Student loan crisis widens gap between rich and the rest. Bill Zimmerman. February 21, 2014. San Francisco Chronicle.
Growing concern about wealth and income inequality overlooks a principal cause: the student loan crisis, which is much deeper than the $1.1 trillion owed and the tens of millions who owe it. Unnoticed are the astonishing profits banks have made from these loans and the impact those profits have had on redistributing wealth.
Since 2010, federal student loans have come from the Treasury instead of private banks (which previously made them with a federal guarantee) so the government now gets the interest rate profit that the banks once realized. In August, the Congressional Budget Office predicted that between 2013 and 2023, the government would make a shocking $184 billion in profits from its student loan program.
If expected governmental profits are that large over the next decade, it is logical that bank profits were as big in past decades. Interest rates were higher then, and the spread between them and the discount rate the banks had to pay to borrow money from the Federal Reserve was comparable to the future spread anticipated by the CBO. Thus, in the four decades before 2010, when the banks made federal loans, their profits must have been some multiple of $184 billion.
That doesn’t include profits from private student loans. When federal loans could no longer keep up with the expanding student population or snowballing college costs, the banks made millions of these private loans. They were not as numerous as the federal loans, but the interest rates were much higher.
Add to these profits a recent windfall. Following the recession, while the “too big to fail” banks got bailout money, the Fed also lowered its discount rate to 0.50 percent in 2009 and 0.75 percent in 2010. The banks gladly accepted these taxpayer-funded subsidies but continued to charge pre-recession interest rates, some as high as 8.5 percent, to their student loan clients.
Figuring conservatively, total bank profits must have been at least $500 billion and more likely $800 billion or more. This vast transfer of wealth came from student families with the greatest need. It was not an actual college expense, only the profit on their loans. Such a vast amount had to have played a significant role in generating our current wealth inequality.
That role continues.
Of the tens of millions still paying off student loans, many are underemployed and unable to make regular payments. Cut off from credit, they are stuck in a debtors’ prison without walls because laws passed in 1998 and 2005 prevent student loans, federal or private, from being discharged through bankruptcy. Meanwhile, no agency of government is even considering meaningful relief for these borrowers.
The Federal Reserve, the Treasury and numerous others have warned that this huge unsecured debt, much of which can never be repaid, creates dangers to the entire economy similar to those generated by housing debt in 2008.
Two reforms are needed:
Monthly payments on student loans should be a percentage of the borrower’s income, after essentials like food and housing are covered, instead of being fixed.
Interest rates on student loans should be nonprofit, which means equal to the Fed’s discount rate, currently 0.75 percent.
Government can adopt these reforms for the loans it makes and force the banks to do the same, retroactively, for all student loans still outstanding. While that would cost the banks billions, it would merely offset some of their past profits. Government used its emergency powers to seize the steel industry in 1952 and mandate wage and price controls in 1971, acts undertaken to prevent damage to the overall economy. Similarly aggressive action is now required to avert another debt-driven recession like 2008.
Over the past 40 years, conservative ideology has shifted the cost of college from the state to the student. Now, for the same reasons that government funds primary and secondary education, it must return to funding higher education. These two reforms can help move it in that direction.
Bill Zimmerman, a California political consultant, is the author of the e-book “The Student Loan Swindle: Why It Happened, Who Is to Blame, How the Victims Can Be Saved.” To comment, to go sfgate.com/submissions/#1