US states cut higher education spending by nearly 1/3 while Wall Street profits on student loan debt

Editor's Comment: The two analyses/reports below demonstrate the rapid destruction of higher education among middle and working classes in the United States. Actually, this process began in earnest back in the 1980s with the funding of technical training, particularly in 1-2 year programs over 4 year liberal arts education. It was then that the federal and state governments began their push to train young people "to do" for the corporations rather than to learn independent thinking for themselves. Increasingly, 4 year degrees in the liberal arts were reserved (by cost) for students from wealthy families and young people from lower socio-economic classes were relegated to 2 year community colleges and technical schools. Now we are seeing another disenfranchisement of students among the latter population with severe reductions in public funding.

In the 2009-2010 academic year the average annual cost for tuition, required fees, room and board for 4 year undergraduate degrees in the US was $15,090 at public universities for students residing in-state and $18,451 for out-of-state students. The average annual cost for a 4 year program in private universities was $32,790. In the 2010-2011 academic year the costs were similar. Those who do manage to graduate from 4 year programs begin whatever work they can find, frequently outside or below their academic training - in debt from student loans. It's not uncommon for a college graduate to begin their worklife owing $60 - $80,000 or more with their incomes garnished for Wall Street profits. Parents and grandparents, 60 years and older who co-signed for unpaid student loans are having their social security checks garnished to pay them back.

This insidious program for higher education in the United States is a major contributing factor in the growing divide between the ruling and working classes and the "dumbing down" of the latter. A population filled with independent thinkers could become an existential threat to the US corporate government and Global Corporate Empire.

- Les Blough, Editor

US states cut higher education spending by nearly one third
By Zac Corrigan

Since the recession began, state governments have cut funding to public higher education by 28 percent. This is the finding of a recent study published by the Center for Budget and Policy Priorities (CBPP). What emerges is a devastating picture of the situation facing youth seeking an education, as over three quarters of undergraduate students in the US attend public colleges and universities.

Titled “ Recent Deep State Higher Education Cuts May Harm Students and the Economy for Years to Come ,” the CBPP report describes the deep cuts in state spending and student aid and the resulting increases in tuition, cuts in jobs and infrastructure, and curtailment of services at the affected colleges and universities.

Nationwide, states are spending $2,353 or 28 percent less per student on higher education in fiscal year 2013 when compared to 2008, just before the recession triggered by the collapse of Lehman Brothers. Individually, 48 states are spending less per student than in 2008, with most making severe cuts.

The amount of spending cut varies from state to state; in some areas it has been particularly drastic. Arizona and New Hampshire have cut spending per student by more than half, and nine other states have cut it more than one third; 36 states have cut funding by more than 20 percent. States and localities provide 53 percent of the funding for instruction at public colleges and universities in America.

In response to the cutbacks, schools have themselves cut spending, as well as raised tuition, resulting in education that is both more expensive and worse in quality. Individually, every single state has increased tuition at four-year public institutions faster than the rate of inflation since 2008.

Nationwide, tuition has risen by 27 percent or $1,850 per student, adjusted for inflation, since the 2007-2008 school year. In some states the tuition rise has been especially steep, with California and Arizona leading the pack with increases exceeding 70 percent.

Increases in federal assistance, such as an increase in the availability of Pell Grants and an expansion of some higher education tax credits, have fallen short of covering the decreases from the state end, adding up to about three quarters of the shortfall nationwide. And because these increases were applied basically equally among all states, the states with the worst state funding decreases, like Arizona and New Hampshire, are falling particularly short. The funding shortfall was further exacerbated due to the recent expiration of federal emergency funds at the end of the 2011 fiscal year.

In addition to increasing tuition, schools have responded by cutting spending through the elimination of faculty positions, discontinuation of many course offerings, the closing of facilities like computer labs, reduction of library services, and even the closing of entire campuses. In Arizona alone, more than 2,100 university positions were eliminated; eight “extension-campuses,” which facilitate distance learning, were closed; and 182 schools, programs and departments were consolidated or eliminated.

The majority of state money used to fund higher education comes from tax revenue, which, adjusted for inflation, is down nationwide by 6 percent compared to 2008. At the same time, an increasing number of young people are attending public universities, partly as a result of the “baby boom echo,” which resulted in a surge in people presently aged 18-24 years. Compared to the beginning of the recession, 1.3 million or 12.4 percent more full-time students were enrolled in public higher education in the 2011-2012 school year.

These cuts are all the more damaging to students and their families as they come at a time when the working class is still reeling from the officially ended recession. Additionally, $85 billion in sequester cuts signed into law by President Obama last week will affect programs providing housing assistance, early childhood education, nutrition assistance and unemployment insurance, among many others.

Compared to 2008, median household income is still down 8 percent. Unemployment remains high, officially at 7.7 percent, which is still a falsely rosy measurement as it does not include the underemployed and those who have stopped looking for work. Real estate values are still depressed as well.

All of this puts families of those seeking higher education in dire financial straits, and dissuades young people from attending college at all. The Georgetown Center on Education and the Workforce projects that by 2018, 62 percent of jobs in America will require some form of college education, which is up from 59 percent in 2007 and 28 percent in 1973. It also projects that by that time, the country’s higher education system will produce 3 million fewer graduates than the labor market will demand.

The cuts to higher education are of a piece with broad attacks on public education by state governments, and especially the Obama administration’s “Race to the Top” program. Under this policy, schools in poor districts are held to the same testing standards as those in affluent areas.

Under this policy, if students fall short of mandated standardized test scores, teachers may be fired and replaced with inexperienced and lower-paid new-hires. So-called “failing schools” may then be closed or turned over to charter companies, which run the schools for a profit, funneling public funds into the pockets of private shareholders. Some public school districts, including in Michigan’s capitol, Lansing, are eliminating art, music and physical education classes, which do not factor into the standardized tests.

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Wall Street turns profit in student loan debt
By Nancy Hanover
11 March 2013

For the one in five Americans with student loan debt, it is a hellish nightmare. To others, it is an investment opportunity. Last week’s news on student loans provided a glimpse on both sides of this growing divide.

First, there were the sequester budget cuts, implemented by means of a phony crisis generated through the collusion of the Democrats and Republicans. The cuts will hit low-income students by reducing Federal Work-Study and Supplemental Educational Opportunity grants by about $86 million. Loan fees will go up and student aid administration funds will be cut. Some financial aid already granted will be withdrawn, forcing students into additional loans.

Then the fourth quarter 2012 statistics from the Federal Reserve Bank of New York came out, showing student debt tripling over the last eight years. It found that 43 percent of 25-year-olds had student debt in 2012, an increase from 27 percent in 2004. Even more disturbing is the fact that a staggering 35 percent of people under 30 who have student loans are at least 90 days late. For all student borrowers currently in the repayment process, nearly 30 percent are delinquent, giving student loans a higher delinquency rate than any other loans, including credit cards.

Source: FRBNY Consumer Credit Panel / Equifax

Pointing to another aspect of the crisis, a report from research group Demos warned of the debilitating effect of poor credit on job seekers. Not only are millions of people unable to pay their college loans, but precisely because they are struggling under a mountain of debt, their ability to find work is severely impacted. Presently 47 percent of employers conduct credit checks before hiring, according to the study. The decision to hire even for low-wage entry-level positions such as maintenance work, telephone tech support, delivery driving, supervising a stockroom or food service now routinely involves a credit check.

Source: FRBNY Consumer Credit Panel / Equifax

With more than half of recent college graduates either unemployed or underemployed, and with average yearly incomes of 25- to 34-year olds with a degree down about $10,000 since 2000, it is no wonder there are staggering levels of loan defaults.

But no matter how difficult debt may be, in 21st Century capitalism it is someone’s investment opportunity. And the riskier the debt, the greater the possible return. There is money to be made—a lot of it—when there is $1 trillion worth of debt.

Last week’s news on the other side of the financial divide was therefore far more sanguine. Former government entity turned student loan originator, collection agent and debt seller Sallie Mae (SLM) announced that it had sold $1.1 billion worth of new student loan debt securities. The publicly traded firm also noted there was a whopping 15 times more demand for the highest-risk, highest-return batch than there was supply.

The Wall Street Journal commented that “boom times may be back for the student loan market” as “investors’ hunger for risky loans shows the lengths they are willing to go to generate returns in a period when interest rates are hovering near record lows.” Since the announcement of the Obama administration’s quantitative easing (QE3) last September, there has been a decided uptick in the purchase of student loan securities. In 2012, SLM sold $13.8 billion worth of these bonds, making $514 million in the fourth quarter, a 12.5 percent increase over the previous year.

This current market frenzy for student loans is a product of the policies of the Obama administration. On the one hand, he has overseen the continuing record demand for student loans by implementing budget cuts to education and financial aid. On the other hand, the administration is pumping $85 billion a month into Wall Street, driving up the prices of financial assets as capital searches for investments.

The market in securitized loans known as SLABS (Student Loans Asset-Backed Securities) was first created in 1992 by the Sallie Mae Marketing Association. SLABS rocketed in popularity with the asset-backed security scam, growing from $75.6 million in 1990 to $2.67 trillion at their height. While overall securitization levels have diminished, private student loans (with generally higher interest rates than government direct loans) from such lenders as Sallie Mae and Discover are still packaged into bonds and sold to institutional investors.

About $11 billion worth of SLABS were created in each of the last three years. This year through February, dealers sold $5.6 billion of student-loan-backed securities, more than triple the figure for the same period in 2012, according to Asset-Backed Alert.

Of the $1 trillion in student loan debt, between a quarter and a third is now securitized into SLABS. As with the subprime racket, SLABS are often bundled with other kinds of loans for trading purposes.

These financial instruments may now be set to proliferate substantially. Last week, The Wall Street Journal reported that an online securities trading company named SecondMarket has unveiled a new series of products to facilitate student loan debt speculation. Created in 2004, SecondMarket, with the tagline “the reinvented stock market,” became the conduit for Facebook, Twitter and LinkedIn to sell privately owned stocks amongst the well heeled. The company operates in the arcane trading world of bankruptcy claims, structured products, illiquid public equity, restricted securities, warrants, unregistered stock, convertible debt, and employee stock options.

The new mechanism will give SecondMarket's vetted base of “high net worth individuals,” hedge fund managers and institutional investors access to SLABs issued by agencies like Educational Funding of the South (EdSouth) and other student loan securities issuers. SecondMarket notes that while only a small number of investors have participated in student loan offerings in the past, their organization will facilitate the development of this niche.

The new platform will provide an opportunity to bet both ways on the debt, either with Sallie Mae & Co. or to “short” the industry and bet on cascading defaults, as hedge fund manager John Paulson did in the mortgage crisis. Either way, investors are looking to cash in on the unrelenting growth of student loan debt and its financialization.

Other recent student loan debt news includes the following:

A number of schools are taking the unprecedented step of suing their own former students for defaults on Perkins loans. Yale, the University of Pennsylvania and George Washington University have begun taking defaulters to court. According to research by Bloomberg News, student loan debt collectors earned nearly $1 billion in commissions in 2011.
The just-released State Higher Education Finance (SHEF) study reports a 25-year low in state and local support for higher education, the result of an additional decrease of 9 percent in 2012. Budget cuts have drastically affected the “new normal” in state funding for public education, the study explains. The student share of higher education costs is now 47 percent, a new high. The report states that they expect students and their families “to continue to make increasingly greater financial sacrifices in order to complete a postsecondary education.”

Relatively unreported has been the developing crisis among parents and grandparents who have co-signed student loans. This debt has spiked more than fivefold since the beginning of 2005, making the group of debtors aged 60 and older the fastest growing segment being hit by the crisis. This has resulted in a growing number of Social Security garnishments on behalf of the Department of Education. According to Treasury Department data cited by The New York Times, nearly 119,000 seniors age 60 and older were garnished as of last year.

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