Why Congress does nothing to solve the student loan problem

Student loan debt is a huge problem, not only for the students themselves, but for all; of America.

Congress has several alternatives available to it, that would remove this huge albatross from the necks of America’s best and brightest, and even from the rest of us.

1. Congress simply could pay off all existing and future loans. Unlike students, the U.S. government never can run short of U.S. dollars.
2. Congress could provide Free education for everyone (Step #4 of the Ten Steps to Prosperity), and
3. Congress could provide a Salary for attending school (Step #5.)

But Congress has not lifted a finger to solve this national problem. In fact, Congress caused the problem.

The reasons can be found in the following excerpts from an article that ran in the “naked capitalism” web site:

Wall Street Has Been Gambling With Student Loan Debt For Decades
Posted on October 27, 2019 by Lambert Strether

Student loan debt burdens 44 million people in the United States.

However for CEOs of student loan companies, or investors on Wall Street, student debt is a lucrative commodity to be bought and sold for profit.

There, in two words, “lucrative commodity,” you see the fundamental reason why Congress, and especially this right-wing administration, like things just as they are, thank you.

Congress and the President are run by money.

Corporations such as Navient, Nelnet, and PHEAA service outstanding student debt on behalf of the Department of Education.

These companies also issue Student Loan Asset-Backed Securities (SLABS) in collaboration with major financial institutions like Wells Fargo, JP Morgan, and Goldman Sachs.

For these firms and their creditors, debt isn’t just an asset, it’s their bottom line.

You might wonder why the U.S. federal government, which handles trillions of dollars worth of Treasury certificates (T-bills, T-notes, T-bonds) needs to farm out the servicing of student loan debt and SLABS.

And, you might wonder why the government helps to create the indebtedness of America’s potential leaders.

MONEY is the answer.

Congress loves privatization, not because it is “more economical” than the federal bureaucracy (It isn’t), and not because the private sector can do the job better and more safely (It can’t, as the recession of 2008 demonstrated.)

Congress loves privatization because big donors love it. If somehow big donors wanted the federal government to do 1, 2, and 3 (above), that would be the way Congress and the President would vote.

Investors holding SLABS are entitled to coupon payments at regular intervals until the security reaches final maturity, or they can trade the assets in speculative secondary markets.

There is even a forum where SLABS investors can anonymously discuss their assets and transactions, free from unwanted public scrutiny.

Yet the financialization of student debt is almost never reported on in the media.

There is little public awareness that when student borrowers sign their Master Promissory Notes (affirming that they will repay their loans and “reasonable collection costs”), their debts may be securitized and sold to investors.

The rich speculators do not want you to know how valuable student debt is to them. You might want to eliminate student debt, heaven forbid.

SLABS resulted from specific federal policy decisions. On November 27, 1992, the Securities and Exchange Commission adopted Rule 3(a)(7) of the Investment Company Act of 1940, which allows companies who issue asset backed securities to be exempt from the legal definition of an “investment company.”

This exemption permits companies to avoid asset registration fees and regulatory oversight – making it profitable for student loan companies to issue securities, which effectively created the market for SLABS.

“Regulation” is a dirty word in the eyes of the rich. They opt for “free enterprise,” meaning “We can get away with anything when everything is legal.

Over the past few decades, student loan companies and Wall Street have amassed record profits.

Meanwhile, $1.6 trillion of student debt is crushing generations of Americans by delaying home ownership, causing generational wealth to decrease, and contributing to widespread depression and even suicide.

Since the ironically-named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, student debt is virtually impossible to discharge in bankruptcy.

Donald Trump repeatedly was able to discharge his and his companies’ debts via bankruptcy. He has boasted about how smart he was to take advantage of bankruptcy laws.

The rich lenders have made sure that students are not afforded this privilege.

Navient is the largest student loan servicing company and the largest issuer of SLABS. In filings with the SEC, Navient acknowledges the following risk factors: “An economic downturn may cause the market for auction rate notes to cease to exist… Holders of auction rate securities may be unable to sell their securities and may experience a potentially significant loss of market value.”

Due to the “securitization food chain”, if Navient or other SLABS issuers and holders experience a significant loss of revenue, they could default on their obligations – triggering negative consequences for Wall Street firms that market these securities to investors and supply credit to the greater public.

Those of you who remember the painful Great Recession of 2008, will note that massive debt default was the cause. For the rich, this lesson has not been inhibiting.

Greed and power tend to preclude caution.

As economist Michael Hudson has argued, “debts that can’t be paid, won’t be paid”, and the insistence of creditors to collect on those debts can trigger social unrest.

As the rational discontent of younger generations continues to grow, catalyzed by a lower quality of life than older generations, the accelerating climate crisis, and insurmountable student debt – activists may choose to utilize “the power of economic withdrawal.”

Young people could exploit the vulnerabilities of the SLABS market via debt strikes or boycotts, as advocated during the Occupy Wall Street movement in 2011.

Writes David Graeber in his comprehensive 2011 book Debt: The First 5000 Years. “For the last five thousand years, with remarkable regularity, popular insurrections have begun the same way: with the ritual destruction of the debt records-tablets.”

Activists concerned about student debt should ask themselves: what would such a symbolic protest look like in the United States today, and could it become popular enough to pose a significant threat to the status quo?

Historically, most social progress has been initiated by the young and the progressive, and resisted by the older and conservative.

The battles between the two often have been bloody and destructive, leaving the nation in tatters for decades or even generations. We still have not completely recovered from the atrocities of the Civil War, the Great Depression, and Vietnam.

For very good reasons, city, county, and state governments pay for grades K through 12. And these governments are not Monetarily Sovereign, so supporting education is a huge financial strain on them. Yet they do it.

For the same very good reasons, the federal government should fund grades 12+ — and it is Monetarily Sovereign, so such support would be no financial strain at all.

Student debt is an abomination that should not have begun, should not continue, and easily could be solved, if our government leaders had the morals and spine for it. 

Perhaps, by rising up, marching, engaging in civil disobedience, and especially voting, young people may help our Congresspeople develop some decency, integrity, and vertebrae.

Congress should initiate Steps #4 and #5, now.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY