Russell Moore: Are Student Loans The New Indentured Servitude?
Monday, September 02, 2013
Once they reached America, they’d receive no pay other than food and board for toiling away on the farm. It sounds horrible. But they were told it was a worthwhile investment given the opportunities it would open up for them. Sound familiar?
Today, our youngsters are all but required to take on six-figure debt to obtain an education that in many cases has very little practical value.
Unlike the student loans of today however, the indentured servant had a darn good chance to flee his debtor if he was so inclined. Try doing that with student loans—which are non-dischargeable in bankruptcy. I, for one, would much rather flee a single farmer than an army of debt collectors.
More expensive and less valuable than ever
The situation is bad and getting worse. This week, just as students were packing their bags and heading off to college, the Wall Street Journal was reporting that increasingly employers are saying “grades can be misleading” and that they have “grown skeptical of college credentials.”
To combat this problem, some colleges are offering up a new standardized test, which they believe is a new metric to show employers a student’s aptitude and job readiness. Why do we need college and grades if they’re apparently useless?
The ridiculous notion that anyone who doesn’t attend a 4-year college is inherently a failure, or not intelligent, coupled with an easy money credit policy for students to obtain loans has artificially increased both the demand and the money supply. It doesn’t take a Chicago School of Economics grad to know that those factors will cause prices to skyrocket.
The fundamentals of the student loan issue bear a strong resemblance to the housing crisis. And to make matters worse, private loan lenders, hungry for profits at the expense of ill-informed students, have stepped in and capitalized on the situation.
The new subprime crisis
A report released by the newly created national Consumer Financial Protection Bureau last year found that private student lenders sold students loans they neither understood nor could afford.
According to Arne Duncan, the US Secretary of Education, “subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan. “We still have some work to do to ensure that students who take out private student loans have the same kinds of protections offered by federal loans. In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”
The reasons why are rather simple. Private lenders are more aggressive with respect to their collection tactics, offer less flexibility in deferments and repayments and, unlike federal loans, are much less likely to forgive student loan debts for those entering public service careers.
There are really only two kinds of loans, federal and private. If the loan isn’t a federal loan, it’s a private loan. There is roughly $150 billion in private student loan debt (ie, non-federal student loan debt) in America.
RISLA sells private loans
Here in Rhode Island, we have a situation where a quasi-state agency the Rhode Island Student Loan Authority (RISLA) sells entirely private student loans to students. RISLA is a state agency in name only. Their employees are not considered state employees and there’s no state oversight outside of the fact that the Governor appoints members of the board and the Treasurer (or his/her designee) has a permanent seat on the board. That doesn’t stop the agency from aggressively marketing themselves as a state agency.
RISLA will argue that it encourages students to seek federal loans first and maybe they do make half-hearted attempts to do that. But that notion is against the agency’s self-interest. The agency survives strictly by selling private loans in direct competition with the federal loan program.
And they’re pretty darn good at it too. RISLA's own audited financial statements show they have carried reserves of up to $110M in as of the 2011 fiscal year—the last one of which data is available on their website.
This wasn’t always the case. The agency once sold federal loans as well as private student loans, but ceased marketing federal loans in 2010 when newly adopted federal regulations required that all federal loans be originated by the U.S. Department of Education.
RISLA sought the Glengarry Glenn Ross leads
Since then, RISLA has sought to reposition itself as more than a private lender by moving to merge with the Rhode Island Higher Education Assistance Authority (RIHEAA). At first blush, the move seemed benign enough as it would combine two agencies aimed at helping students.
But RIHEAA works with the US Department of Education, while RISLA competes with them. RIHEAA also manages several student-centered programs such as CollegeBoundfund (RI's 529 college savings program), the RI State Grant Program (for needy students) and WaytogoRI.org, an innovative career and college planning website for middle and high school students. A RISLA merger with RIHEAA would give RISLA access to a massive database of student contact information to market their private loans to students who might not be well served by them.
Make no mistake about it: these would’ve been the Glenngary Glen Ross leads for RISLA. Governor Chafee balked at the merger proposal earlier this year and moved to replace the entire RISLA board and the chairman of the RIHEAA board.
Avoid indentured servitude
In any event, it goes without saying that students should be wary of taking on expensive educations, which don’t even prepare them for today’s careers and require them to buy expensive loans.
It’s sad that we’ve literally built institutions and careers whose sole intent is to capitalize on the naiveté and optimism of young people. Ironically enough, education is the antidote to the excesses of the education industry.
To quote from the movie Good Will Hunting, today’s youngsters would be wise to reconsider taking out six-figure loans that could’ve been attained for “$1.50 in late fees from the public library”. Who could blame them for letting the cup of indentured servitude pass them by?
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