Student Debt Slavery: Bankrolling Financiers On The Backs Of The Young

Authored by Ellen Brown via Web Of Debt blog,

Higher education has been financialized, transformed from a public service into a lucrative cash cow for private investors.

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The advantages of slavery by debt over “chattel” slavery – ownership of humans as a property right – were set out in an infamous document called the Hazard Circular, reportedly circulated by British banking interests among their American banking counterparts during the American Civil War. It read in part:

Slavery is likely to be abolished by the war power and chattel slavery destroyed. This, I and my European friends are glad of, for slavery is but the owning of labor and carries with it the care of the laborers, while the European plan, led by England, is that capital shall control labor by controlling wages.

Slaves had to be housed, fed and cared for. “Free” men housed and fed themselves. For the more dangerous jobs, such as mining, Irish immigrants were used rather than black slaves, because the Irish were expendable. Free men could be kept enslaved by debt, by paying them wages that were insufficient to meet their costs of living. On how to control wages, the Hazard Circular went on:

This can be done by controlling the money. The great debt that capitalists will see to it is made out of the war, must be used as a means to control the volume of money. . . . It will not do to allow the greenback, as it is called, to circulate as money any length of time, as we cannot control that.

The government, too, had to be enslaved by debt. It could not be allowed to simply issue the money it needed to meet its budget, as Lincoln’s government did with its greenbacks (government-issued US Notes). The greenback program was terminated after the war, forcing the government to borrow from banks – banks that created the money themselves, just as the government had been doing. Only about 10% of the “banknotes” then issued by banks were actually backed by gold. The rest were effectively counterfeit. The difference between government-created and bank-created money was that the government issued it and spent it on the federal budget, creating demand and stimulating the economy. Banks issued money and lent it, at interest. More had to be paid back than was lent, keeping the supply of money tight and keeping both workers and the government in debt.

Student Debt Peonage

Slavery by debt has continued to this day, and it is particularly evident in the plight of students. Graduates leave college with a diploma and a massive debt on their backs, averaging over $37,000 in 2016. The government’s student loan portfolio now totals $1.37 trillion, making it the second highest consumer debt category behind only mortgage debt. Student debt has risen nearly 164% in 25 years, while median wages have increased only 1.6%.

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Unlike mortgage debt, student debt must be paid. Students cannot just turn in their diplomas and walk away, as homeowners can with their keys. Wages, unemployment benefits, tax refunds and even Social Security checks can be tapped to ensure repayment. In 1998, Sallie Mae (the Student Loan Marketing Association) was privatized, and Congress removed the dischargeabilility of federal student debt in bankruptcy, absent exceptional circumstances. In 2005, this lender protection was extended to private student loans. Because lenders know that their debts cannot be discharged, they have little incentive to consider a student borrower’s ability to repay. Most students are granted a nearly unlimited line of credit. This, in turn, has led to skyrocketing tuition rates, since universities know the money is available to pay them; and that has created the need for students to borrow even more.

Students take on a huge debt load with the promise that their degrees will be the doorway to jobs allowing them to pay it back, but for many the jobs are not there or not sufficient to meet expenses. Today nearly one-third of borrowers have made no headway in paying down their loans five years after leaving school, although many of these borrowers are not in default. They make payments month after month consisting only of interest, while they continue to owe the full amount they borrowed. This can mean a lifetime of tribute to the lenders, while the loan is never paid off, a classic form of debt peonage to the lender class.

All of this has made student debt a very attractive asset for investors. Student loans are pooled and repackaged into student loan asset-backed securities (SLABS), similar to the notorious mortgage-backed securities through which home buyers were caught in a massive debt trap in 2008-09. The nameless, faceless investors want their payments when due, and the strict terms of the loans make it more profitable to force a default than to negotiate terms the borrower can actually meet. About 80% of SLABS are backed by government-insured loans, guaranteeing that the investors will get paid even if the borrower defaults. The onerous federal bankruptcy laws also make SLABS particularly safe and desirable investments.

But as economist Michael Hudson observes, debts that can’t be paid won’t be paid. As of  September 2017, the default rate on student debt was over 11% at public colleges and was 15.5% at private for-profit  colleges. Defaulted borrowers risk damaging their credit and their ability to borrow for such things as homes, cars, and furniture, reducing consumer demand and constraining economic growth. Massive defaults could also squeeze the federal budget, since taxpayers ultimately cover any unpaid loans.

Investing in Human Capital: Student Debt and the G.I. Bill

It hasn’t always been this way. Until the 1970s, tuition at many state colleges and universities was free or nearly free. Education was considered an obligation of the public sector, and costs were kept low.

After World War II, the federal government invested heavily in educating the 15.7 million returning American veterans. The goal of the Servicemen’s Readjustment Act of 1944, or G.I. Bill, was to facilitate their reintegration into civilian life. By far its most popular benefits were financial assistance for education and housing. Over half of G.I.s took advantage of this educational provision, with 2.2 million attending college and 5.6 million opting for vocational training. At that time there were serious shortages in student housing and faculty, but the nation’s colleges and universities expanded to meet the increased demand.

The G.I. Bill’s educational benefits helped train legions of professionals, spurring postwar economic growth. It funded the education of 450,000 engineers, 240,000 accountants, 238,000 teachers, 91,000 scientists, 67,000 doctors and 22,000 dentists, 14 future Nobel laureates, two dozen Pulitzer Prize winners, three Supreme Court justices, and three presidents of the United States. Loans enabled by the bill also boosted the housing market, raising home ownership from 44% before the war to 60% by 1956. Rather than costing the government, the G.I. Bill turned out to be one of the best investments it ever made. The legislation is estimated to have cost $50 billion in today’s dollars and to have returned $350 billion to the economy, a nearly sevenfold return.

That educational feat could be repeated today. The government could fund a public education program as Lincoln did, by simply issuing the money or having the central bank issue it as a form of “quantitative easing for people.” Infrastructure funded with government-issued US Notes in the 1860s included not only the transcontinental railroad but the system of free colleges and universities established through federal land grants.

The exponential rise in college costs occurred only after the government got into the student loan business in a big way. The Higher Education Act of 1965 was part of President Lyndon Johnson’s Great Society agenda, intended “to strengthen the educational resources of our colleges and universities and to provide financial assistance for students in postsecondary and higher education.” The Act increased federal money given to universities, created scholarships, gave low-interest loans for students, established a National Teachers Corps, and included a PLUS loan program that allowed parents of undergraduate and graduate students to borrow up to the full cost of attending college. Unfortunately, the well-intended Act had the perverse effect of driving up tuition costs. The availability of federally guaranteed loans allowed colleges and universities to raise their prices to whatever the market would bear. By the mid-1970s, tuition was rising much faster than inflation. But costs remain manageable until the late 1990s, when the federal student loan business was turned over to private banks and investors with aggressive collection practices, converting federally-guaranteed student loans from a public service into a private investor boondoggle.

Meanwhile, in many countries in Europe university tuition is still free, including Denmark, Estonia, Finland, Germany, Norway, Slovak Republic, Slovenia, Sweden and Turkey. But providing an affordable education for the next generation is evidently not a priority with our government. Only 3 percent of the federal budget is spent on education – not just for college loans but for school programs of all sorts, from kindergarten through graduate school. Compare that to the outlay for military spending, including the Veterans Affairs and other defense-related departments, which consumes over half the federal budget and is an obvious place to cut. But there are no signs that our government is moving in that direction.

What then can be done to relieve the student debt burden? Stay tuned for Part 2.

Comments

Gap Admirer Four Star Dec 29, 2017 10:59 AM Permalink

Now look, snowflakes:  You are super SMART, right?  You went to college to earn your Womyn's Studies degree becasue you are special and the smartest person you know, especially when compared to those bitter-clingers who believe that socialism doesn't work. 

USE YOUR SMARTS AND DON'T TAKE A LOAN IF YOU DON'T WANT TO PAY IT BACK!

Quit whining and telling me that I have to pay for YOU decisions, geniuses.

In reply to by Four Star

pods Gap Admirer Dec 29, 2017 11:51 AM Permalink

The problem is that higher education has been financialized, and it is just about impossible to save enough $$ to pay for your education that way anymore.

Same thing happened with housing, autos, shit even furniture is inflating because of the "no $$ down" crap.

Once the spigot opens, prices shoot up, not allowing people to pay their way through school by waiting tables anymore. So if you want an education, you have to take out a loan (or have your parents pay).

I bet nowadays the CC for 2 years and then transferring is quite difficult.  Just the book racket will get you.  (that one should be looked at because that is a RICO prosecution just waiting to happen)

pods

In reply to by Gap Admirer

QE4MeASAP Gap Admirer Dec 29, 2017 12:30 PM Permalink

Higher education is a wealth transfer from indebted families to professors.

Local daycare just hired young black girl that helps take care of my kid.  Pretty so I looked her up.  Anthropology major, which means "black studies."  Told my wife I'd like to do some black studies on her.  Anyway, she was probably radicalized and now, to pay the bills, she has to change white kids' diapers.  At least she's busting her ass working, but nevertheless ironic. 

In reply to by Gap Admirer

Anteater Four Star Dec 29, 2017 1:13 PM Permalink

Goldman has quietly begun to circulate a new digital currency among senior investors as a 'token of appreciation'. Dubbed BLD, or BloodCoin, each digital currency unit is in form of a tax-free DIRT, or Debt Investment Repayment Trust, in which all the added penalties and fees in student loan collections accrue to BLDCoin holders. There is an escape clause for the students owned by DIRTs: they can discharge their student loan debt through regular blood transfusions to the senior investors, making BLD coin highly sought-after by elderly Chosen from NYC to Tel Aviv..

In reply to by Four Star

pods DownWithYogaPants Dec 29, 2017 11:09 AM Permalink

Article did a great job describing what is going on. The solution, not so much.  Central banks cannot just issue currency (without debt backing it) as that un-backed currency would rip through the system like a California wildfire, chewing up debt and never being extinguished.  They will NEVER allow that to happen. Deflation is their biggest fear, so they certainly are not going to start it.

It's always about keeping the money (debt) supply expanding. If it is not expanding (exponentially) then there is not enough $$ in the system to pay the interest (keeping velocity constant).  (((They))) like it when there is slightly less $$ than required, as they can absorb a bit of default and repossess real property. That is the goal. But they have to keep it small enough to not start a deflationary implosion, which is what would result from unbacked currency entering the system.  One reason why they fight so hard against counterfeiting. Because it can destroy the system and unbalance the Matrix-like equation.

My one wish for the new year is that nobody here brings up the EO 11110 bs about how Kennedy was going to kill the Fed by issuing silver backed notes. For once and all, he did nothing of the sort with that. Many have written on that. It's a nice fairy-tale, but that is all it was. So please, people, if you are going to try and throw that fallacy out, read EO 11110, read the EO it modified, read how he passed the bill to allow the Fed to issue small denomination FRNs (why would he do that if he wanted to kill the Fed?). Then, if you still don't get it, post your BS. But please do the research and think before spouting off the EO 11110 BS and how it was gonna stop the Fed by taking Kennedy's power and delegating it to his Treas Sec C. Douglas Dillon, who was a bankers banker.

Okay, that is my last soap box of the year. I promise.

pods

 

In reply to by DownWithYogaPants

MaxMax pods Dec 29, 2017 1:02 PM Permalink

I was a finance major from a top university, graduated with high honors, got my CMA, etc.  No one ever brought up the rather simple concept that total debt has to constantly expand else the old debt + interest can't be repaid.  I didn't figure that out until 30 years later - in fact I just hadn't given it any thought.  It wasn't until 2006 that I started looking at what was going on and the implication of what happens if debt starts shrinking hit me.  I bring that concept up to people occasionally and almost everyone's eyes glaze over.  Anyhow, I am sure the FED knows this, and I suspect it is their biggest fear.

As long as the underlying economy is growing at the same rate of interest and debt expansion, everything is fine.  But when debt and interest are expanding more than the economy, then you get bubbles in all sorts of things.  The system is so far out-of-wack now, that I have no idea what the solution is, and neither do those in power. They just hope to keep it going as long as they can.

In reply to by pods

DrBrown New_Meat Dec 29, 2017 3:29 PM Permalink

As someone retired from the University of Wisconsin system I can assure you that what you say is exactly what is going on. It's a sucker play from day one. Students are nothing more than a necessary evil to keep their game going. The faculty are tenured weasels who work maybe 6-8 hours a week. It's more like a hobby than a job. The average faculty member teaches 3-5 hours a week. That's it. A few office hours your done. It's a joke. They are ripping everyone off in a huge way.

In reply to by New_Meat

Stan522 Akzed Dec 29, 2017 10:39 AM Permalink

Attending two university tours where the higher education candidate puts on a show, they sell hard the availability of student loans. After telling my kid and me how great things are at the college, they farm you into a room where they close you on taking out a loan.... I left with my kid in toe.

Government creates programs in order to enslave their intended recipients and thus creating a giant voting block they can manipulate in order to garner votes. I know how government operates and expect nothing less. I blame parents and kids too naive to realize long term debt like student loans is like a prison sentence.

In reply to by Akzed

Gap Admirer Stan522 Dec 29, 2017 12:03 PM Permalink

Exactly.  An "infinite" supply of money (government backed/encouraged student loans) drives prices up.  Have private businesses give student loans and prices will come down.  Loans for worthless "degrees" will be fewer as well becasue no job will be waiting upon graduation to pay the loan back.  The government screws up pretty much everything.

In reply to by Stan522

XBroker1 Dec 29, 2017 10:41 AM Permalink

Unlike mortgage debt, student debt must be paid.

Suckers. Only parents who don't GAF allow their children to wander into bondage & brainwashing.

Anteater XBroker1 Dec 29, 2017 1:34 PM Permalink

Gingrich's 'Contract on Americans' GOP Congress were the ones who created the Student Loan Bankruptcy Bill, making student loans the ONLY loans that can't be discharged by bankruptcy, because the loans are secured by the parents, usually in the form of home equity.

Even if the student DIES the loan must be repaid,  though the 'loans' never existed, that is, it was just fiat Fed money created out of thin air. All the student receives for their debt is four years on the sidelines, and a worthless parchment paper.

It's like I 'loaned' you four years of work for me, then gave you a trophy, now you owe me $160,000 for the privilege! The trade schools are just the opposite, they pay the student to work and study for five years, then a journeyman certificate worth six figures out the gate.

Thanks Republicans! You showed your true colors!! The first debt slaves since Nebukenezzer!

In reply to by XBroker1

bluebear1914 Dec 29, 2017 10:43 AM Permalink

So I am confused.  Please identify the person who made them sign these notes at gunpoint?  He should be put in jail!  The "massive" debt of $37,000 is less than the costs of most cars, so I am further confused as to the problem this authority (so sorry author) is screaming about.

Oh, wait now that I reread the article, we the people should pay for an education beyond the K-12 system we pay for now.  Hmm.  I think the students are indoctrinated enough with public schools that they can pay for more on their own dime.  

ZH is getting more and more worthless as it move from the financial to the political.  Oh well, there are other sites.

  

Anteater bluebear1914 Dec 29, 2017 1:46 PM Permalink

It's interesting in other forms of debt that you can discharge through bankruptcy, the underlying actual value of the debt instrument is the wholly artificial interest that MUST BE PAID IN ENTIRETY FIRST, so when they repossess your car, even if you had already paid down some of the principal, THEY REFUND YOU NOTHING BACK, ...EVEN AFTER THEY RESELL YOUR USED CAR AT A PROFIT!

It's also interesting you can get a 'factored' loan just on the perceived value of a performance contract you've signed, even if you never perform the contract, there is nothing to repossess, you keep the loan, and discharge the debt through bankruptcy...and that's just swell with the GOP Congress that make students (and their parents) debt slaves, EVEN AFTER DEATH.

That's because the 'factor' sold the loan as an equity interest to some poor bond holder who's getting stiffed.

AND IT'S ALL FIAT OUT OF THIN AIR!!!

In reply to by bluebear1914

wisehiney Dec 29, 2017 10:45 AM Permalink

37K is just is not that much money.

An education and four/five years of fun for the price of a car.

Buckle up, bear down, pay it off.

And quit whining.

Stevious wisehiney Dec 29, 2017 11:18 AM Permalink

You're right.  $37k is not that much money if you're making $60+ per year.

If the only job that's available pays you $25k and 40% goes to rent and 40% goes to mandatory medical insurance then 37k is quite a lot.

That college education has almost tripled while income has gone up a meager 3%, therein lies the problem.

That America no longer makes much of anything and buys everything from China (et al) so we have fewer basic jobs--therein is another problem.

 

In reply to by wisehiney

Stevious ThrowAwayYourTV Dec 29, 2017 11:28 AM Permalink

I was a tool & die maker in the 70's, so long for that job.

It is interesting that it's hard to find any college near me where I could learn trim carpentry, renovation or even become a plumber if I wanted.

So it's true, most do not want to work with their hands, for many they don't want to work--period, but not all.

TV and cell phones are destructive to youth.

In reply to by ThrowAwayYourTV

Snout the First Dec 29, 2017 10:47 AM Permalink

Yes, if you insist on living away from home and graduating in four years, you can get into a lot of debt and have no one to blame but yourself. 

I've earned two degrees at night while working full time, did it out of cash flow, and didn't have one cent of debt doing it. And my son is nearly finished with his degree, doing it the same way.