is reputed to be very poor, and there are widespread reports of defaults occurring because student lenders make little or no effort to contact debtors when repayment periods start. Collection of student loans and credit card and other debts is now a separate SLM business line, and it racked up about $800 million in debt management fees in 2005.

Morris goes on to argue that there are smarter ways to finance higher education which offer more social benefit by taking it away from the profit-taking private sector. The direct federal loan program offers the same service for half the price, but the program has been contracted in recent years. He argues: "If all loans were financed through the direct loan program, the savings could finance full tuition grants for another million students." He also cites the historical precedents which show our traditional commitment to higher education, including Lincoln's land-grant college system and the GI Bill after World War II.

Young People in Debt

In a previous article here, "The Financial Risks of College", I offered some numbers on the increasing debt load of college students. Of the two-thirds of students who finance their education, the average accumulation by 2003-4 was $20,000. Interest rates offered by private financing can be as high as 20%, which in the worst cases are severely compounded by default fees. About 10% of students are defaulting over a ten year period, and for those with loads higher than $15,000, the default rate doubles. It's a grim start at a time when young people are preparing to start their own families.

Graphic from National CrossTalk.

November Theme: Economy, Debt

This month, Cahiers Péguy is introducing a new format of a monthly theme inviting closer analysis on topics of cultural, social and political interest. Each theme will start from a broad field and will focus in on a discrete topic. This format will provide an emphasis, and won't preclude the regular programming that arises in response to current events.

For our first month, we will take the economy as a category and put household debt under the lens. While the recent economic meltdown has generated a sense of helplessness, addressing the question of using money opens up a more human response to the crisis. As free individuals, we can manage resources and seek the common good in our economic relationships. As educators, we can propose a more healthy economic mentality which puts money in the context of a tool rather than an end for life.

Graphic from The American Prospect.