Thursday, December 22, 2011

Risk and the Indentured Servitude of Student Loans

Students stuck with gargantuan loans for life are bound in a bank-dominated "improvement" of indentured servitude.

Yesterday ( Risk is Necessary for Adaptation, Innovation and SuccessI discussed the inevitable failure of systems in which risk has been transferred from those who reap the gain to others. In the case of student loans, the risk has been transferred to students who enter decades of indentured servitude.

Indentured servitude has a long history in the U.S.; many immigrants accepted servitude of between two and seven years in exchange for passage to the New World. Orphans were indentured out of orphanages to the age of 21--potentially a much longer servitude. Indeed, the labor of anyone on the public dole could be auctioned off:
By the time of the Revolutionary War, indentured servitude had been a common practice in the United States for 150 years. 
Following British laws established during the colonial period, post-Revolutionary public authorities indentured the labor of those who were likely to fall upon the public dole. Appalachian county governments bound out indigent adults and children whose families could no longer care for them. The age, gender, and racial trends are clearly documented in early records of Appalachian poor houses, for women and orphans represented more than two-thirds of the individuals whose labor was auctioned off by county governments. 
Isaac Miller of Anderson County, Tennessee, advertised in 1819 for the return of Margaret Hutcheson who had been bound to him by the county poor house. Obviously, the seventeen-year-old girl had tried the patience of her master, for he offered only "a reward of 6 1/4 cents to the person who w[ould] deliver her to [him]," caustically adding, "but I will not thank any person for doing so." 
When an orphan was bound out by the county poor house, the child was legally tied to the master until the age of eighteen or twenty-one. 
Orphans were often bound to tradesmen or farmers until age 21, and indigent adults were typically bound for three to seven years. However, there is no way to document how many laborers were bound out by their own families. When parents indentured their own children, it was for "a usual term of seven years if a girl, or five if a boy."
Let us consider the modern form of indentured servitude, student loans, which now exceed a staggering $1 Trillion: "It's Going To Create A Generation Of Wage Slavery"(Zero Hedge), or perhaps more accurately, indentured servitude, because the debt cannot be dismissed via bankruptcy.
Lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. 
The debt can't be shed in bankruptcy. 
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future. 
"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of 
"It's going to create a generation of wage slavery," says Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble — with borrowers, rather than lenders, as the losers.
The University of Phoenix, the nation's largest, got 88% of its revenue from federal programs last year, most of it from student loans.
In effect, students get A Mortgage with Every College Graduation (Dr. Housing Bubble, via Jed H.) with one key difference: there is no way to get out from underneath the student loans.

This is the perfection of indentured servitude. How many students pay off their $100,000 loans in a mere seven years? Modern banks and corporate "higher education" diploma mills have improved the old system of indentured servitude, extending the servitude from seven years to decades.

The key dynamic here is the transference of risk from the lenders, who stand to reap immense profits from these loans, to the students. This transference is enforced of course not by the banks but by their partner, the Savior State, which obliterated the right to bankruptcy for students while guaranteeing profits to the banks via Sallie Mae, another guarantor of private profits backstopped by taxpayers.

The feedback between risk and return has been severed. Lenders can extend massive loans to marginal students attending for-profit colleges, knowing their losses will be backstopped while the gains are theirs to keep, and the debt-serf students are indentured for life.

Imagine if risk were connected to gain. Maybe lenders would be a bit more careful about which students they deemed worthy credit risks; perhaps they would begin differentiating between low-market-value liberal arts degrees from hard-science degrees.

Maybe they'd start considering the students' incomes while in university. Maybe they'd recognize differences in risk between for-profit diploma mills protected by the rapacious, captured-by-corporations Savior State and state universities.

There can be no "fix" to our decline until risk is bound once again to return and gain. If risk is transferred to others, you're left with some type of indentured servitude and financial tyranny in service of the banks and their Savior State toadies.

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