In the Hidden Ponzi Schemes, I talked about meter maids, tolls, social security, and the IMF. Recent news has led me to discover another danger lurking in our midst.
Recently, the Congressional Budget Office (CBO) reported that for fiscal year 2013, the United States government made $37 billion dollars in profit from student loans. That number is actually down $3.6 billion from the prior year.
Let’s put this in perspective: for FY 2013, Uncle Sam made more money off students than what every other corporation made in profits on the face of the planet, less two (Apple and Exxon Mobil). This trend is expected to continue with nearly one-fifth of 1 trillion dollars in profit over the next 10 years.
From the same CBO document (the bold type is my own, and note that “savings” for the CBO is doublespeak for the government making money while the taxpayers lose money; their net “profits” are also cleverly spun since the “surplus” can be used to trim the federal deficit):
What Are the Budgetary Effects of the Federal Direct Student Loan Program?
CBO projects that the total cost to the federal government of student loans disbursed between 2013 and 2023 will be negative; that the student loan program will produce savings that reduce the deficit. Under rules established by the Federal Credit Reform Act of 1990 (FCRA), the cost of a student loan is recorded in the federal budget during the year the loan is disbursed, taking into account the amount of the loan, expected payments to the government over the life of the loan, and other cash flows—all discounted to a present value using interest rates on U.S. Treasury securities. Under FCRA’s rules, CBO estimates, savings from the program will be $184 billion for loans made between 2013 and 2023. The estimated savings are $37 billion in 2013 but will diminish over time to fall below $10 billion per year from 2018 through 2023. (That $37 billion in savings for loans originated in 2013 excludes savings of $15 billion that CBO expects to be recorded in the budget this year as a result of the Administration’s reassessment of the cost of student loans made in previous years.)
What makes this fact even more disturbing is that educational debt ($1.2 trillion) now exceeds credit card debt, although there are far more credit card holders than student loan borrowers.
In all fairness, there is some debate as to how to best calculate the federal government’s profit margin, with some estimates being as “low” as $5 billion. Even if that is the case, the point is still the same—the government is making gigantic profits by putting young aspiring students into the shackles of debt slavery.
The pervasive burden of debt is an impediment that is afflicting (mostly) the young before they are able to establish themselves and certainly will have deleterious effects on their livelihood, decisionmaking, and purchasing decisions.
Since 2007, the average debt of a student federal loan holder has increased over 40 percent to more than $24,000. In the same period, the amount of federal student loans has gone up nearly 100 percent. Student debt is growing at $90 billion a year.
Consider some more sobering statistics compiled from the Federal Reserve Board, the Chronicle on Higher Education, and the College Board:
- Average student loan debt: $24,304.
- Sixty percent of college students borrow money annually.
- There are 37 million outstanding loans from student borrowers today.
- Fourteen percent of student loan borrowers have at least one loan past due.
- Approximately $85 billion of the money owed on student loans is past due.
- A vast majority (24.6 million) of those repaying loans are 39 years old and younger, but there remains 2.2 million still paying off student loans that are older than 60 years.
The most egregious part of this whole scenario is that while college students are graduating, it is becoming harder and harder to find work. Even those who do manage to find a job have found their wages to be flat, creating the vicious cycle of more and more borrowing with no means to pay off the debt. The National Association of Colleges and Employers reported that more than half of all college graduates who had applied for a job in 2007 had received an offer by graduation day. By 2009, that number went down to less than 20 percent.
The private colleges and universities are a unique bunch because greater than 95 percentof their students assume debt in order to attend, and within 15 years after graduating from said institutions, 40 percent of private school alumni are in default on their loans. In fact, almost 25 percent of federal financial aid is awarded to students who attend private institutions, although these institutions enroll less than 10 percent of the nation’s student body.
An extreme case is the University of Phoenix, which receives 90 percent of its funding from the government. Incidentally, it is one of the largest private universites in North America.
And guess what? The Department of Education does not record defaults after the first two years of repayment, so the institutions (private) that proportionately have the largest number of borrowers will not be in danger of having their federal subsidies eliminated because these defaults go “off the books.”
Have you ever tried to apply for a federal student loan? If you did, guess what you do not need. A credit score, an income, or a job. All you really need is a computer and a pulse (and maybe a pen and a paper if you’re old-school). Most people are not aware, but in the Student Aid and Fiscal Responsibility Act (SAFRA) signed into law as part of Obamacare (2010), it stipulates that students may borrow money directly from the federal government regardless of their credit score or any other financial hindrances that plague them. The message then is “free easy money for everyone who can’t pay it back.” With more money available, students will inevitably spend more because the institutions realize that more of their enrollees are swimming in the dough, so they inflate their prices. Easy money without documentation and resultant astronomical price increases sound a lot like the subprime mortgage crisis and the housing bubble.
So the process incentivizes those who have no proven assets or established ability to pay, encouraging more lending by more naïve students. After all, if you’re 18 years old and Uncle Sam offers to foot the bill to your local university (“Pay nothing now”), what’s the typical teenager likely to do since he won’t (in most cases) have the means to pay for his education up front?
The bottom line is that once you subsidize anything, you get more of it, and costs invariably go up. In an article for the Freeman, Jason Bower states, “Since 2000, tuition at public, four-year colleges has risen by an inflation-adjusted 72 percent, and over the past 25 years it has increased at an annual rate 6 percentage points higher than the cost of living.” So of course, students borrow because a college education is becoming increasingly less affordable year after year.
Furthermore, college education has been producing diminishing returns. Because as a college degree does tend to correlate with a relatively higher income, during the last eight to ten years, the median income of highly educated Americans has been declining.
The bubble eventually must pop.
This subsidization by the government also makes the private lending industry less attractive for students, thus forcing the private lenders out of the market via coercive capitalism.
Hence, federal student aid, whether in the form of grants or loans, is the main factor behind the runaway cost of higher education. Subsidies raise prices, leading to higher subsidies, which raise prices even more. Meanwhile, large numbers of students will graduate with more debt than they would have in an unsubsidized market.
In a very cheeky magazine article, Matt Taibbi explains in Rolling Stone, “Turning down the credit spigot would force schools to compete by bringing prices down. It would help to weed out crappy schools that hawked worthless ‘degrees in bulls#&!.’ It would also force prospective students to meet higher standards—not just anyone would get student loans.”
Let’s summarize the Ponzi:
- (1) You pay your taxes (earned money), or the Fed prints money (free).
- (2) The government uses this revenue to lend money to students, putting this group into debt.
- (3) The schools realize someone else is writing the check, so they raise prices.
- (4) With prices rising, the students have to borrow more money to pay higher prices.
- (5) Students attempt to pay back this debt (by paying the government) but soon realize the degree they worked so hard for doesn’t really mean that much, although it costs so much.
- (6) Back in D.C., Uncle Sam is making more money in profit than nearly all of the corporations on earth.
- (7) Repeat steps (1)–(6) but deceptively continue to give away more “free” money in order to make college “affordable” and ensure everyone gets a college education. This sham is reported to fix the problem, although it’s the root of the problem. More students will be in debt, and the government will reap more profit.
Sadly, everyone gets paid (except the students), and everyone wins (except the students). Mr. Ponzi would have been proud.
Dr. C.H.E. Sadaphal