Student Loans,Debtfare and the Commodification of Debt: The Politics of Securitization and the Displacement of Risk

Abstract

Student loans represent the largest and fastest growing segment of unsecured consumer debt in the US; yet, the literature is silent on the power relations of the industry. Who benefits from the expansion and reproduction of student debt to low-income students, and how? To address these questions, I explore two key features of the industry: the high level of upstream repackaging of student loan asset-backed securities (SLABS) and the high default rates. By historically contextualizing SLABS, I reveal the intrinsic political nature of the processes surrounding the commodification of debt. Through the temporal displacements inherent in the commodification of debt (i.e. accelerating the repayment schedule for lenders), SLABS serve to reduce financial risk for private lenders, whilst relocating the social dimensions of risk onto student debtors. The neoliberal state plays an integral role in attempting to mediate, discipline, and depoliticize the social fallout involved in the relocation of risk, primarily through regulatory reforms.

Keywords

asset-backed securitization student loans debtfare neoliberalism Sallie Mae credit-led accumulation

Introduction

Registering US$1 trillion in April 2012, student loans in the USA exceeded the total amount of all other forms of unsecured consumer debt, representing more than all credit card debt and auto loan debt combined. Educational loans remain the only form of consumer debt to markedly increase since the peak of household debt in late 2008 (Federal Reserve Bank of New York, 2012). Policy pundits and economists have been concerned about student loans because educational loans act as a drag on housing recovery, as highly indebted recent graduates cannot afford to purchase a home (Bloomberg, 23 February 2012). Other groups such as the National Association of Consumer Bankruptcy Attorneys are concerned about what they call the ‘student loan debt bomb’, as they view current debt levels of recent graduates, parents who co-signed loans, and older students returning to school for job training, as unsustainable. Defaults on student loans have steadily increased from 6.13 percent in the first quarter of 2003 to 8.69 percent in 2012, with delinquency rates higher than that of mortgages, auto loans, and home equity lines of credit (Federal Reserve Bank of New York, 2012). The growing numbers of student debtors who have been subjected to the devastating and humiliating social consequences of default have also vented their anger and frustration with the student loan industry through various acts of protest, most notably within the Occupy Wall Street movement (Collinge, 2009).

A key, yet implicit, theme running throughout the above discussions concerning the increasing rate of default among student debtors is the credit system. The power relations in the credit system seem to be muted in the debates about student loans, largely because the system has been assumed by many observers to be comprised of rational economic actors entering into equal exchanges with one another. In contrast, seen from a Marxian perspective, the credit system not only entails exploitative relations of power, but also plays an important role in facilitating the expansion and reproduction of capital accumulation in that it temporarily resolves the contradictions to which capitalism is prone (Marx, 1991). Underpinning the student loan industry, there is a core tension between the expansion of student loans and the rise of defaults. Missing from the debates is a rigorous and radical interrogation of how and why this tension has been socially constituted and reproduced. The main objective of this essay is to address this gap in the literature by framing student debt as an integral feature of the wider credit system and, by extension, part and parcel of the processes of capital accumulation. In doing so, I aim to repoliticize our understanding of the student loan industry, particularly with regard to the seemingly technical and thus neutral strategies therein, most notably: student loan asset-backed securities, or SLABS. Before turning to my argument, it is helpful to elaborate briefly on the history and contours of SLABS.

Since the 1980s, SLABS have represented the backbone of the student loan industry; yet, despite their centrality – representing over 100 percent of student loans in 2006¹ – SLABS have remained invisible in the critical scholarly debates on student debt. SLABS refer to a technique in which illiquid assets such as student loans are transformed into tradable securities through a legally created tax-exempt entity called either a Special Purpose Vehicle (SPV) or a Special Purpose Entity (SPE) (Elul, 2005). Despite the role played by asset-backed securitization (ABS) in the 2008 sub-prime housing crisis, many pundits regard ABS as an important feature of the contemporary financial system. This is because ABS is presumed to represent a highly efficient method of raising capital and mitigating or even reducing risk for lenders (Fabozzi and Kothari, 2008; Gorton and Souleles, 2007). Moreover, ABS has been billed as an important instrument in achieving the financial inclusion of sub-prime borrowers, including many students who are not considered creditworthy due to inadequate credit history, income, collateral, and so forth (Federal Reserve Bank of New York, 2012). According to industry observers, SLABS act as the ‘main artery through which funds are channelled from investors to students’ (Ergungor and Hathaway, 2008: 2). As I demonstrate below, SLABS seem unaffected by the 2008 crisis. In fact, dominant financial corporations in the student loan industry such as Sallie Mae continue to generate high profit margins as they expand their operations in both student loans and other key consumer products such as credit cards and mortgages.

Notwithstanding the significance of SLABS to the student loan industry, there has been little scholarly work on the topic outside of economistic analyses (cf. Ergungor and Hathaway, 2008; Fried and Breheny, 2005) and legal commentary (Simkovic, 2013). Missing is an interrogation into questions of power and the capitalist nature of the student loan industry: What role has the state played in facilitating the ability of private lenders to reduce their risk through SLABS? How has the state helped to reproduce and naturalize the social consequences of this risk, particularly with regard to defaults? And, who benefits from SLABS and the definition of financial risk that dominates the student loan industry? Taken together, these questions are aimed at repoliticizing our understanding of the credit relations underpinning the student loan industry by disrupting the dominant assumption that SLABS are an apolitical, efficient, win-win financial instrument that can limit or reduce risk as well as raise capital by transforming student debt into assets that can be bought and sold on the market.

To tackle these questions, I develop the following two-pronged argument. First, I demonstrate that SLABS are not a natural, neutral, and inevitable feature of the market but instead are constructs that have been created and reproduced by powerful capitalist interests and the neoliberal state. Drawing on David Harvey’s work on money, I suggest that SLABS represent a form of social power imbued with the ability to dictate particular temporal and spatial displacements. I refer to these processes as the commodification of debt (Harvey, 1989, 1999). As I explain more fully in my book, Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population (Soederberg, 2014), the commodification of debt is a tension-ridden, class-based strategy that emerges from the contradictions inherent to the credit system within the wider dynamics of capital accumulation. A primary paradox that underpins the student loan industry is the ever-increasing expansion of loans to student debtors who cannot meet their payment obligations.

Seen from a historical materialist perspective, the processes involved in the commodification of debt involve more than the buying and selling of debt to generate fee- and interest-based income. Underpinning these processes, for instance, are highly unequal and exploitative social relations of power that entail both temporal and spatial dimensions. Financial corporations (e.g. Sallie Mae) possess the power to sell (and transform) unsecured debt into assets in order to accelerate the temporal dimension of repayment on their initial outlay plus interest, fees, and commission. They do so, however, by displacing the social dimensions of risk involved in this process onto student debtors. This is not a neutral, natural, and inevitable feature of the market but instead represents a socially constructed reality that is both highly dynamic and paradoxical in nature. This leads me to the second part of my argument, which concerns the nature of the credit system and role of the state.

Given the anarchical nature of capital accumulation, including the credit system, capitalists cannot resolve the core tensions of capitalism on their own. I thus argue that the displacement of social risk that occurs through the commodification of debt is mediated, depoliticized (i.e. de-classed, decontextualized and dehistoricized) and legitimated by the ideological and institutional (e.g. regulatory) features of the neoliberal state (Peck and Tickell, 2002). To add more precision to our understanding of various forms of neoliberal state intervention, particularly with regard to the central tension of the student loan industry, I introduce the concept of debtfare (see Soederberg, 2014). A component of the neoliberal state in the USA, debtfare serves to facilitate the expansion and social reproduction of SLABS and the wider student loan industry by constantly revising the Bankruptcy Code to keep student debtors from accessing its protection, and by continually expanding the temporal definition of default.

I have organized my argument into four main sections. Section one provides an overview of the student loan industry. Section two elaborates on the meaning and key conceptual tools of my historical materialist framework. Section three embarks on an historical materialist analysis of the relationship between SLABS and student defaults, as well as the role of the debtfare state in managing these tensions over the last three decades. Section four provides a summary of the argument.

The Student Loan Industry: An Overview

The student loan industry has grown steadily over the past several decades in lockstep with rising student demand and rapidly rising tuition fees (US Department of Education, 2012a). In the USA, the industry is comprised of two main categories of loans and lenders: public student loans, which are issued by the federal government and represent the largest type of loan (85 percent) (Consumer Financial Protection Bureau, 2012), and private student loans, which are issued by banks such as JP Morgan Chase and Citibank. Private lenders, primarily banks, have played a critical role in the industry, supplying about 80 percent of the US$55 billion to US$60 billion in new federal loans made annually from 1998 to 2008, and US$15 billion to US$20 billion in the form of private loans (Ergungor and Hathaway, 2008).

The Guaranteed Student Loan Program was established in the Higher Education Act of 1965 and was later renamed the Federal Family Education Loan Program (FFELP). The FFELP guaranteed and subsidized student loans, which were originated and funded by private lenders, most notably commercial banks. Key loans that constituted FFELP included: subsidized federal Stafford loans (the largest type of student loan), unsubsidized federal Stafford loans, Perkins loans, FFELP PLUS loans, and FFELP consolidation loans (Elgin, 1993). FFELP loans can be applied to both public and private colleges. Guaranteed FFELP loans place the full faith and credit of the government behind a private bank loan to each student. With the exception of the unsubsidized Stafford loans, the state pays interest on the loan during periods of grace (six months after graduation) and deferment, in addition to paying the difference between a set low interest rate and the market rate after graduation (known as the ‘special allowance’) (Corder and Hoffman, 2001). Aside from subsidizing interest rates, the state guaranteed a large portion (97 to 100 percent) of the FFELP loan if a parent (typical co-signer) or student defaulted (Fried and Breheny, 2005).

To help raise capital and ensure liquidity to assist in guaranteeing federal student loans, the government set up the Student Loan Marketing Association (Sallie Mae) in 1972. Sallie Mae was permitted to raise funds by issuing SLABS, which afforded an efficient way of raising money to help finance low interest rate loans to students by subsidizing and guaranteeing repayment to their private lenders (Federal Reserve Bank of New York, 2012). Sallie Mae was privatized in 1996 (and was subsequently renamed the SLM Corporation) and eventually became the largest issuer of SLABS in both federal and private student loans, as well as the largest educational lender of private student loans in the US. In addition, Sallie Mae expanded into other areas of consumer finance (e.g. mortgages, credit cards, car loans), and created Laureate, an online loan delivery system. The company has also moved into debt collection and guarantor servicing. Sallie Mae has been growing at such a rapid and profitable pace that in 2013 it announced its intention to split into two separate publicly traded companies: ‘an education loan management business and a consumer banking business’ (Guardian, 29 May 2013).

The passage of the Health Care and Education Reconciliation Act in 2010 put an end to the FFELP program, replacing it with the William D. Ford Direct Student Loan Program (or DLP). Under this new law, public student loans originate directly from the Department of Education (DOE), effectively ending the ability of private banks to originate – but not to profit from – student loans backed by the federal government. Like the FFELP loans (e.g. Stafford loans), DLP loans can be applied to both public and private colleges. I address the FFELP loans and DLP in more detail below.

Although federal student loans remain the largest category of educational lending, private student loans have been growing at a swift pace over the past decade. Default rates on private student loans, which carry higher interest rates than federal student loans, are high and show no signs of abating. The percentage of borrowers who defaulted on federal loans within the first three years of payments rose to an average of 13.4 percent in 2011. This number was considerably higher, 22.7 percent, for students who attended for-profit colleges (US Department of Education, 2012b). For instance, while 62 percent of students graduating from public universities held some kind of student debt, 72 percent of students attending private universities held a student loan. Students attending for-profit private universities (or proprietary schools), many of whom are from a low-income bracket, tend to have higher levels of student debt, given the comparatively higher tuition fees and other costs (see Table 1 below) (Lynch et al., 2010; National Consumer Law Center, 2011).

Table 1.

Unmet Need among Low-Income Students, 2007.

Type of Institution	Cost of Attendance	Expected Family Contribution	All Grant Aid, 2007	Unmet Need, 2007
Four-Year
Private, for-profit*	$31,976	$3,518	$3,501	$24,957
Private, non-profit	$34,110	$3,911	$13,624	$16, 574
Public	$18,062	$3,798	$5,676	$8,588
Two-Year
Private, for-profit*	$26,690	$1,882	$3,736	$21,072
Public	$11,660	$3,659	$2,523	$5,478

These institutions attract a large segment of low-income, minority students (US Department of Education, 2012a).

Source: Education Trust analysis of NPSAS:08 using PowerStats; Full-time, full-year, one-institution dependent students in the bottom half of the income distribution are included in this analysis (see Lynch et al., 2010: 3).

The precise debt load of recent graduates is difficult to ascertain given the variation in public and private debt as well as the variability of higher education institutions across state lines (e.g. public colleges, for-profit private colleges, non-profit private colleges). Nonetheless, the Project on Student Debt estimates that ‘two-thirds of college seniors who graduated in 2010–11 had student loan debt, with an average of [US]$25,250, which was up five percent from the previous year’. Moreover, ‘state averages for debt at graduation from four-year colleges ranged widely in 2010 from [US]$15,500 to [US]$31,050’ (Project on Student Debt, 2011: 1).

An Historical Materialist Framework

The student loan industry must be understood within the wider dynamics of capital accumulation and, in particular, what some refer to as financialization or financialized capitalism (Fine, 2010). This phase of capitalism, which emerged in the US in the late 1970s, emerged from the underlying paradoxes of overaccumulation linked to Fordist forms of capital accumulation. Briefly, overaccumulation refers to a condition of surpluses of labor (i.e. rising under- and unemployment) and surpluses of capital (i.e. money capital) (Harvey, 2003). Since the late 1970s, capitalists, with assistance from states, have sought to overcome the barriers to capital valorization by temporally and/or spatially displacing surpluses of money capital. This has resulted in a situation in which interest- and fee-generated income from financial investments such as student loans far outpace the profits derived from the production of physical goods (Lapavitsas, 2009). The credit system has come to play an increasingly important role in contemporary capitalism because it temporarily resolves the contradictions to which capital is prone (e.g. overaccumulation) and thereby facilitates revenue generation largely based on interest, commission, and fees (Soederberg, 2014). However, as Harvey (1999) reminds us, the credit system can only carry this task out by internalizing the tensions within itself (see also Marx, 1991). These very tensions lie at the heart of the relationship between increased defaults in student loans and SLABS.

The first step in moving beyond the common economistic and technical understanding of SLABS as an efficient and neutral process of reducing risk is to grasp that money capital, which comprises SLABS, is not a thing but a historical social relation that embodies both temporal and spatial sources of social power (Harvey, 1989). SLABS, for instance, are a form of privately created money (i.e. credit), or more specifically, what Marx refers to as a money-form of revenue. It should be highlighted that credit is mediated by formalized abstractions (e.g. interest rates, risk-based pricing, fees and so forth) – all of which are enforced by the debtfare state – as opposed to direct forms of domination between employer and employee. As such, the relations inherent to credit (e.g. lender and borrower), or what Marx refers to as secondary exploitation, appear less politicized and antagonistic than that of employer and employee, that is, primary forms of exploitation (Soederberg, 2014). Seen from this view, SLABS represent a temporal displacement or what Harvey refers to as a ‘fix’, given that they aim to accelerate the transaction process. A necessary condition for this temporal power is the ability to create what Marx refers to as fictitious value (Harvey, 1989). In Marxian terms, fictitious value does not mean ‘unreal’ or ‘imaginary’ forms of capital; but rather a flow of money capital that is not backed by any commodity transaction (e.g. non-collateralized student loans) (Harvey, 1999: 265ff). Fictitious value is implied whenever credit is extended in advance, in anticipation of future labor as counter-value, that is, the extraction of surplus value through primary forms of exploitation. Put another way, fictitious value can only be realized when student debtors are able to secure jobs through which they can repay their loans. Given the increase in the cost of higher education and a labor market characterized by jobless growth and stagnant wages, the realization of increased value on this privately created money is inherently risky (Soederberg, 2014).

SLABs not only wield temporal power over debtors, they are able to accelerate the time of the student loan to suit capitalists’ interests and needs. A freshman at the University of California, Los Angeles (UCLA) who gets a four-year, US$25,000 student loan from a private bank (e.g. post-1996, privatized Sallie Mae), for example, will end up paying, depending on the repayment schedule and interest rate, anywhere from US$50,545.95 (based on a 145-month repayment plan) to US$70,259.07 (based on a 193-month repayment plan) or even US$74,126.61 (based on a 144-month deferred repayment plan).² On the other hand, shortly after making the transaction, the originator (Sallie Mae) sells this loan, as well as a bundle of other student loans, to an outside investor, thereby receiving a payment immediately, as opposed to receiving small monthly payments for 12 to 16 years from the student and taking the risk that the student may default on his/her loan during this time. The basic belief driving this transaction is that the student loan (debt) is an asset – a commodity that can be owned or controlled to produce value (e.g. interest, commission, fees).

I describe this process, which shifts financial risk to debtors, as the commodification of debt. Mitigating or even eliminating risk (default and bankruptcy) linked to lending to student debtors is one benefit of SLABS. But there is another fee-generating perk: by receiving the funds today from selling the student loan to investors, the educational lender has the opportunity to profit further by originating even more loans and thereby earning origination fees (Elul, 2005). The processes involved in the commodification of debt are not technical and apolitical, but are imbued with social relations of power that are asymmetrical and exploitative in nature. Following Marx, the latter term refers to secondary forms of exploitation that occur through dispossessive strategies pursued through the credit system and aimed at modifying workers’ wages and salaries through the payment of interest, commission and fees (Harvey, 1999; cf. Sassen, 2009).

SLABS attempt to overcome the contradictions inherent in financialized capitalism by reducing financial risk and increasing liquidity for educational lenders, so that they may continue to extend credit to primarily high-risk (sub-prime) borrowers (students, particularly low-income students). Yet, student debtors are afforded no protections in terms of dealing with the social consequences of risk, such as the inability to find employment, illness, inflation of health-care and housing costs, inability to complete an educational degree, and so forth. Student debt burdens must be understood alongside the unemployment rate for young college graduates, which has risen from 8.7 percent in 2009 to 9.1 percent in 2010, the highest annual rate on record (Consumer Financial Protection Bureau, 2012; Project on Student Debt, 2011). As a result of these conditions, student debtors are also carrying higher levels of credit card debt (Federal Reserve Bank of New York, 2012) – all of which serves to increase pressure on students’ debt burdens. Indeed, almost three-quarters of students who default on their loans, many of whom are minority students from low-income backgrounds, have done so after withdrawing from school and failing to complete their studies (finaid.org; Lynch et al., 2010).

The unequal and exploitative relations of power involved in securitizing student loans are concealed in the dominant representation and depoliticization of risk in exclusively financial terms. Risk, as conceptualized in the financial industry, is rooted in dominant neoclassical theory and its underlying assumptions of rationality, efficiency, and individualism. Risk understood exclusively in financial terms relates to uncertainty and/or potential financial loss for the lender (Luhmann, 2008). With regard to securitization, this prevailing meaning of financialized risk includes only probable harm to ‘key participants’ in SLABS: securitizers, originators of the assets (educational lenders), and investors (e.g. pension and mutual funds) (Soederberg, 2010a, 2010b; Federal Reserve Board, 2012). Yet, if we understand SLABS and the wider credit system as relations of power imbued with the ability to wield command over time, risk also has social dimensions, notably in the form of defaults. Thus, the social dimension of risks for student debtors is expunged from the sanitized, mathematical, and technical understanding of neoclassical economics (Bourdieu, 2005). Indeed, in the highly abstract world of neoclassical economics and its narrow view of individual rationality, there is a constant severance of the economic from the historical and social conditions in which risk is created, defined, governed, and reproduced (Bourdieu, 1998; Peck, 2010). Still, risk and its strategies of mitigation are profoundly social questions of power. This is particularly the case if we accept the premise that credit entails not only social power over time and space but also is, in effect, a gamble with the future lives of student debtors. As we will see in the next section, the ways in which these two versions of risk are managed is not only highly unequal, but also entails a disciplinary element. A central force in governing risk vis-à-vis student loans is the debtfare state and its role in displacing and disciplining the fallout of financial risk.

Tensions inherent in SLABS and the wider student loan industry are continually mediated and depoliticized through regulatory interventions by the neoliberal state (e.g. legal framings such as bankruptcy law) that give primacy to private consumption and the interests of capitalists over student debtors. As I have suggested elsewhere (Soederberg, 2014), a key component of the neoliberal state is the debtfare state. Debtfare stands alongside other roles of the neoliberal state in the US, such as workfare (Peck, 2001) and prisonfare (Wacquant, 2009). Unlike other aspects of neoliberal state intervention, debtfare strategies are primarily geared toward mediating and depoliticizing the tensions and struggles that emerge from dispossessive capitalism. Debtfarism involves both institutional (e.g. usury and bankruptcy laws) and ideological (e.g. cultural tropes such as the democratization of credit) interventionist strategies, which are both inherently disciplinary in nature and are aimed at expanding and reproducing the student loan industry. In the context of this essay, there are two specific articulations of debtfare. First, institutional and discursive debtfare strategies mediate and secure the normalization of the conditions of secondary forms of student exploitation and the spatio-temporal fixes therein. Second, through its institutional and discursive framings, the debtfare state naturalizes the commodification of social reproduction. Paralleling the neoliberal insistence that there is no alternative but to rely on the market, and thus justifying the state’s declining support for higher education, the debtfare state has normalized and backed the widespread reliance of students on credit to augment and/or replace their current and future social wage.

An Historical Materialist Account of the Making of the Student Loan Industry

Contextualizing Sallie Mae

Sallie Mae was established in 1972 as a government-sponsored enterprise (GSE). It emerged from a specific political and material environment marked by Keynesian ideals of managed capitalism and the slowing of economic growth once fuelled by Fordist forms of domestic and international expansion of exports (Harvey, 2003). Under this configuration of state and material relations, the US saw an expansion of the middle class in the 1950s and with it the growth of the belief that a college education leads to social and economic mobility. In the 1960s and 1970s, social and political pressure by the civil rights and women’s rights movements resulted in many policy changes, not least those that challenged discriminatory access to higher education and credit. These pressures coincided with increased demand for higher education and the sector experienced a period of unprecedented growth. The state infused money into higher education to fund academic research, expansion of colleges, and federal loans (Gumport et al., 1997).

Against this backdrop, Sallie Mae was a state-led attempt to influence the flow of capital and credit to the student loan industry by absorbing the financial risks (defaults and bankruptcies) involved in lending to students (Corder and Hoffman, 2001). Like other GSEs such as Freddie Mac and Fannie Mae, Sallie Mae was a special type of government-backed, shareholder-owned, for-profit corporation. Unlike other GSEs, however, Sallie Mae was legally permitted to purchase, service, sell, or otherwise deal in government-issued student loans, which were, in turn, fully guaranteed and directly subsidized by the state (Corder and Hoffman, 2001). The official justification for this state guarantee was the high-risk nature of student loans. Notwithstanding the subsidized interest rates, ‘special allowance’, and other state guarantees, lenders (mostly banks) were unwilling to participate in the program because student loans not only represented forms of unsecured debt (i.e. an absence of collateral) but they were also illiquid and long-term. Indeed, in the tumultuous environment of the 1970s, interest rates would sometimes fall below the rate of inflation, thereby cancelling state subsidies.

Sallie Mae raised funds in two ways. First, it sold debt securities (e.g. bonds) on secondary markets. Second, after the passage of the Education Amendments in 1980, it was permitted to securitize its financial assets (student loans) (Corder and Hoffman, 2001). This second method of subsidizing lenders pursued by Sallie Mae coincides with the notion of the commodification of debt discussed earlier and the rise of the neoliberal state and its underlying neoclassical economic assumption that private consumption is superior to public consumption (Peck and Tickell, 2002).

Debtfare and the Mediation of the Social Dimensions of Risk

During the period of economic instability in the 1970s and much of the 1980s, many students graduating from colleges were unable to secure well-paying jobs to meet their loan obligations. Indeed, as one commentator notes, many graduates at this time were either unemployed or employed in jobs that they could have secured without post-secondary education (Wiese, 1984: 459). Unsurprisingly, default rates on student loans rose, as did student loans discharged in bankruptcy. In 1975, there was a 59.9 percent increase over the number of claims filed in 1974. Toward the end of 1975, the federal government and guaranty agencies had reimbursed lenders for US$20.9 million of guaranteed student loans discharged in bankruptcy (Birdwell, 1978: 593). Despite these trends, the debtfare state was busily creating more demand for federal loans and, by extension, private banks. In 1978, for instance, the US government permitted most middle-class citizens to access federal loans without the requirement that students demonstrate financial need (Grant, 2011).

To deal with the social risks involved in rising default rates on student loans during this period, Congress enacted disciplinary policies to restrict access to bankruptcy relief for student debtors. For instance, student loans were dischargeable until Congress enacted the Higher Education Act of 1976 (§439A), which in effect made student loans non-dischargeable, if the first payment came due within five years of bankruptcy, unless the debtor could prove undue hardship. These temporal dictates and the burden of undue hardship were further reinforced by the debtfare state with a revision to the Bankruptcy Act. Congress, for instance, repealed the Bankruptcy Act of 1898 and replaced it with the Bankruptcy Reform Act of 1978 (the ‘Bankruptcy Code’). In terms of educational loans, the Bankruptcy Code approved the Education Amendment provision to the original §523(a)(8): no discharge unless the first payment became due more than five years prior to the bankruptcy filing or the debtor could demonstrate undue hardship (Grant, 2011). It should be underlined that the undue hardship clause is specific to educational loans. In other words, debtors with other kinds of debt are not laden with the task of proving undue hardship. Some observers who have been critical of §523(a)(8) have pointed out that undue hardship is ‘unnecessarily harsh, denying debt relief to all but a few select debtors, and usually only to those with dependents and medical conditions that prevent gainful employment’ (Grant, 2011: 819).

Despite concerns of rising defaults on student loans, the debtfare state has actively promoted and subsidized (through its federal student loans via Sallie Mae) the growth of proprietary schools in higher education. During the 1980s, proprietary schools represented one-half of the increase in higher education enrolment (Beaver, 2012). The proprietary schools benefitted from federal student loans, but these loans were often accompanied by a private loan, given the high tuition fees charged by these for-profit schools (see Table 1). As with their federal student loan counterparts, private lenders securitized their private loans to students to offset the financial risks involved in repayment problems. The social risks were left to the debtfare state to mediate and depoliticize, largely through a revision of the Higher Education Act and Bankruptcy Code.

Coupled with a bleak economy, the growth in proprietary schools and the higher levels of student indebtedness pushed up defaults on student loans. In 1985, 600 for-profit schools reported default rates of over 50 percent (Beaver, 2012). Nonetheless, with the pro-business legislative environment of the Reagan Administration and existing government subsidization, it was business as usual for proprietary schools. Between 1983 and 1990 the loan volume of private student loans increased by 83 percent, while defaults increased by 336 percent (see Beaver, 2012). Indeed, while default rates were climbing across the higher education system, proprietary schools were the worst offenders. ‘While proprietary schools account for 33 percent of Stafford loans, they are responsible for 48 percent of defaulted student loans’ (Elgin, 1993: 54).

Thus, instead of mitigating the social dimensions of risk – by, for instance, taxing for education, subsidizing public universities to help suppress the steady rise of tuition fees, allowing for greater protection in bankruptcy proceedings, and so forth – the debtfare state facilitated new venues of dispossessive capitalism by promoting proprietary schools, and, by extension, private student loans, which, in turn, also carried higher rates of interest and stricter repayment schedules (US Department of Education, 2012a).

Debtfare and the Displacement of Risk in the 1990s

The early 1990s saw further changes to legislation governing student loan debt. In 1990, for instance, two important revisions to the Bankruptcy Code were undertaken that had important ramifications for distressed student debtors. First, the debtfare state was able to lengthen the temporal period in which distressed student debtors had to wait before they were permitted to file a bankruptcy claim from five to seven years. Second, the further narrowing placed on the dischargeability of educational loans was revised with an amendment to §523(a)(8) in 1990. The section effectively exempts educational loans made, insured, or guaranteed by a governmental unit or non-profit body (Pashman, 2001). Supporters of this amendment to §523(a)(8) noted that, unlike other loans, educational loans are not granted on the same basis. Lenders or guarantors who participate in educational loan programs typically extend credit to students who might not qualify for credit under traditional standards. In the interest of the state to promote access to educational opportunities, interest rates and repayment terms are made to be very favorable to the student borrower, and no security is usually required. Seen as a benevolent and public-spirited act, students failing to respect the terms of their student loan contract are, therefore, viewed as irresponsible market citizens who harm the good of the wider society by opting to default.

To further absorb the social dimensions of risk and to introduce more disciplinary measures with regard to the collection of debt owed to the government, the debtfare state introduced the Higher Education Technical Amendments in 1991. These amendments effectively removed all statutes of limitation on the collection of student loan repayments or grant overpayments under the Higher Education Act student assistance provisions. In effect, the 1991 Amendments protected the profits of debt collection agencies, particularly those that specialized in student debt, by allowing these companies to tack on hefty collection and commission fees of 25 and 28 percent, respectively, to what students already owed (Ferry, 1995). Further amendments to the Higher Education Act in 1994 (also known as the 1994 Regulations) assisted in decreasing involuntary lender involvement in, and the need for, collection litigation by allowing defaulting student loan debtors a new option of entering into ‘affordable’ repayment agreements that were aimed at rehabilitating their loans, thereby permitting them to be removed from default status (Ferry, 1995).

It should be flagged here that since lenders involved in FFELP loans are protected against the risk of non-payment, only educational lenders pursue collection on defaulted student loans to the point of litigation. Seen in this light, the 1994 Regulations may also be understood as an effort to mitigate the financial risks for educational lenders issuing private student loans. These measures, which aimed at making debt collection more efficient, also reflected the increasing levels of consumer indebtedness in the 1990s (US Department of Commerce, 2010; Draut, 2011). Indeed, in 1996 Congress enacted the Debt Collection Improvement Act, which, among other changes, permitted Social Security benefit payments to be used (garnished) to repay defaulted federal student loans (Pashman, 2001).

These legislative modifications pursued by the debtfare state reflected the fact that risk, understood exclusively in financial terms, and thus concerning lenders, was given higher priority through the creation of SLABS. The social risks associated with educational loans were muted and usually represented by the media and Congress as individualized acts of irrationally, immorality, and/or irresponsibility. It was, therefore, acceptable to garnish old age and disability benefits that fall under the Social Security program. In the context of the bankruptcy system, the burden of proof was placed on the debtor to provide adequate evidence, which could be reduced and tested mathematically, to satisfy the court’s subjective understanding of ‘undue hardship’ (Pashman, 2001).

Despite the increases in student loan defaults in the 1990s, Sallie Mae was quite effective in managing financial risks for private lenders by operating with its implicit assumption of guarantee and by engaging in the asset-backed securitization of student loans in the early 1990s. Notably, while FFELP student loans were guaranteed by the federal government, there was no such explicit guarantee of GSE debt, e.g. loans purchased from private providers and resold in the secondary markets. Yet, there remained a strong market perception that GSE securities are very much like US Treasury issues. This implicit perception by investors, along with changes to Sallie Mae’s charter, resulted in a rise in the amount of loans sold by Sallie Mae in secondary markets, increasing from less than 30 percent from 1981 to 1985 to about 60 percent from 1988 to 1990 (Lea, 2005).

Political questions concerning the social fallout of risk rose to the foreground in the mid-1990s, as attention began to turn to the privatization of Sallie Mae (Lea, 2005). Adhering to neoliberal logic, it was argued that privatizing Sallie Mae would benefit lenders and borrowers as competitive market exposure would increase the efficiency of the GSE. As a private market participant, Sallie Mae could redirect its focus from encouraging bank lenders to sell their student loans to encouraging colleges and lenders to become business partners and distributors for a Sallie Mae-branded set of student loan-related products and services (Lea, 2005: 5; US Department of Treasury, 2006).

Debtfare and Privatizing Sallie Mae: Increasing Temporal and Spatial Fixes for Financial Capitalists

In 1996, Sallie Mae became the first GSE in the US to privatize. The former GSE was subsequently renamed the SLM Corporation, although it is still commonly known as Sallie Mae. Almost four years earlier than planned, its GSE activities were completely terminated in 2004. A key reason for this accelerated target date was due to its high volume of securitization (commodification of debt), which, in effect, allowed it to raise capital through the selling of assets (student loans). One year prior to the termination of its GSE status in 2004, for instance, Sallie Mae issued US$20.3 billion of non-GSE financing, which, combined with securitization, equalled 2.4 times its student acquisitions. For those in favor of privatization, this was suggestive of Sallie Mae’s ability to finance itself in a post-GSE environment and signalled the viability of securitizing student loans. From this period onward, Sallie Mae has continued to be the largest issuer of SLABS (see Table 2) (Ergungor and Hathaway, 2008). The amount of, as well as the temporal and spatial displacement afforded to, fictitious value has been affected by the policies pursued by the debtfare state (Soederberg, 2014).

Table 2.

Top 10 Issuers of SLABS in Federal Student Loans (in US$ billions).

Issuer	2005	2006	2010
Sallie Mae	$26,990	$33,752	$6,103
Nelnet Student Loan	$ 6,540	$ 5,313	$1,183
SLC Student Loan Trust	$ 4,350	$ 4,912	$ 920
Brazos Higher Education Authority Inc.	$ 3,717	$ 243	$1,120
National Collegiate	$ 3,487	$ 4,724	N/A
College Loan Corporation Trust	$ 2,700	$ 1,700	N/A
Collegiate Funding Services Educational Trust	$ 2,700	N/A	N/A
Access Group Inc.	$ 2,074	$ 1,007	$ 464
Wachovia Student Loan Trust	$ 1,800	$ 1,611	N/A
GCO Education Loan Finding Trust	$ 1,130	$ 2,643	N/A

Sources: Data collected from Asset Backed Alert and Wachovia Capital Markets, LLC in E. Walsh (2008) Student Loans ABS, in B.P. Lancaster, G.M. Schultz, and F.J. Fabozzi (eds) Structured Products and Related Credit Derivatives: A Comprehensive Guide for Investors. Hoboken, NJ: John Wiley and Sons, p. 135; SLM Corporation (2011b) ‘ABS East Conference,’ October. Available at: https://www1.salliemae.com/NR/rdonlyres/50F355EE-8FA7-49FA-AABF-D4A4B507A89C/15130/ABSEastConferencevFinal.pdf [Accessed on 1 October 2012]

It is important to note that the student loan industry is highly concentrated. Prior to 2010, when major reforms were introduced, 91.5 percent of the new Stafford and PLUS loans and 99.8 percent of consolidated loans were originated by only 100 lenders, with Sallie Mae dominating the industry after its privatization (Ergungor and Hathaway, 2008). Moreover, over-the-counter (OTC) derivative markets, in which SLABS and other asset-backed securities emerged and operate, have intensified in depth and breadth through active intervention by the debtfare state aimed at re-regulating financial markets to facilitate greater speculative activities and riskier products (e.g. credit default swaps). In 1998, for instance, the Chairperson of the Federal Reserve Board, Alan Greenspan, argued that there was no reason why derivatives markets ‘should be encumbered with a regulatory structure devised for a wholly different type of market process, where supplies of underlying assets are driven by the vagaries of weather and seasons. Inappropriate regulation distorts the efficiency of our market system and as a consequence impedes growth and improvement in standards of living’ (Greenspan quoted in US House of Representatives, 1998). In the wider context of market-friendly re-regulations (e.g. the Gramm-Leach-Bliley (GLB) Act of 1999), educational lenders such as Sallie Mae thrived. Between 2000 and 2005, for example, Sallie Mae’s fee income increased by 228 percent (from US$280 million to US$920 million), while its managed loan portfolio increased by only 82 percent (from US$67 billion to US$122 billion) during the same time period. Prior to the 2007 financial crisis, Sallie Mae’s stock had increased by more than 1,600 percent between 1995 and 2005, which represented an average annual rise of about 160 percent (Collinge, 2009: 5).

At the same time that the GLB Act was signed, SLM Corporation aggressively pursued several key acquisitions in the student loan industry, which gave the company more reach into various aspects of lending. In 1999, for instance, SLM Corporation purchased Nellie Mae, a non-profit student loan company, which was quickly followed by the acquisition of two of the country’s largest non-profit student loan guarantors, the USA Group and Southwest Student Services. In the early to mid-2000s, Sallie Mae acquired two of the largest student loan collection companies in the country – Pioneer Credit Recovery and General Revenue Corporation, as well as Arrow Financial Services in 2004 and GRP Financial Services 2005 (Collinge, 2009: 12–13; see Table 2). Procuring some of the largest collection companies and numerous guaranty agencies (the agencies that administer the FFELP loans), Sallie Mae represents the largest private lender of student loans and collector on student loan debt. It also owns the largest guarantor companies, whose lifeblood is comprised of penalties and fees attached to defaulted loans. Sallie Mae therefore benefits greatly from all aspects of the lending transaction: securitizing student loans, lending, and collection (Forbes, 6 June 2012).

Debtfare and the Depoliticization of Social Risks in the Student Loan Industry

While private educational lenders were enjoying the highly lucrative environment fuelled by state-led subsidization and market-friendly framings of SLABS, the social dimensions of risk linked to the commodification of debt were playing themselves out on the ground. Despite the promise that a college degree would deliver a higher-paying job, the service sector proved to be the fastest growing and largest employer from 1989 to 2000. According to the Bureau of Labor Statistics (BLS), private service-providing industries accounted for 90 percent of the job growth in the 1990s (BLS, 2002). Within this category, low-wage retail and service sector jobs, for instance, ‘accounted for 70 percent of all new job growth between 1989 and 2000. And the majority of these jobs are filled by women’ (Collins and Mayer, 2010: 6). Moreover, the BLS reported that employment in the temporary help services industry, which predominately employs women, grew from 1.1 million to 2.3 million during the 1990–2008 period and thus represented a larger share of workers than before in higher skill occupations. During this period, the Clinton Administration (1993–2001) actively pursued sharp spending cuts to decrease the budget deficit by slashing financing in key social programs such as welfare and higher education (US Department of Education, 2012a). Low-income and middle-class Americans turned to consumer credit to deal with overall higher living costs and stagnant wages.

Against this backdrop, defaults on student loans and increasing delinquent payments continued to mark the consumer debt landscape of the US. In an attempt to tackle the issue of defaulting student loans, the Clinton Administration signed into law the Higher Education Amendments of 1998, which removed the seven-year exception, leaving only the undue hardship exception to non-dischargeability regarding student loans (Pashman, 2001). In accordance with this change, Congress revamped the Bankruptcy Code once again in 1998 with the Bankruptcy Review Act. As noted above, prior to 1998 student loan debts were non-dischargeable unless: (1) the loans first become due more than seven years before the debtor filed for bankruptcy, or (2) not allowing the student loans to be discharged would impose an undue hardship on the debtor and the debtor’s dependents (Pashman, 2001: 605). Yet, Congress has refused to provide a definition of undue hardship, opting instead to transfer responsibility for interpretation, and thus punishment, to the courts. This has created a situation in which ‘there are as many tests for undue hardship as there are bankruptcy courts’ (Pashman, 2001: 609). As one bankruptcy court observes, ‘The rigidity of some of those “tests” (e.g. means testing) almost suggests that the solution to human suffering lies in the application of algebraic equations’ (Pashman, 2001). The increased use of abstract mathematical tools to deal with social problems is both rooted in, and reflected by, the dominant position of neoclassical economics (and its pseudo-scientific mathematical modelling) in the debtfare state, as well as the social power of financial capitalists. This method of testing is also instrumental in depoliticizing the disciplinary nature of bankruptcy – and, by extension, those debtors considering, or entering into, default – by expunging social considerations and upholding the myth of impartial and expert interpretation of the legal framing of ‘undue hardship’.

It should be noted that the amendment of the Bankruptcy Code to limit bankruptcy relief only on the grounds of undue hardship lacked any convincing empirical evidence to support the claim that students and graduates were trying to take advantage of the bankruptcy system, or that such bad actors actually posed a threat to the continued viability of student loan programs and the role of the benevolent state and taxpayers in ensuring educational access for all citizens (Pashman, 2001). Congress was clearly trying to send a message to abusive student debtors and protect the solvency of student loan programs. In particular, the state was concerned by reports of irresponsible students and recent graduates declaring bankruptcy as a way to avoid repayment of student loans on the eve of lucrative careers. The implementation of the §532(a)(8) of the Bankruptcy Code was a disciplinary tactic to remove the perceived temptation of recent graduates to use the bankruptcy system as a low-cost method of decoupling debt from future earnings. This representation of student debtors continued despite the availability of evidence by the General Accounting Office that only a fraction of one percent of matured student loans had been discharged in bankruptcy, a rate, at the time, which compared favorably to the consumer credit card industry (Pashman, 2001).

Preying on the Dispossessed: Spatial Expansion of the Student Loan Industry in the New Millennium

In the first decade of the new millennium, under the leadership of the G.W. Bush Administration (2001–9) and its explicit embrace of private consumption, federal funds flowed into proprietary schools, increasing from US$4.6 billion in 2000 to US$25 billion in 2010 (Gorski, 2010). During this period, enrolment in proprietary schools increased 37 percent compared to the 11 percent average increase during the previous decade. Interestingly, the demographic of these students shifted. According to a study by the Department of Education, the majority of students enrolling in for-profit private schools are more than 25 years of age. There also appears to be a gender and racial dimension to the student bodies, as slightly more women are returning to school (US Department of Education, 2012a). Moreover, the majority of students attending proprietary schools are from a low-income background and stem from minority groups (Lynch et al., 2010). According to the Project on Student Debt, African-American undergraduates were the most likely to take out private loans, with the percentage quadrupling between 2003–4 and 2007–8, from 4 percent to 17 percent (Project on Student Debt, 2011).

Private student loans are closely linked with the rise of for-profit private universities. The for-profit higher education sector charges some of the highest tuition fees in the country, which means that low-income students usually turn to private educational lenders, such as Sallie Mae, to top up their federal student loans and grants. Once grant aid is taken into consideration, the out-of-pocket cost – or unmet need – for low-income students at proprietary schools is even higher than at private non-profit colleges, which draw on institutional grants to defray college costs (Lynch et al., 2010: 3; see Table 1). ‘At four-year for-profits, low-income students must find a way to finance almost [US]$25,000 each year, with only a 22 percent chance of graduating’ (Lynch et al., 2010: 3). This means that low-income students in for-profit private schools are borrowing heavily, which results in a large debt burden. Moreover, given that the graduation rate at four-year proprietary schools is 22 percent (compared with 55 percent at public and 65 percent at private non-profit colleges and universities), the chances of income improvement to meet loan payments are low. Data collected from the Department of Education’s Integrated Postsecondary Education Data System (IPEDS) reveals that the graduation rate at the nation’s largest for-profit university – the University of Phoenix – is only 9 percent (Lynch et al., 2010). Despite these grim numbers, proprietary schools have expanded rapidly over the past decade. With an enrolment of 450,000 students, the University of Phoenix is the second largest university in the country (Beaver, 2012).

The financial risks associated with the issuance of federal student loans and private student loans for the rapidly rising proprietary sector of higher education were offset by the issuance of SLABS in private student loans. Key SLAB issuers in the area of private student loans in 2008 included SLM Private Credit, which represented the largest issuers of private SLABS (Walsh, 2008; see also Table 2). The industry thrived off of the double-digit growth rates of private student loans in the late 1990s and early 2000s, reaching its peak in 2007–8 with the advent of the sub-prime crisis. According to the Consumer Finance Protection Bureau, private student lender underwriting standards loosened considerably in this period. Between 2005 and 2007, coinciding with its peak phase, private lenders such as Sallie Mae embarked on aggressive lending techniques in which an increased percentage (from 40 percent to over 70 percent) of loans were made to undergraduate students without school involvement or certification. Additionally, during this period lenders were more likely to originate loans to borrowers with lower credit scores (Consumer Financial Protection Bureau, 2012: 3). Private lenders could offload their financial risks, of course, through the issuance of SLABS.

By the mid-2000s, the Bush Administration was forced to deal with the tension between supporting proprietary schools and educational lenders and depoliticizing the social risks inherent in the increasing levels of educational debt and the rise of defaults on private student loans. The debtfare state undertook at least two major moves in an attempt to resolve this tension. First, the government implemented the Higher Education Reconciliation Act of 2005, which effectively cut US$12.6 billion from student financial aid. This made it more expensive for students to pay for their education (finaid.org), forcing them to turn to private student loans to make up the difference (see Table 1). Second, the Bush Administration responded to the social risks tied to increasing default rates by implementing draconian changes to the Bankruptcy Code in 2005 with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). There were at least two major features of this Act that are relevant to understanding the coercive features of the debtfare state and its attempts to manage social risks generated by the student loan industry. First, BAPCPA was designed to keep debtors out of bankruptcy. Of the two basic options of obtaining relief from creditors, namely Chapter 7 liquidation or Chapter 13 adjustment of debts for debtors who have adequate income to repay all or part of their debts through a repayment plan, the former was made extremely difficult to obtain. Under Chapter 13, if the student debtor is granted bankruptcy by convincing the courts of undue hardship, loan repayment plans revise the temporal span of indebtedness and usually assign some sort of debt management plan (Soederberg, 2014; see also Coco in this issue). This attempt to keep debtors out of bankruptcy has important consequences for distressed student debtors who may be seeking relief in other areas of indebtedness, such as credit card debt (Federal Reserve Bank of New York, 2012). Second, BAPCPA amended §523(a)(8) discussed earlier to broaden the types of educational student loans that cannot be discharged without proof of undue hardship. As Coco (this issue) notes, according to §220 of BAPCPA, debtors are no longer able to discharge private educational loans, which have higher interest rates and less flexibility in repayment. On the other hand, the debtfare state has ensured that private loans are non-dischargeable pursuant to §532(a)(8) bankruptcy revisions, thereby protecting lenders such as Sallie Mae by bestowing them with a super-creditor status (Stern and Feinstein, 2005). This status means that, like the state, Sallie Mae has limitless powers (to garnish wages, tax refunds and even Social Security payments) and unlimited time to collect student loan debt (Stern and Feinstein, 2005).

Mediation of Risks for Capital: Defaults, Crisis, and Corporate Welfare

The credit crunch that ensued in the wake of the 2007 crisis had an immediate impact on the student loan industry. Educational lenders had no one to sell their government guaranteed loans to in order to offset their financial risks. One of the first measures the federal government established in order to deal with asset-backed securities was the Term Asset-Backed Securities Loan Facility (TALF) in 2008. According to a 2010 Government Accounting Office (GAO) report, the TALF program spent US$7.15 billion on propping up SLABS (Government Accounting Office, 2010).

Meanwhile, the social dimensions of risks tied to high student loan debt, especially, but not exclusively, with regard to private student loans, intensified due to the crisis. In 2009, for instance, the unemployment rate for private student loan borrowers who began school in the 2003–4 academic year was 16 percent. Default rates began to spike considerably following the crisis in 2008 (Consumer Financial Protection Bureau, 2012).

To ensure that liquidity (trading activity) remained stable in education lending, the Bush Administration implemented the Ensuring Continued Access to Student Loans Act (ECASLA) in 2009. The ECASLA authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In effect, the ECASLA represented a major, yet largely unnoticed, government bailout of the student loan industry. The ECASLA was originally presented as a temporary program, to exist only until 28 February 2009, and was to use approximately US$6.5 billion. According to the Department of Education, ‘the Department will purchase loans [from the private sector, e.g. Sallie Mae, JP Morgan Chase, Bank of America, and so forth] at 97 percent of the principal interest coincidental with the standard guaranty rate for these loans’. The Department of Education anticipated purchasing up to US$500 million in loans each week, up to an aggregate of US$6.5 billion during the designated time-period (US Department of Education, 2011). As the banks demonstrated continued disinterest in lending to students in the immediate aftermath of the sub-prime crisis, the ECASLA was subsequently extended and augmented. In 2010, the Department of Education projected that it will eventually purchase US$112 billion in FFELP loans from private lending corporations (Department of Education, 2011).

In an effort to depoliticize growing anger over government bailouts of private student loan providers, the Obama Administration (2009-present) re-introduced the above-mentioned Federal Direct Loan Program (DLP) under the Health Care and Education Reconciliation Act in 2010. According to the Congressional Budget Office (CBO), the direct loan program could save the government US$67 billion over the next decade (Congressional Budget Office, 2010). These savings presented an attractive cost-offset to the Health Care Reform Act for the Obama Administration. Included, as a rider clause to the Health Care Reform Act, as of 1 July 2010 the US$60-billion-a-year FFELP was replaced with the Federal Direct Loan Program, making it the only government-backed loan program in the USA. From that time on, the direct lender of all federal student loans was the Department of Education and not private banks. The Democrats touted the legislation, which was represented as a key feature of President Obama’s education agenda, as a ‘far-reaching overhaul of federal financial aid, providing a huge infusion of money to the Pell grant program and offering new help to lower-income graduates in getting out from under crushing student debt’ (New York Times, 25 March 2010).

Upon closer inspection, however, the DLP did not introduce far-sweeping changes to the student loan industry. For one thing, the maximum Pell grant award climbed from US$5,550 for the 2010–11 academic year to US$5,900 in 2019–20 (Congressional Budget Office, 2011). This is an insignificant amount given that it covers only a third of the cost of attending a public university, compared to three-quarters when the program began in the 1970s. More importantly, as discussed above, the majority of low-income students are attending proprietary schools, where tuition rates are several times the price of public universities. Additionally, the major winners of the DLP remain the financial markets, which continue to benefit from low-risk SLABS (i.e. due to the market perception of government guarantees). Sallie Mae, in particular, has benefited from the 2010 program. In addition to its role as the largest private student loan provider, key student loan debt collector, and the largest issuer of SLABS, Sallie Mae, along with four other corporations (FedLoan Servicing, Great Lakes Educational Loan Services, Inc., Nelnet, and Direct Loan Servicing Centre), have been assigned the role of federal loans servicers (finaid.org). In 2010, Sallie Mae continued to grow by acquiring US$28 billion of securitized federal student loans and related assets from the Student Loan Corporation, a subsidiary of Citibank (SLM Corporation, 2010). The largest private lender and SLABS issuer also reported that it would begin loosening its restrictive lending practices in 2010 and that ‘volumes should pick back up as the company did some “tweaking” to its standards’ (Korn, 2011). Relaxing its allegedly strict lending requirements meant enticing more low-income students to sign private student loans, thereby expanding its net to capture more sub-prime borrowers (Consumer Financial Protection Bureau, 2012).

Sallie Mae provides service to 3.6 million loan customers on behalf of the Department of Education and is prospering from its new status as service provider to the debtfare state. For instance, in 2011, Sallie Mae earned US$63 million in servicing revenue from its Department of Education loan-servicing contract, compared to US$44 million in 2010 (SLM Corporation, 2011a). The combination of the government bailout and loosening lending restrictions has benefitted the country’s largest private educational lender and issuer of SLABS. Sallie Mae reported a 19 percent increase in loan originations for 2011 and a 29 percent increase in loan originations in the third quarter of 2011 alone (SLM Corporation, 2011a).

Depoliticizing Risk: Tropes of Consumer Protection and Private/Public Dichotomies

One of the consequences of the financial crisis of 2007–8 was the creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The Act did not impose legal limits to risk production on the part of financial markets and various sectors therein, such as the student loan industry. Instead, the Dodd-Frank reforms were more or less based on market-friendly re-regulation (e.g. soft or voluntary law) initiatives such as self-reporting and minimal reforms (Picciotto, 2011). For its part, the government issued reports to Congress about the nature of risk in the financial system. Pursuant to Section 941 of the Dodd-Frank Act, the Federal Reserve Board issued a Report to Congress on Risk Retention that focused on ABS, including student loans, both federally guaranteed and privately issued. The Federal Board concluded that due to the ‘considerable heterogeneity’ between the asset classes, it was ‘unlikely to achieve the stated objective of the [Dodd-Frank] Act – namely, to improve the asset-backed securitization process and protect investors from losses associated with poorly underwritten loans’ (Federal Reserve Board, 2010). Put differently, it was unlikely that SLABS would be subject to any legally binding or state-led forms of regulation.

Another relevant report pursuant to the Dodd-Frank Act emerged from a joint initiative involving the Consumer Financial Protection Bureau (CFPB) and the Department of Education (DOE), which issued a 2012 report to various Senate and House of Representative committees. The report argues that risky lending practices tied to private student loans have not only increased more rapidly than public student loans over the past decade but also have come to share many similarities to the 2007 sub-prime mortgage crisis (Consumer Financial Protection Bureau, 2012). According to the report, private lenders issued loans without considering the repayment ability of borrowers. The lenders (i.e. private banks) securitized the loans to mitigate losses when students defaulted, reselling the loans to investors. The CFPB and DOE estimate that there are more than 805,000 private loans in default, which amount to more than US$8.1 billion (Consumer Financial Protection Bureau, 2012).

For the CFPB and the DOE private student loans represent a riskier form of credit for students. The interest rates tied to these loans are far higher than on federal student loans. Unlike other consumer loans (e.g. federal student loans), for instance, repayment plans for private student loans are not based on income; also, bankruptcy laws in the US do not permit private student loans to be discharged through bankruptcy proceedings. Despite the latter restriction, a growing number of desperate former students have opted for bankruptcy in the hope of gaining some repayment relief in other areas of indebtedness such as credit card debt (Consumer Financial Protection Bureau, 2012).

According to the report, there are two key reasons for the increase in private student loans and subsequent defaults. The first reason is the lack of proper financial education on the part of students and their families, as public student loans have lower interest rates and better consumer protection clauses built into their loan products. For instance, private loans are purported to be designed to mimic key product features of Stafford loans (Consumer Financial Protection Bureau, 2012). The second reason offered for the increase in defaults is that private educational lenders have aggressive lending practices, which prompted the Secretary of Education to argue that sub-prime lending has moved from the housing market to colleges (Consumer Financial Protection Bureau, 2012). The report wholly fails to acknowledge the role of the state and financial corporations such as Sallie Mae in constructing and reproducing the student loan industry,

The only substantial regulation that the Department of Education has issued to deal with the social dimension of financial risk in the student loan industry is the ‘gainful employment’ clause in 2011. Essentially, this clause suggests that private colleges will lose eligibility to participate in the federal student loan program if less than 35 percent of their graduates are repaying the principle on their loans, and if loan repayments exceed 30 percent of a typical graduate’s discretionary income and 12 percent of their total earnings. However, no penalties will be imposed on schools until 2015 (Beaver, 2012: 277). In 2012, the debtfare state also sought to deal with the increasing default rates by yet again redefining the meaning of default, by extending the default period in the Direct Loan Program from 270 to 360 days (under 34 CFR 668.183(c)) (finaid.org).

While the predatory nature of private student loans and their servicing tactics should be criticized, the distinction between private and public student loans is not as clear cut and unproblematic as presented by the joint CFPB-DOE report and other scholarly treatments of private student loan debt (Consumer Financial Protection Bureau, 2012; Beaver, 2012). Moreover, the literature concentrating on the abuses linked to private student loans, and, by connection, the for-profit private colleges and universities, downplays the role played by the state and, by extension, public student loans, in subsidizing capitalist interests through dispossessive practices. For-profit colleges, for instance, derive 66 percent of their revenues from federal student loans (Lynch et al., 2010). Through its neoliberal restructuring strategies, the state has played several key roles in promoting and permitting the private student loan market to thrive and feed off of low-income students and their families. The borrowing limits on public student loans have not kept pace with the rapidly increasing tuition fees in both private and public colleges over the past several decades, thereby forcing students to turn to private loans, which have higher borrowing caps. Moreover, as I have demonstrated above, the debtfare state has facilitated the rapid rise of for-profit private universities by encouraging the spatial displacement of capital through funding and (soft or voluntary) regulatory framings.

Conclusion

The objective of this paper was to re-inscribe the role of capitalist power, including the role of the state, in the student loan industry in such a way so as to uncover not only the economic and social consequences of student loan debt but also to question how and why the interests of the financial community are given primacy over student debtors, particularly more vulnerable low-income students. To accomplish this task, I focused my investigation on the conflict-ridden relationship between default and student loan asset-backed securities (SLABS). I also examined the role of the neoliberal state and, more specifically, its debtfare vector in not only mediating the connection between SLABS and defaults, but also facilitating the intensification and expansion of the student loan industry over the past several decades.

Through an historical materialist framing, I sought to reveal the intrinsic political nature imbued in these relations by identifying the commodification of debt as a key tactic in the student loan industry. Through the temporal displacements inherent in the commodification of debt (i.e. accelerating the repayment schedule for lenders), SLABS serve to reduce financial risk for private lenders, whilst relocating the social dimensions of risk onto student debtors. The debtfare state has responded in several ways to the tensions emerging from the management of risk involved in the expansion and intensification of the student loan industry, most notably by making it more difficult for student debtors to declare bankruptcy.

This analysis has sought to complement the rich and informative scholarly debates on the corporatization of education in the United States. I hope that some of the insights offered here will further stimulate debate on the political and capitalist nature of student debt, including its temporal and spatial dimensions. Critical analyses of the educational lending industry must also re-examine the common sense assumptions surrounding SLABS, and the wider economistic treatment of the credit system and the private-public dichotomy, both of which sever questions of power from debt and leave the lives of students and their families hanging in the balance.

Footnotes

Funding

This research received funding agency from the Social Science and Humanities Research Council of Canada

Notes

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