As the presidential primaries rumble on, the candidates — especially Bernie Sanders and Hillary Clinton — have debated college affordability and Wall Street greed. Unfortunately, no one is confronting the links between the two.
More than 40 million Americans have student debt, totaling at least $1.2 trillion. On average, borrowers out of school owe $36,000, with a monthly payment of $680. Roughly 11 percent of borrowers are in default. Overall, indebtedness discourages people from starting degrees, families and businesses, dragging everyone down.
Or almost everyone. One person’s debt is another person’s asset. What some owe, others own. And student debtors don’t just cut checks to lenders. Our money flows to third parties — including investors.
One rarely discussed feature of the “student loan industrial complex” is the $200 billion market for student loan asset-backed securities (SLABS). This is a circular business, involving lenders like Sallie Mae and big banks like Wells Fargo and Bank of America. Like mortgages, student loans get pooled and repackaged into new financial products (securities). The lenders then sell the securities to investors. Investors receive the reward of monthly loan payments, plus interest. They can hold the securities themselves, trade them or bet on them. In turn, lenders receive quick cash, including fees and commissions, and push the risk of the underlying loans onto investors. This shift allows lenders to make more, and larger, loans.