Student Loan Protesters Don’t Get It

I recently commented on a MyFoxDC article about 36 students who disrupted free entry to the Sallie Mae loan company in DC. I heard they also blocked traffic, too, which is a really great way to win Washingtonians over to your cause on a weekday.

To read this extremely long post, make the jump!

The article concluded with one of these supposedly clever lefty chants:

Protesters chanted, “Sallie Mae, you can’t hide, we can see your greedy side.”

I thought it was ironic that students supposedly saddled with debt could afford to travel across the country to protest and get arrested, so I said in the comments:

“The students traveled to D.C. from across the country…” Apparently not deeply in debt enough to forgo a trip across the country! Now they have to make bail. Will they protest against the bail bondsmen who lend them money because “they can see their greedy side?” It takes two to tango.

Turns out I was wrong about that, and I struck a nerve with the students. But I was wrong in kind of an amusing way.

One commenter (one of the arrested students) derided my statement as “really ignorant” and another even accused me of making “false comparisons” and suggested I “actually stop and think about how this issue affects not only the students but everybody who participates in the american economy.”

Oh boy, how I’ve missed insults from self-righteous college liberals! Why did I ever graduate and join the real world? One wonders. I wonder what in the hell these kids are “learning” these days?

So, how was I wrong? I assumed they paid for the trip themselves. I thought that was logical. Well, according to a student who attended the protest and was arrested, they neither paid for the trip or the bail.

According to David Emmanuelle Castillo, the part-time student, part-time protester and part-time jail occupier who responded to my comment, their lefty national student association paid for it:

Students from across the nation attended this event, which was funded by that very insignificant fee each student pays into from their respective associations so that way we can use our voice to express our political dissent against corporate greed.

He says that the trips for the arrested students were funded by the United States Student Association. (And because he opposes corporate “greed” I wonder if he opposes union and government “greed?”)

 
(You can see his full comments by clicking the images above.)

While this group’s name sounds innocent, it’s actually a national left-leaning (I’m being generous, they are absolutely nuts) student group that is funded by contributions from student government associations, however they choose to raise the money.  About $ .25 per student per school.

The group believes silly things like “Education is a Right,” discharging student loans in bankruptcy, and has programs closely affiliated with labor unions. In short, they’re a stone’s throw away from being full blown socialists. Some probably already are.

I didn’t suggest, or even insinuate that that student loans or other financial aid (is that even possible?) went to fund their trip — as it was pretty clear from my comment that I was suggesting they weren’t in enough financial trouble to forgo such a trip.

But, of course, here is how David Castillo took it:

Really ignorant statement. The students that traveled across the country did not use their student loans or financial aid in a wasteful manner. It is used in a constructive manner since a very small and insignificant portion of our loans/financial aid goes into funding this thing called “Student Government”.

I guess it is ignorant to presume college students would pay for such a trip themselves, and cover their own bail. Silly me.

Well, who paid for their bail then? David enlightens us:

And we were bailed out by Unions who are supporters in this cause.

Ah, yes! Unions bailed you out. Forgive my ignorance, but didn’t union labor demands play a role in the crippling legacy costs at GM and Chrysler? Didn’t they get bailed out? Didn’t the government step in and screw bondholders and give unions get a big stake in those car makers? Those unions?

Or maybe it was the (indirectly taxpayer funded) public employees unions that advocate for unreasonable policies for state, local and federal governments that bailed these kids out.

Let me see if I’ve got this straight:

  • Kids who believe education is a “right” and want other people to subsidize (read: pay for) it,
  • Come on an expenses paid trip to Washington,
  • To protest and get arrested,
  • And get free bail from Unions,
  • To bitch and moan about how “unjust” it is that they have to repay student loans.

Got it.

Either way, it was clearly ignorant of me to assume that people would actually bear the financial burden of their trip and their arrest, or if they lacked the money, would utilize a bail bondsman. Again, liberal students, please forgive my ignorance, I guess it comes from spending too much time away from college.

You know, though, arrests don’t look good on a job application. So, I am happy that David was so generous with his future, shunning future employability at respectable places of work all to courageously get arrested and increase the likelihood he’ll default on his student loans. And for what? Nope, higher default rates won’t hurt future borrowers at all.

Come to think of it, I do know of one place that loves to hire people with previous arrests and criminal histories: Union-controlled public transportation systems!  There is a future for you, David! “Next stop, Gallery Place-Chinatown.

To take the advice of commenter Hayley Cavataro, I will “stop and think about how this issue affects not only the students but everybody who participates in the american economy.”

Thanks for encouraging me to be introspective, Hayley. (To my knowledge, I know no Hayleys, so I can safely admit that there is a 0% chance any of my offspring will be cursed with such a silly name. With apologies to Gov. Barbour, it’s hard to take anyone with the name Hayley very seriously.)

Do these students understand how student loans work, other than the fact they have to repay them?

I doubt it. To be frank, since these students got pissed because I assumed they paid their way to come to DC and to cover their bail — why should they expect that they should have to cover the costs of their education? Sensible question.

Anyone who has gone to college knows that the FAFSA is not a walk on the beach, so why can’t people understand that the details behind financing college is equally (actually far more) complicated? I was going to make an infographic with all of the ways to pay for college, but why re-create the wheel if a good one already exists?

Here it is:

Filling The Gap Infographic: How Students Pay for College

If you’re interested, you can see one of the draft infographics I made here:

(I acknowledge it needs some work, like fixing the line between Treasury and investors… but you get the point, it’s a draft.)

If you looked at the Filling the Gap infographic, you’ll see there are a wide variety of ways to pay for college:

  • Federal Grants (Pell, and about 8 others)
  • Federal Loans (Direct, Subsidized, Unsubsidized)
  • Scholarships
  • Federal Work Study Program
  • Family funding (i.e. generous parents, 529s)
  • Paying for it yourself (with jobs)
  • Family funded loans (Parent PLUS and FFEL)
  • Private Student Loans
  • Winning Mega Millions

OK, I made the last one up. (But if I won, I’d offer David and Hayley each a scholarship to get their masters in Econ at the college of my choice.)

Very few people just pay for college with one of these options. Most people use a combination of some or all.

In the case of these students, they were protesting the Sallie Mae loan company, which is a publicly traded private company. Founded in the 1970s, Sallie Mae was originally a Government Sponsored Enterprise (like Fannie Mae and Freddie Mac). Unlike the failed housing GSEs, however, Sallie Mae was spun off as a private entity in 2004 when the federal government terminated its charter as a GSE.

While Sallie Mae is one of the biggest players in student lending, that is changing with the passage of the Student Aid and Fiscal Responsibility Act (SAFRA). This was passed as part of the President’s health-care law, PPACA. While the furor over this ill-advised law continued outside of the Supreme Court this week, very few people paid attention to the SAFRA law, which the Wall Street Journal dubbed the “Quietest Trillion.”

Democrats added the SAFRA bill, in part, as a “pay-for” — meaning that because under Congressional budget rules because it showed that it would save money, it would help make the law appear cheaper. (Congress never cooks the books like Enron.) They also did it because they wanted to take over most of the student lending industry (thanks, Rep. George Miller!)

However, the circumstances that would have to occur for SAFRA to actually save that money are based on dubious assumptions — namely that the default projections were low — something CBO Doug Elmendorf  noted in a letter to then Ranking Member Judd Gregg on the Senate budget committee:

[the statutory methodology] “does not include the cost to the government stemming from the risk that the cash flows may be less than the amount projected (that is, that defaults could be higher than projected).”

Assuming low student default rates is about as dumb as assuming that borrowing and spending nearly a trillion dollars is going to immediately fix our economy.

At $100 billion a year in costs, we clearly don’t have the capital to cover the new SAFRA loans and maintain current levels of spending. So, where’s the money gonna come from? It will be borrowed from investors, or will supplant other spending that will be replaced by borrowed dollars. Unless, of course, we balance the budget tomorrow and stop borrowing entirely, SAFRA will involve more borrowing.

One question I have is this: to the kids who think loan companies are evil because they charge interest > 0%, is the government just as evil/greedy? What’s worse, paying back student loans with interest to compensate investors or paying back student loans with interest to pay for other peoples’ health-care and compensating federal treasury bond holders?

Even if the federal government made all student loans through DOE interest free, we as a government would still have to pay interest because of the way our balance sheet is structured. There is no free lunch.

But how did Sallie Mae, which services loans from the old federal loan regime, work? The Journal explains:

For decades, loans carrying a federal guarantee have been the most common way of borrowing for college. After raising money in the private capital markets, lenders made the loans, paying a fee to the government for each one. The government covered most of the cost of defaults while allowing the private lenders to make a regulated return.

The system broke down after Congress in 2007 legislated a return so low that no private lenders could make money holding these assets. To keep the money flowing to student borrowers, the government began buying the loans from private originators last year. But this larger federal role was intended to be temporary, with an expiration date next summer. The news from Washington now is that rather than scaling back federal involvement, the pols want the U.S. Department of Education to be the exclusive banker to America’s college students.

And while Sallie Mae and other still might help the Dept. of Education service the loans under the new federal program, they won’t originate federal loans as they used to. But they (and others) will continue to provide private student loans, minus of course, having them being guaranteed or subsidized by the federal government.

That’s what I don’t think these students understand about lending — it’s a two way street.

They agree to terms of repayment with lenders, and either investors agree to a rate of return with the lending institution or buy stock based on projections and data. They are always free to invest elsewhere.

When borrowers don’t repay according to the terms of the deal (default) that has an effect on the returns to investors and raises the risks of investing. This obviously raises costs. Don’t believe me? You can try this as an experiment at home: Stop paying your credit card bill, and see if your interest rate goes up. Similar concept.

Student lending, both public and private, is very complicated. Government, rightly, has done its part to muck it up and make it much more complicated than it has to be with deferments and such that make student loans as investments less desirable. But, just like consumers, investors can go elsewhere, whether they’re investing in private student lenders or buying federal bonds.

Back to David Castillo’s incoherent rant. The first 280 words are a description of how his free trip to interfere with the peaceful lives of others, his subsequent arrest, and union-subsidized bail (out) weren’t paid for by him as well as some naively broad and hasty generalizations about the origins of the financial crisis. I did however, want to respond to these points he made:

Students are bearing the brunt since current neoliberalist policies favoring big business has gave homage to divestment of public funds for public higher education, which has caused students and their families to pay more than the State/taxpayer contribution. Along with this, we are seeing increases in the cost to attend such institutions due to the route of privatization that has been a common pattern across the nation. For some students, financial aid and student loans is not enough since some may have to work two, even three jobs to pay their way through college. Where is the justice in that?

I was one of the students who partook in todays action and was arrested. We targeted Sallie Mae because they are the main bank issuing our student loans and they have currently taken the necessary steps to get their policies of setting exhorbitant interest rates on those loans so they can profit off our misery. We took this action to ensure the future is a more just and equitable society not just for us, but for future generations. Before you go making such an invalid and erroneous statement do your research and get educated on the issues.

Long live the GOOD FIGHT!

I have never heard the term “neoliberalist” before this kid’s rant, so I looked it up. Given his worldview, you can see he actually believes in whatever the opposite of “neoliberalism” is (maybe socialism?) So I guess that’s his verbal critique of people who believe in individual freedom, personal responsibility, free trade and open markets. They’re neoliberalists. It just seems to that people who use this as a derogatory term just hate economists.

I guess by the definition of neoliberalist, it would appear that I am one (except, I don’t believe in tax benefits or subsidies as they distort markets.) Thank you, David. I will wear that term with a badge of honor just for you.

His neoliberalism rant aside, what is “paying more than the State/taxpayer contribution?” Is that something like tuition? I have heard of this concept of “tuition.” Maybe David is of the worldview that state funded colleges should be “free” — meaning they charge no tuition.

I, of course, don’t support that notion, but States are free to do what they want. He doesn’t elaborate, though and I don’t want to put words in his mouth. It does sound like he supports socialized education, which has worked out so well in our public schools.

This next quote was probably the most laughable one in his entire rant:

Along with this, we are seeing increases in the cost to attend such institutions due to the route of privatization that has been a common pattern across the nation.

Privatization is the reason college is getting more expensive? Really? I don’t know, maybe basic economic principles like supply and demand play a role…

I don’t think that demand is the only reason college costs increase, but it definitely plays a major part. I realize the supply and demand chart is very basic, but it gets the point across. The economics of college are just about as complex as student loans, but I think we can safely and easily conclude that demand has much more to do with increasing college costs than does privatization.

Liberal economists are obsessed with “demand” — so you’d think this would be an easy concept for them to grasp. Apparently not.

There are a ton of other reasons, that college costs go up — like inflation, and the fact that colleges are not really comparable to other institutions (like families):

  • Colleges have to invest in technology and infrastructure much more often than families do.
  • Insurance costs (post 9/11 and Virginia Tech) also have risen.
  • Colleges compete with each other on financial aid, which is funded by endowments and scholarships, but it’s also priced into tuition.

I get suspicious anytime people use the word “justice” or “fair” in political discussion, so forgive me for not having much sympathy for David’s woe is me cry here:

For some students, financial aid and student loans is not enough since some may have to work two, even three jobs to pay their way through college. Where is the justice in that?

Who ever said there should be “justice” in paying for a college education? Taking out loans sucks, nobody denies that, but people do it because they think that attaining a college degree will increase their future earnings, even with the financial burden of repaying student loans (that are not discharged in bankruptcy.)

Side note: I’m sure if we made student debt dischargable in bankruptcy, nobody would file for it immediately after they found their first job out of college. Nobody would ever do that, right?

Since I’m not looking for “justice” in higher education financing, I’ll move on.

David continues:

We targeted Sallie Mae because they are the main bank issuing our student loans and they have currently taken the necessary steps to get their policies of setting exhorbitant [sic] interest rates on those loans so they can profit off our misery.

I am not going to make another infographic about how interest rates work. I presume that since this kid is attending college, he’ll take a finance class and learn for himself. Though, I’ve rarely found that the kids who are part of these groups are business students. Remember liberal high school seniors, corporations = evil, and so business degrees = evil!

In my experience in dealing with them personally, they’re usually arts and sciences majors and their colleges don’t require a diverse core curriculum — so most never see the inside of the business school or learn basics about supply and demand, risk and investment or financial markets.

They usually hate their financial institutions because they’re greedy for the same ignorant reasons they hate Sallie Mae. Hippies and liberals often decry things they do not understand as “greedy” — it is their defense mechanism.

However, David’s line about misery struck me: he and the USSA are the ones that are trafficking in misery, and interestingly, it was self-imposed. Misery seems to be the product USSA is selling, and I ain’t buying.

Guess what: despite the best efforts of society, misery will always exist. Deal with it.

And judging by his misspelling of exorbitant, I’d say he’s probably not an English major either. Though, if he’s going to continue his life path as a left-wing social organizer he should probably learn how to spell this word because I bet he’ll be using it 10 times a day for the rest of his life.

I can see those Sallie Mae folks now: lighting illegal Cuban cigars with $100 bills, doing drugs off of prostitutes, and laughing at the stupid kids getting arrested on their doorstep.

Wait, they don’t do that? You mean it’s now how things work? They have investors? They have to ensure that rates accurately reflect risk so they’ll have enough money coming back to lend to other students and be able to repay investors as to ensure future investment?

Say it ain’t so! That narrative about Sallie Mae execs doing blow off of hookers was really enticing, too. Darn.

POP QUIZ TIME!

Time’s up. How did you fare?

If you wrote anything along the lines of: “defaults and inconsistent repayment of debt can deter investors, leading to higher interest rates for future borrowers” you get a pass. Congrats.

What do students like David propose, setting interest rate limits? Because that would totally work. Price controls for student loans would certainly keep prices low, but only for a few amount of people, but most other people would just not get student loans at all. How is that any solution? One need only look at the gasoline price controls we implemented to see how well that went.

When I think of usury laws (which limit interest rates), I think of happy, prosperous places like the middle east during biblical times.

Investors expect a return. They won’t lend money for nothing, nor should they. Even if some benevolent individual wanted to start lending money with 0% in return for students, he probably would cease doing it if kids were defaulting on merely paying him back. Defaults factor into risk and return.

Government regulating the loans and the lenders’ returns, as was the case before SAFRA, didn’t work so well when Congress legislated too little of a return, and lenders just left. (See: College Cost Reduction Act.) One might argue that, compared to a free market, it didn’t work well out at all.

But let’s be honest, the old system already socialized losses — because kids with poorly chosen majors, bad grades, and no real hope for a prosperous future got similar loan rates as future doctors, lawyers, and financial professionals, but that wasn’t enough for liberals. The liberals wanted more, and they gave us SAFRA.

So, why are these kids protesting, other than for my amusement? Well, SAFRA isn’t retroactive, for starters. And SAFRA doesn’t completely eliminate private loans, which are still an option, and a popular one, since the government can’t seem to please everyone, as evidenced by federal borrowing limits.

And here’s David’s closing:

 We took this action to ensure the future is a more just and equitable society not just for us, but for future generations. Before you go making such an invalid and erroneous statement do your research and get educated on the issues.

I am pretty well educated on how markets work and how student loans work. It’s an odd presumption for him to make. But here’s my problem: I don’t think that, if David truly cares about an “equitable society” for future generations, he’s pursuing the right path. Having the federal government take an increasingly large role in education, like health-care, will result in costs that grow out of control, which will have unintended consequences.

And when this happens (some may argue it already has), the government will have to ration those services in some way– meaning it could deny people a college education, create a federal waiting list for loans, or even restrict peoples’ choice of a major and a career. Or it could work like public schools and people have to attend the college closest to them. Nobody wants that.

The private sector student lenders (for now) will still continue to exist, but it’s hard to compete with a government that seems to be OK with never-ending borrowing and continually subsidizing losses. But it is important to understand that the dollars used fund federal student loans come from somebody, either through taxation or borrowing, unless of course the Fed creates them.

Before I end the post, I can’t forget about Hayley’s comment:

The average student debt is $25,000. Student loan debt just reached one trillion dollars nationally, surpassing credit card debt. Most of these students received aid to be there, either from their schools or community support. That’s not “greedy.” What’s greedy is a corporation that exploits those who can’t afford to pay for a private school education, allowing a select few to make massive amounts of money by creating an economic bubble that’s about to burst. You can deride the students for expressing their anger by drawing false comparisons, or you can actually stop and think about how this issue affects not only the students but everybody who participates in the american economy.

The average student loan debt is only $25k? That would buy you about 8 months at Saint Louis University, my alma mater. $25k as an average is nothing to complain about. Many people have far higher student debts than that. I’m sorry if I don’t feel sorry for somebody who had to borrow an average of $6,250 a year to attend college. To me, that seems like quite a deal. [However, the real cost is higher when you factor in pell grants, scholarships, etc.]

I am glad that Hayley realized that student loan debt just reached $1 trillion. Education costs real money that comes from a lot of somewheres.

As we’ve previously examined, Sallie Mae isn’t a greedy corporation that is exploiting anyone. Anyone who reads a student loan contract, agrees to it and signs it isn’t being exploited at all. It takes two to tango. Only if you can’t read or understand the contract and choose to sign it anyway are you being exploited, but in this case you’ve been exploited by our poor public schools.

It was good that she brought up the “bubble” that’s about to burst. Who created it?

The “greedy/evil” loan companies, potential students, or government policies that the created artificial demand? You be the judge.

Sallie Mae, of course, was once part of the nucleus of student lending decision makers: the government. Now it’s not.

One of the biggest things liberals often ignore is that the government itself gets “greedy.” And because it, unlike market forces, dictates the rules (law, regulation, and policy) it often gets greedier and greedier.

Let’s take a look at housing policy:

The GSEs (Fannie and Freddie) were a revolving door of Washington insiders. And those insiders got rich by advocating for bad, market distorting policy. They got Washington to do their bidding, created artificial demand for housing, and bad things happened as a result.

I’m not of the belief that student lenders are innocent does, but when they came under attack recently (RE: SAFRA), it’s not illogical for them to defend their existence.

The biggest difference between these kids and me is that they actually trust government to make things “just”, “equitable” and “fair.”

While I don’t think it’s possible for government to truly accomplish those things, since the definitions of each term is subjective, I don’t think it’s the government’s role to work towards that end in the first place.

What David and Hayley consider “fair” I consider “unfair.” I don’t think education is a right, and I don’t think the federal government has a role subsidizing it. I’m not arguing against public schools K-12, but education is a term completely left out of the Constitution, and, thus, left up to States.

Spring break trips should be a right as far as I am concerned, but not a right provided by government.

I know it’s radical and unpopular, but I don’t think the federal government should have a role in education whatsoever. If States like California want to load up their balance sheet with debt from the many colleges they run, good for them. Go for it. If other States, like Vermont, which has less than 10 public colleges and universities want to have fewer, that’s OK too.

Call me crazy, but the best way to accomplish college affordability is to leave the market distorting up to the States. If California wants to sink a bunch of its taxpayers’ dollars into colleges and attract out of staters, they can do that. If other States want to have few (or no) public colleges, and just give high school seniors vouchers for some money to go to college, that’s fine too. Just as it would be fine if a State provided a quality K-12 education and left the rest up to you.

In conclusion, I have a problem with people advocating that the government get intrinsically involved in education of every level and in student lending who later blame all of the ill effects of that interference on private entities trying to serve a market demand. 

 

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