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Guest Post: Risk And The Indentured Servitude Of Student Loans
Submitted by Charles Hugh Smith from Of Two Minds
Risk And The Indentured Servitude Of Student Loans
Students stuck with gargantuan loans for life are bound in a bank-dominated "improvement" of indentured servitude.
Yesterday (Risk is Necessary for Adaptation, Innovation and Success) I discussed the inevitable failure of systems in which risk has been transferred from those who reap the gain to others. In the case of student loans, the risk has been transferred to students who enter decades of indentured servitude.
Indentured servitude has a long history in the U.S.; many immigrants accepted servitude of between two and seven years in exchange for passage to the New World. Orphans were indentured out of orphanages to the age of 21--potentially a much longer servitude. Indeed, the labor of anyone on the public dole could be auctioned off:
From Wilma A. Dunaway's Online Archive:
By the time of the Revolutionary War, indentured servitude had been a common practice in the United States for 150 years.
Following British laws established during the colonial period, post-Revolutionary public authorities indentured the labor of those who were likely to fall upon the public dole. Appalachian county governments bound out indigent adults and children whose families could no longer care for them. The age, gender, and racial trends are clearly documented in early records of Appalachian poor houses, for women and orphans represented more than two-thirds of the individuals whose labor was auctioned off by county governments.
Isaac Miller of Anderson County, Tennessee, advertised in 1819 for the return of Margaret Hutcheson who had been bound to him by the county poor house. Obviously, the seventeen-year-old girl had tried the patience of her master, for he offered only "a reward of 6 1/4 cents to the person who w[ould] deliver her to [him]," caustically adding, "but I will not thank any person for doing so."
When an orphan was bound out by the county poor house, the child was legally tied to the master until the age of eighteen or twenty-one.
Orphans were often bound to tradesmen or farmers until age 21, and indigent adults were typically bound for three to seven years. However, there is no way to document how many laborers were bound out by their own families. When parents indentured their own children, it was for "a usual term of seven years if a girl, or five if a boy."
Let us consider the modern form of indentured servitude, student loans, which now exceed a staggering $1 Trillion: "It's Going To Create A Generation Of Wage Slavery" (Zero Hedge), or perhaps more accurately, indentured servitude, because the debt cannot be dismissed via bankruptcy.
Student loans outstanding will exceed $1 trillion this year (USA Today):
Lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.
"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of FinAid.org.
"It's going to create a generation of wage slavery," says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.
The University of Phoenix, the nation's largest, got 88% of its revenue from federal programs last year, most of it from student loans.
In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans.
This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades.
The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers.
The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.
Imagine if risk were connected to gain. Maybe lenders would be a bit more careful about which students they deemed worthy credit risks; perhaps they would begin differentiating between low-market-value liberal arts degrees from hard-science degrees.
Maybe they'd start considering the students' incomes while in university. Maybe they'd recognize differences in risk between for-profit diploma mills protected by the rapacious, captured-by-corporations Savior State and state universities.
There can be no "fix" to our decline until risk is bound once again to return and gain. If risk is transferred to others, you're left with some type of indentured servitude and financial tyranny in service of the banks and their Savior State toadies.
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It actually happened ... SWAT team executing DOE initiated warrant on a woman detained her estranged husband for several hours trying to beat out of him where she could be found.
Stephen Falken: I never could get Joshua to learn the most important lesson.
David Lightman: What's that?
Stephen Falken: Futility. That there's a time when you should just give up.
Jennifer: What kind of a lesson is that?
Stephen Falken: Did you ever play tic-tac-toe?
Jennifer: Yeah, of course.
Stephen Falken: But you don't anymore.
Jennifer: No.
Stephen Falken: Why?
Jennifer: Because it's a boring game. It's always a tie.
Stephen Falken: Exactly. There's no way to win. The game itself is pointless!
Sometime later ....
Joshua: Greetings, Professor Falken.
Stephen Falken: Hello, Joshua.
Joshua: A strange game. The only winning move is not to play. How about a nice game of chess?
http://youtu.be/NHWjlCaIrQo
The only solution I can see is getting a degree or diploma from the internet. Online education is at the infancy at the moment but in 5 years time it will be relatively common to have a higher education qualification from the net.
I see a day when most education will be done via interactive internet. Perhaps even done in small neighborhood groups all wearing white suits with a compliance monitor. Sarc?
Yank student loans and there goes education.
There is no such thing as financial weapons of mass destruction.
Mission accomplished -- where's my flight suit, fuckers.
No not yank, just keep raising the prices higher until it breaks off the gag reflex of students salvating at the 5000 dollar monthly check that they are going to get.
Half tempted to go back to school, sink one of those checks into Gold and wait a while.
While I agree that the non-dischargable student loans have caused a lot of suffering for those that made bad choices I would tend to disagree with the life-time servitude angle. I believe we are in the endgame of ZIRP. While Japan has especially exceeded it's ZIRP shelf-life, we for the first time have reached debt-saturation and m1 and m2 are rising way beyond growth and we are probably a year from the Fed buying enormous amounts of foreign debt. Massive deflation and deleveraging is on its way to be followed by massive inflation.
For students expecting to study 4 or more years I would almost advise taking as much student debt as posiible - buy an ounces of gold and put it in a safe depsoit box - and get the best degree possible. At some point in the next 10 years odds are the $200,000 could be paid off with the gold. There are complexities over fixed and variable interest and payments and legal matters but if we follow the path of Germany (20's), Argentina, Russia my read of history is that all paper issued pre-hyper-inflation will have little or no value post - regardless of type or structure of debt. My reading of history indicates that YES people who had debts did pay them off with almost nothing. People who relied on the principle and interest were screwed.
If anyone has exceptions to this it would be interesting to hear!
And You Sir win the blue ribbon!
The interesting thing is that you rarely hear anyone complaining about Big Education and its fleecing of the 99%. This article seems to blame the lending institutions ... sure, they are the pusher, but you need to get to the root problem of why so many need the drug of "cheap student loans," which is a predominantly liberal academic elite in bed with the government that is now the primary pusher of the "cheap" credit.
It's a vicious feedback loop designed to pick your pocket and pay off the liberal elite for their unswerving support of Big Government.
"Lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.
"The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future."This is why I have not advised those under tons of student loans to default yet. -- MCR http://www.collapsenet.com/154.html
I know this thread is stale, but I want to add something.
It's true that most people who major in liberal arts should take a trade instead. This is especially true if the person does not go on to law school or grad school. This means that the vast majority of students should take a technical degree. I agree that the federal loan system should encourage technical degrees. A minority of humanities students should also be funded.
Denying humanities students federal loans outright suggests that there is no place for humanities in higher education at all. Think about it: if a future professor can't take any federal loans and is herded into Business instead, that's one less prof to teach an elementary writing course. Regardless of what many think, even people who take "profitable" degrees need to learn how to write and have at least a basic knowledge of history, foreign languages, comparative religion etc. in order to navigate different business cultures. Deny federal loans outright to all liberal arts BA's, and there'll be few profs left to teach basic humanities in a decade or two.
Maybe this is a better idea: the federal government should fund all "profitable" majors from Day 1. So long as a "profitable" student doesn't flunk out, he or she can get the full loan amount every year, no questions asked.
Humanities BA students would not be federally funded the first year. In order to qualify for federal loans afterwards, each student would be indexed to the overall performance of the Arts and Sciences school of their university. Only the top 25% or 20% in grades would qualify for any federal loan, with total amount available increasing in direct proportion with grades. This second year winnowing-out would likely convince some students to move to a technical degree. If a humanities student falls below the cut and wants to continue on, he or she can do so at his or her expense and not that of the taxpayer.