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Common Dreams - October 26, 2019

"The student debt crisis is symptomatic of an unsustainable capitalist system. In the past several decades, thesecuritization of debthas become central to economic growth,but at what cost? As economist Michael Hudson has argued, "debts that can't be paid, won't be paid", and the insistence of creditors to collect on those debts can trigger social unrest."

Student loan debt burdens 44 million people in the United States. However for CEOs of student loan companies, or investors on Wall Street, student debt is a lucrative commodity to be bought and sold for profit.

Corporations such as NavientNelnet, and PHEAA service outstanding student debt on behalf of the Department of Education. These companies also issue Student Loan Asset-Backed Securities (SLABS) in collaboration with major financial institutions like Wells Fargo, JP Morgan, and Goldman Sachs. For these firms and their creditors, debt isn't just an asset, it's their bottom line.

Investors holding SLABS are entitled to coupon payments at regular intervals until the security reaches final maturity, or they can trade the assets in speculative secondary markets. There is even a forum where SLABS investors can anonymously discuss their assets and transactions, free from unwanted public scrutiny.

Yet the financialization of student debt is almost never reported on in the media. There is little public awareness that when student borrowers sign their Master Promissory Notes (affirming that they will repay their loans and "reasonable collection costs"), their debts may be securitized and sold to investors.

The history of SLABS

SLABS resulted from specific federal policy decisions. On November 27, 1992, the Securities and Exchange Commission adopted Rule 3(a)(7) of the Investment Company Act of 1940, which allows companies who issue asset backed securities to be exempt from the legal definition of an "investment company." This exemption permits companies to avoid asset registration fees and regulatory oversight—making it profitable for student loan companies (among others) to issue securities, which effectively created the market for SLABS. In total, $600 billion worth of SLABS have been issued, with $170 billion worth still outstanding.

There are two main types of SLABS: those backed by loans made by private lenders, and those backed by loans made through the Federal Family Education Loan program (FFEL). The majority of all student debt today is the $1.1 trillion loaned by the federal government through the Direct Lending program. While these loans cannot be securitized directly, they can be if borrowers consolidate or refinance their loans through a private lender.

Private student loan debt accounts for roughly $120 billion of the $1.6 trillion total outstanding debt. Companies such as SoFi refinance student loans, and have issued $18 billion in SLABS since their founding in 2011. These loans are highly favorable to lenders—as borrowers who default on private loans face greater consequences than those who default on federal loans.

FFEL loans are made by private lenders that are guaranteed by the federal government if borrowers default, which incentivizes riskier lending. Although Congress ended the program in 2010, there are still roughly $280 billion of FFEL loans outstanding, and the largest firms such as Navient and Nelnet retain FFEL loans in their portfolios and have continued to issue FFEL-backed SLABS. ...
Read full report at Common Dreams