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Revealed: How Wall Street and the Government Profit From Student Debt

Posted on Jun 29, 2016

  Sign from a protest over student debt in New York City. (Michael Fleshman / CC 2.0)

It’s no secret that student debt is one of the biggest crises young Americans face today. And you’ve probably heard some of the numerous accusations against Wall Street for its part in the debt crisis. But a new report on Reveal News, produced by The Center for Investigative Reporting, shines a light on the outrageous profit made from student debt by big banks, private investors and even our own government.

The authors, James B. Steele and Lance Williams, use anecdotes to illustrate the struggles of living with student debt. “My loans are a black cloud hanging over me,” says one woman who owes more than $90,000. But they also report the stories of those who profit—such as an elderly executive whose golf course and several houses were paid for with money he made off the student debt industry.

They also acknowledge the historic shifts that have brought the situation to a tipping point, writing:

Student loans are virtually the only consumer debt that cannot be discharged in bankruptcy except in the rarest of cases—one of the industry’s greatest lobbying triumphs.

At the same time, societal changes conspired to drive up the basic need for these loans: Middle-class incomes stagnated, college costs soared and states retreated from their historical investment in public universities. …

The calculus for students and their families changed drastically, with little notice. Today, there is a student debt class like no other: more than 40 million Americans bearing $1.3 trillion in debt that’s altering lives, relationships and even retirement.

Student debt isn’t an insulated problem, either—it will certainly “exacerbate income inequality for decades to come.” The authors also explain that it isn’t just top Wall Street CEOs who profit from student loan debt, but the Department of Education as well. After student loan administration became privatized in the early 2000s, the department began to contract with private companies. Now, the authors write:

As borrowers struggle to make their payments, student debt has become the go-go sector of the debt collection industry. Under Education Department contracts, the more collectors recoup, the more they earn. Contractors are expected to make more than $2 billion in commissions from the government this year. …

The Department of Education has little incentive to fix the core problem. The loan program that began with the principal goal of helping disadvantaged students pay for tuition has become a moneymaker for the federal government.

The profit arises from the government’s ability to borrow money at a low rate and then lend it to students at a higher rate, thus charging students more than is necessary to recoup its costs.

As the 2016 election season heats up, presidential candidates Hillary Clinton and Donald Trump both have made proposals to fix the broken system. Given the long history of profit made by the government, as well as the millions of dollars spent on lobbying by big banks and investment firms, it may be hard to reform. “As for the student loan industry,” states the article, “it keeps rolling along.”

Read the entire article here.

—Posted by Emma Niles

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