Monday, Mar 30, 2015
Slimy new loan options proliferate, as Wall Street looks to do for education what it did to the economy
Jeff Bryant
Wall Street wants to own your education destiny.
To the old saying about “death and taxes,” you can now add another: debt.
In fact, in contemporary America, debt is likely becoming at least as all-encompassing as the other two.
An increasingly powerful force behind the debt explosion is not what you might expect: not cars, not homes, not healthcare. It’s education.
Since the Great Recession, federal and state authorities have been disinvesting from their obligations to educate the citizenry. So now, nearly every state spends less on higher education than it did in 2007. And most states continue to spend less on K-12 education than they did in 2007. Federal government expenditures on education are also in decline.
So the burden of financing education has increasingly fallen on local governments and individuals, who have responded by borrowing money to pay for schooling.
Education debt is rapidly becoming a cradle to grave omnipresence – from parents taking out kindergarten loans, to taxpayers shouldering the ballooning costs of exotic school bonds, to senior citizens staving off bankruptcies caused by college debts.
With edu-debt levels mounting higher and higher at every turn, cash-strapped parents, municipal governments and education institutions have turned to solutions from Wall Street.
According to at least one investment news source, banks are increasingly reluctant to back infrastructure investments like schools, so the financial industry is rushing in to fill the void. “The severely restricted capacity of banks to provide long-term debt for infrastructure deals comes at a time when the need for infrastructure spending across the globe is soaring,” the report notes. “A great deal of debt will go to the bond markets. But they will not be the full solution by any means.”
Instead, an emerging “private loan space” is introducing “a number of new vehicles.”
An alphabet soup of new financial vehicles – SLABS, CABS, PPPs, ISAs – that’s been created in the edu-debt sphere spells disaster, as Wall Street tightens its control of how – or even whether – the nation educates its future workers and citizens.
Wall Street wants to own your education destiny.
To the old saying about “death and taxes,” you can now add another: debt.
In fact, in contemporary America, debt is likely becoming at least as all-encompassing as the other two.
An increasingly powerful force behind the debt explosion is not what you might expect: not cars, not homes, not healthcare. It’s education.
Since the Great Recession, federal and state authorities have been disinvesting from their obligations to educate the citizenry. So now, nearly every state spends less on higher education than it did in 2007. And most states continue to spend less on K-12 education than they did in 2007. Federal government expenditures on education are also in decline.
So the burden of financing education has increasingly fallen on local governments and individuals, who have responded by borrowing money to pay for schooling.
Education debt is rapidly becoming a cradle to grave omnipresence – from parents taking out kindergarten loans, to taxpayers shouldering the ballooning costs of exotic school bonds, to senior citizens staving off bankruptcies caused by college debts.
With edu-debt levels mounting higher and higher at every turn, cash-strapped parents, municipal governments and education institutions have turned to solutions from Wall Street.
According to at least one investment news source, banks are increasingly reluctant to back infrastructure investments like schools, so the financial industry is rushing in to fill the void. “The severely restricted capacity of banks to provide long-term debt for infrastructure deals comes at a time when the need for infrastructure spending across the globe is soaring,” the report notes. “A great deal of debt will go to the bond markets. But they will not be the full solution by any means.”
Instead, an emerging “private loan space” is introducing “a number of new vehicles.”
An alphabet soup of new financial vehicles – SLABS, CABS, PPPs, ISAs – that’s been created in the edu-debt sphere spells disaster, as Wall Street tightens its control of how – or even whether – the nation educates its future workers and citizens.
Turning Students Into SLABS
A lot has been written about college student loan debt, now nearly $1.2 trillion and counting. But too little attention has focused on Wall Street’s role in the run-up.
Recall, when Wall Street speculators wanted a market for subprime mortgages, they created high-risk derivative securities that bundled the mortgages to sell as investments. The speculators have done the same for student loans.
These student loan asset-backed securities, or SLABS, have a performance history that has “been very good, and investors’ rate of return has been excellent,” according to an article in Wikipedia.
SLABS are “hot,” a Wall Street Journal headline exhorted its readers in 2013. “Investors are flocking to SLABS,” a more recent article on the Huffington Post reports.
A post on the blog for left-leaning advocacy Demos explains, “Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent.”
It’s not hard to see the allure of SLABS. Student loans seem to be an endless stream of revenue as colleges and universities continue to increase tuition, economic conditions and employment transience feed the unemployed back into continuing education, and political leaders urge everyone to attend college. The income stream is nearly guaranteed to pay off because the loans are next to impossible to discharge in bankruptcy.
A Huffington Post article by Chris Kirkham states, SLABS offer “seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default.”
Indeed, any attempt to write off the massive student debt would not only have to contend with government reluctance to lose such a profitable revenue source, but would also meet deep-pocketed opposition from the financial industry.
But SLABS are only a subset of Wall Street’s continuously expanding man spread in the edu-debt sector.
Recall, when Wall Street speculators wanted a market for subprime mortgages, they created high-risk derivative securities that bundled the mortgages to sell as investments. The speculators have done the same for student loans.
These student loan asset-backed securities, or SLABS, have a performance history that has “been very good, and investors’ rate of return has been excellent,” according to an article in Wikipedia.
SLABS are “hot,” a Wall Street Journal headline exhorted its readers in 2013. “Investors are flocking to SLABS,” a more recent article on the Huffington Post reports.
A post on the blog for left-leaning advocacy Demos explains, “Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent.”
It’s not hard to see the allure of SLABS. Student loans seem to be an endless stream of revenue as colleges and universities continue to increase tuition, economic conditions and employment transience feed the unemployed back into continuing education, and political leaders urge everyone to attend college. The income stream is nearly guaranteed to pay off because the loans are next to impossible to discharge in bankruptcy.
A Huffington Post article by Chris Kirkham states, SLABS offer “seemingly unlimited growth potential at virtually zero risk. The burden of college loan repayment falls entirely on students’ backs, shielding corporations from the consequences of default.”
Indeed, any attempt to write off the massive student debt would not only have to contend with government reluctance to lose such a profitable revenue source, but would also meet deep-pocketed opposition from the financial industry.
But SLABS are only a subset of Wall Street’s continuously expanding man spread in the edu-debt sector.
Selling Schools on CABS And Charters
Much less attention has focused on how government and education institutions are becoming more and more saddled with debt.
According to the website Governing.com, “Many local governments across the U.S. face steep budget deficits as they struggle to pay off debts accumulated over a number of years. As a last resort, some filed for bankruptcy.”
School district bankruptcies are occurring with alarming frequency, USA Today reported last year. “California saw a record number of school districts in fiscal distress in 2012; currently, eight school districts have negative certifications, meaning that based on current projections, the school districts will not meet their financial obligations for fiscal 2014 or 2015. Another 41 school districts may run out of money by fiscal 2016.”
California schools trying to stave off insolvency have increasingly turned to the financial sector for help. Writing at the Web of Debt blog site, Ellen Brown explains how financial brokers have promoted “something called ‘capital appreciation bonds’ (CABs) as a tool. … CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2,000 percent).”
Adding to the edu-debt burden is the rush to finance charter schools. Recently, the Bloomberg news agency reported, “US charter schools are issuing a record amount of municipal debt … The institutions, privately run with public funding, have sold $1.6 billion of securities in 2014.”
Charter schools are notorious for closing suddenly, often on very short notice, leaving school districts holding the bag for the remaining costs and outstanding debts. Over 65 percent of the time, charter school closures are due to financial problems or “mismanagement,” according to research quoted in the Huffington Post.
According to the website Governing.com, “Many local governments across the U.S. face steep budget deficits as they struggle to pay off debts accumulated over a number of years. As a last resort, some filed for bankruptcy.”
School district bankruptcies are occurring with alarming frequency, USA Today reported last year. “California saw a record number of school districts in fiscal distress in 2012; currently, eight school districts have negative certifications, meaning that based on current projections, the school districts will not meet their financial obligations for fiscal 2014 or 2015. Another 41 school districts may run out of money by fiscal 2016.”
California schools trying to stave off insolvency have increasingly turned to the financial sector for help. Writing at the Web of Debt blog site, Ellen Brown explains how financial brokers have promoted “something called ‘capital appreciation bonds’ (CABs) as a tool. … CABs have now been issued by more than 400 California districts, some with repayment obligations of up to 20 times the principal advanced (or 2,000 percent).”
Adding to the edu-debt burden is the rush to finance charter schools. Recently, the Bloomberg news agency reported, “US charter schools are issuing a record amount of municipal debt … The institutions, privately run with public funding, have sold $1.6 billion of securities in 2014.”
Charter schools are notorious for closing suddenly, often on very short notice, leaving school districts holding the bag for the remaining costs and outstanding debts. Over 65 percent of the time, charter school closures are due to financial problems or “mismanagement,” according to research quoted in the Huffington Post.
A Plague Of PPPs
In higher education, the recent announcement that Sweet Briar College in Virginia would have to close due to financial insolvency stunned current and former students. But Sweet Briar’s imminent demise is likely just the first of many more college financial failures to come, according to a recent Op-Ed by a former Department of Education official Dennis Cariello in The Hill.
Cariello points to a recent study by Bain & Co. that concludes over 60 percent of American colleges and universities are on an “unsustainable financial path” or at financial risk.
To a considerable extent, Sweet Briar was done in by bad loan arrangements made with the private financial sector. As an expert for the Roosevelt Institute explains, “It is closing because it signed some terrible deals to get what must have felt like ‘needed’ money at the time.”
Is Sweet Briar “the canary in the coal mine?” the Roosevelt piece asks, and points to the University of California system, the University of Michigan, and American University that are also examples where “banks are certainly making obscene profits … and passing debt on to students through increased costs.”
A report from Inside Higher Education explains the extent of the financial wheeling-and-dealing in public higher ed. “Burdened by aging campuses, several years of backlogged maintenance projects, increased competition for students (and the tuition revenue that comes with them), and little hope that states are going to fund the construction they need, either through appropriations or by issuing their own debt, public colleges and universities are likely to issue their own debt to finance the renovation of their facilities.”
Among the many options public universities are considering for funding are more “public-private partnerships [PPPs], whereby private developers get the capital to construct facilities and then universities strike long-term leases to occupy the space.”
No doubt, these long-term PPPs present other opportunities for the financial industry to divert public money to private debt holders who can further capitalize on the venture by securitizing the debts, sticking education institutions – and therefore, students and taxpayers – with unsustainable levels of debt.
With SLABS, CABS, PPPs already in the mix, it’s hard to see how the plague of edu-debt schemes could get any worse. But it can.
Cariello points to a recent study by Bain & Co. that concludes over 60 percent of American colleges and universities are on an “unsustainable financial path” or at financial risk.
To a considerable extent, Sweet Briar was done in by bad loan arrangements made with the private financial sector. As an expert for the Roosevelt Institute explains, “It is closing because it signed some terrible deals to get what must have felt like ‘needed’ money at the time.”
Is Sweet Briar “the canary in the coal mine?” the Roosevelt piece asks, and points to the University of California system, the University of Michigan, and American University that are also examples where “banks are certainly making obscene profits … and passing debt on to students through increased costs.”
A report from Inside Higher Education explains the extent of the financial wheeling-and-dealing in public higher ed. “Burdened by aging campuses, several years of backlogged maintenance projects, increased competition for students (and the tuition revenue that comes with them), and little hope that states are going to fund the construction they need, either through appropriations or by issuing their own debt, public colleges and universities are likely to issue their own debt to finance the renovation of their facilities.”
Among the many options public universities are considering for funding are more “public-private partnerships [PPPs], whereby private developers get the capital to construct facilities and then universities strike long-term leases to occupy the space.”
No doubt, these long-term PPPs present other opportunities for the financial industry to divert public money to private debt holders who can further capitalize on the venture by securitizing the debts, sticking education institutions – and therefore, students and taxpayers – with unsustainable levels of debt.
With SLABS, CABS, PPPs already in the mix, it’s hard to see how the plague of edu-debt schemes could get any worse. But it can.
Investor Impunity Enforced by ISAs
The ultimate solution in the private edu-debt sphere emerged recently when conservative ex-governor of Indiana, now president of Purdue University, Mitch Daniels proposed to the U.S. Congress that, “Instead of taking out a traditional college loan, students would have the option of finding an investor – possibly a Purdue alum – to finance their degree in exchange for a share of their future income.”
Daniels is not the only proponent of these arrangements. According to the reporter, Republican Florida Sen. Marco Rubio and former House Rep. Tom Petri from Wisconsin introduced legislation last year to help create the legal framework for these kinds of schemes. The bills did not advance.
But like what so often happens, quirky proposals from conservatives that appear like blips on the outer edge of the crazy radar, actually have a huge think tank machinery behind them. As a report from an Indiana news outlet explains, the financial vehicles Daniels alluded to are what’s known in the biz as Income Share Arrangements (ISAs). The reporter sourced the concept of ISAs to 1955 and University of Chicago economist Milton Friedman, the god of right-wing privatization advocates.
Beth Akers, a fellow with centrist think tank Brookings, has argued ISAs should “play a role” in financing student loan debt. She posits that the central problem with higher education is there is “almost no incentive” for students to choose schools and courses of study that pay off down the road in terms of lucrative salaries. A broad market for ISAs could change that by enabling students to “collateralize their financing with future earnings, just as home buyers collateralize their mortgage with the house itself.”
“Income share agreements … are quietly gaining a following among critics of the nation’s staggering student-debt problem,” Slate’s Alison Griswold observes. “New companies such as Upstart, Pave, and Lumni have turned to the investing-in-people model.”
Griswold points to a study from the conservative American Enterprise Institute which argues, “Because ISA investors earn a profit only when a student is successful, they offer students better terms for programs that are expected to be of high value and have strong incentives to support students both during school and after graduation. This process gives students strong signals about which programs and fields are most likely to help them be successful.”
It’s not at all hard to imagine what this would lead to – academic programs where students are financially “incentivized” to pursue what investors prefer rather than follow their imaginations and ideas. Even if they do take the incentive route, they run the risk of a lifetime of indentured servitude to their financial backers should the market for their chosen career turn sour after they graduate.
The consequences of such a financial arrangement are harmful to businesses too. Want to be that creative writing major that ends up in the marketing field, or that botany student who pursues food and wine retailing? Forget it. The system run by ISAs will likely never incentivize outliers in our employment system that often end up being the drivers of problem solving and creativity in business.
What’s worse, instead of student debt getting “collateralized,” as the Brookings fellow put it, what really becomes the collateral is not a thing, like a house, but a person: the student herself.
One can easily see how a speculative market where math or science majors are tossed onto the gambling table with students who pursued art or humanities studies would play out, and what could have propelled a student’s choices when they’re still teenagers – a quest for personal development and intrinsic reward – becomes a lifelong liability regardless of personal attributes.
The ramifications of a higher education system financed by these kinds of debt mongers would be catastrophic as it worked into K-12, as it surely would.
Daniels is not the only proponent of these arrangements. According to the reporter, Republican Florida Sen. Marco Rubio and former House Rep. Tom Petri from Wisconsin introduced legislation last year to help create the legal framework for these kinds of schemes. The bills did not advance.
But like what so often happens, quirky proposals from conservatives that appear like blips on the outer edge of the crazy radar, actually have a huge think tank machinery behind them. As a report from an Indiana news outlet explains, the financial vehicles Daniels alluded to are what’s known in the biz as Income Share Arrangements (ISAs). The reporter sourced the concept of ISAs to 1955 and University of Chicago economist Milton Friedman, the god of right-wing privatization advocates.
Beth Akers, a fellow with centrist think tank Brookings, has argued ISAs should “play a role” in financing student loan debt. She posits that the central problem with higher education is there is “almost no incentive” for students to choose schools and courses of study that pay off down the road in terms of lucrative salaries. A broad market for ISAs could change that by enabling students to “collateralize their financing with future earnings, just as home buyers collateralize their mortgage with the house itself.”
“Income share agreements … are quietly gaining a following among critics of the nation’s staggering student-debt problem,” Slate’s Alison Griswold observes. “New companies such as Upstart, Pave, and Lumni have turned to the investing-in-people model.”
Griswold points to a study from the conservative American Enterprise Institute which argues, “Because ISA investors earn a profit only when a student is successful, they offer students better terms for programs that are expected to be of high value and have strong incentives to support students both during school and after graduation. This process gives students strong signals about which programs and fields are most likely to help them be successful.”
It’s not at all hard to imagine what this would lead to – academic programs where students are financially “incentivized” to pursue what investors prefer rather than follow their imaginations and ideas. Even if they do take the incentive route, they run the risk of a lifetime of indentured servitude to their financial backers should the market for their chosen career turn sour after they graduate.
The consequences of such a financial arrangement are harmful to businesses too. Want to be that creative writing major that ends up in the marketing field, or that botany student who pursues food and wine retailing? Forget it. The system run by ISAs will likely never incentivize outliers in our employment system that often end up being the drivers of problem solving and creativity in business.
What’s worse, instead of student debt getting “collateralized,” as the Brookings fellow put it, what really becomes the collateral is not a thing, like a house, but a person: the student herself.
One can easily see how a speculative market where math or science majors are tossed onto the gambling table with students who pursued art or humanities studies would play out, and what could have propelled a student’s choices when they’re still teenagers – a quest for personal development and intrinsic reward – becomes a lifelong liability regardless of personal attributes.
The ramifications of a higher education system financed by these kinds of debt mongers would be catastrophic as it worked into K-12, as it surely would.
Are Children Just Numbers?
When Wall Street influence trickles down to K-12, there’s certainly a market opportunity awaiting.
Advocates in the K-12 arena who insist on running every student through a battery of standardized tests every year have given – either unwittingly or intentionally (does it matter?) – the financial industry a huge gift by decreeing that student scores on standardized tests should define students’ learning “output.” Now, everything monetarily related to a child’s education – operations budgets, teacher salaries, classroom costs, government funds, grant money – can be related to a test score output.
This in effect turns student learning – and by extension, the students themselves – into a commodity that can be speculated on. In a financial environment populated with ISA investors, students then become like pork bellies or yen, and schools get turned into test-preparation factories, ignoring subjects and skills that are not assessed.
That could be what Wall Street wants, an education system focused on spitting out products that fit into pre-conceived business models, while less money goes toward educating those “other kids.” But is that really what the rest of us want?
Advocates in the K-12 arena who insist on running every student through a battery of standardized tests every year have given – either unwittingly or intentionally (does it matter?) – the financial industry a huge gift by decreeing that student scores on standardized tests should define students’ learning “output.” Now, everything monetarily related to a child’s education – operations budgets, teacher salaries, classroom costs, government funds, grant money – can be related to a test score output.
This in effect turns student learning – and by extension, the students themselves – into a commodity that can be speculated on. In a financial environment populated with ISA investors, students then become like pork bellies or yen, and schools get turned into test-preparation factories, ignoring subjects and skills that are not assessed.
That could be what Wall Street wants, an education system focused on spitting out products that fit into pre-conceived business models, while less money goes toward educating those “other kids.” But is that really what the rest of us want?
