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Drowning in Debt

News & Features | November 13, 2012

Dan is a teacher. Dan is a father. Dan is over $90,000 in debt.

Dan’s debt doesn’t come from his credit card. Although Dan owns a house, he makes roughly congruent payments towards the $90K and to his mortgage each month. This extraordinary $90,000 refers to the price of his education—the amount he still owes for loans taken out to earn the degrees society promised him would be his salvation.

National student loan debt recently surpassed $1 trillion—exceeding credit card debt— with interest rates rising twice as fast as those on mortgage loans at the housing bubble’s peak. Higher educations economists still debate whether or not student debt embodies a “bubble” in the same sense as housing did in 2008, or the dot-com bubble in the ’90s. Nevertheless, graduates—and current students—feel the weight of debt as tuition prices and interest rates continue to increase during a fiscal depression.

Speculative “bubble” theory dictates that debt securities should be traded with values problematically greater (in the interest of profiting the traders) than their “intrinsic” worth. With the advent of Sallie Mae, Wall Street began purchasing asset-back securities collateralized by student loans—known as SLABS—and thereby sought to shave a bit of profit off of the enterprise. What has happened, due to the nature of these assets and the market itself, is that graduates are either defaulting on their loans or not paying them back in a timely manner. The values at which SLABS were purchased by, for example, Bank of America, do not match the debt incurred. Compound those discrepancies by millions, and the bubble inflates until it is ready to pop.

Admittedly, this phenomenon is distinct from the housing crisis on the basis of scale. Housing debt out-marks student debt roughly tenfold, and thus appears less likely to crash the markets in a comparable way than it did a few years back. But for clarity: students and graduates make up a key demographic to the functioning of the economy. They’re most likely to start businesses, to buy goods (indeed, houses), to kick-start economic growth—none of which they can do while in tremendous debt. When what may be an ever-expanding “bubble” threatens the markets, we can’t rely on the actors (students) who would be keystones to our salvation, because they’re precisely the ones doomed by this process in the first place.

Corruption on the part of Sallie Mae and Wall Street is no help either. This forgoes even the countless suits Sallie Mae has faced (most prominently by New York Governor Andrew Cuomo) for racist practice: misrepresenting the hope for low-income minority students to pay off loans that would have unfavorable interest rates (sound familiar, sub-prime?) or altogether hiking those rates on black and Latino borrowers. The profit-seeking manner in which banks enter the security market leads them to, for instance, offer kickbacks to universities if they raise their tuition prices so that future payments might better meet the values that the SLABS were purchased at.

Heaven forbid you’re a minority student looking for a loan for a liberal arts degree that will lead you—if you do get a job—to a starting salary of around $36,000 a year. With an average graduating debt of $26,600 combined with interest rates of who knows how high, is your first step off-campus going to be diving into the consumerist pool and helping to resuscitate the economy? Likely not, especially if debt collectors, disregarding of the Fair Debt Collection Act, continue to harass borrowers and collect on their misfortune.

To deliver us from evil, that which may appear extreme has been confirmed as necessary. Striking existing student debt—as has been advocated by Occupy Student Debt, the movement’s newest pivot towards the crisis—and building a fairer system of loans for students would give graduates the leg room to stimulate economic growth. New York Times columnist and resident predictor-of-“bubble”-crises Paul Krugman even admitted, in an interview on The Brian Lehrer Show, “I think the idea that [striking student debt] is a threat to the economy is wrong.” While Krugman isn’t as optimistic as some about student debt refusal being an economic spark, he further notes that our current system is utterly crooked: “Basically, we’ve been using public funds, but running them through the private sector for no good reason, except to provide some extra profits to the financial industry.”

Yet, whether an answer lies in resisting debt, reforming the system, or a hybrid strategy, the crisis continues to deepen, and demands action on the part of institutionalists and insurrectionists alike. The trillion dollars in student loan debt is an overwhelming burden on an entire generation, if not our society at large. If the American narrative—that a college education means a successful life—is to be believed, the conditions for that narrative to progress must be inset. Student debt, born in corruption and a failure of the elites, has reached a crisis. Are we prepared to resist?