The costs of the ongoing credit crisis have been well chronicled. But there's a bright spot, too.
In a crushing blow to lobbyists, bankers, and loan intermediaries, the credit crisis and the accompanying collapse of the securitization market may actually force a top-to-bottom overhaul of this country's much-maligned student loan system.
If that happens, prospective student borrowers may no longer have to face a lifetime of indentured financial servitude, and the U.S. higher education system may finally get a long-overdue makeover.
When it comes to the ongoing financial crisis – of which the frozen credit markets are a primary casualty – one of the only positives to date has been a total bypassing of the bankers and loan facilitators that had been pushing student loans for college and graduate-level studies. In the new era, the federal government itself plans to take over the bulk of the lending duties.
While the prospect of fewer private lenders lowers the total pool of available student loans, U.S. President Barack Obama's new budget proposes to fill the void by having the federal government take over most student lending. The proposal is not a budget-buster, because the government already finances or guarantees most student loans. A "Student Loan Bill of Rights" may even emerge from this credit conflagration.
A Lot of Anger
From a financing standpoint, the greatest impact of the credit crisis has been on the securitization market. Student loans are originated by private bankers and government-sponsored intermediaries, and are packaged into "asset-backed securities." The government guarantees repayment of the underlying loans in many of the security pools.
Securitized student-loan pools are sold to investors and the proceeds of those sales go back to the originators, who then have more money to make more loans. The credit crisis brought the securitization markets to a complete standstill.
The 2007-2008 school year was the most difficult year on record for student borrowers. The Massachusetts Educational Financing Authority was unable to meet loan commitments, forcing 32,000 students to seek alternate funding sources. Another non-profit lender, the Michigan Higher Education Student Loan Authority, stopped making loans. Major banks, including: Bank of America Corp. (BAC) and Wachovia Corp., have exited the student loan business altogether. So did Northstar Education Finance Inc. and CIT Group Inc. (CIT), two other active student loan lenders.
More than 100 student-loan lenders withdrew or ceased operations from 2007 through 2008, according to Finaid.org, a financial aid Web site catering to student borrowers.
Then there's the giant of them all, SLM Corp. (SLM), commonly known as Sallie Mae. This onetime government-sponsored enterprise (GSE) was privatized in 2004 and manages more than $130 billion in student loans for more than 10 million borrowers. Like many student loan providers, SLM originates federally guaranteed loans under the Federal Family Education Loan Program. And like many other student loan lenders, SLM has experienced its share of controversy.
In 2005 , a former Sallie Mae employee alleged in a federal lawsuit that the company engaged in "a pattern and practice of granting forbearance in a purposeful effort to increase total student loan debt." The particularly onerous practice – by Sallie Mae and many other loan management and servicing companies – of extending and consolidating loans for borrowers for substantial fees and at higher interest rates has gained national attention. A year later, CBS News' "60 Minutes" profiled Sallie Mae and its controversial business practices.
But when it comes to the ire of student borrowers, as well as watchdog groups, Sallie Mae is certainly not the only target. In 2007, New York Attorney General Andrew Cuomo launched an investigation against Citibank, The College Board, EduCap and Nelnet – alleging deceptive lending practices. Sallie Mae eventually agreed to a new code of conduct and donated $2 million to a fund to educate borrowers about student loan options.
The pain inflicted on student loan borrowers and their families is chronicled at www.studentloanjustice.org. Alan Michael Collinge, the founder of Student Loan Justice and the author of the book, "The Student Loan Scam," says many borrowers come to realize that they've been essentially condemned to indentured servitude. Lenders and servicers have paid enormous sums to their lobbying armies to generate legislation that disallows refinancing of student loans, provides for the garnishment of wages, social security and even disability benefits, and worse.
The Overhaul Game Plan
In May 2006, then-U.S. Sen. Hillary R. Clinton, D-N.Y., with substantial input from Student Loan Justice, introduced a Student Borrower Bill of Rights (Senate Bill 511). The bill was reintroduced the following year but was overcome again by lender lobbying. Perhaps the Obama administration will embrace wholesale changes in how student borrowers are treated and offer them a way out of debtor slavery.
Financial aid to students is different from other types of consumer debt, which can facilitate – or even encourage – overconsumption. And the fallout from the tight-credit environment has a substantial long-term social cost.
For instance, some of the hardest-hit for-profit schools offer vocational training in such potentially valuable areas such as nursing and computer-technology. And these schools typically cater to lower-income students with lower FICO credit scores and higher default prospects. Providing affordable loans to students and a realistic timetable and payback arrangements will further the education agenda the United States needs to make a priority in an increasingly competitive job market.
While the credit crisis is to blame for our deep and devastating recession, the one silver lining may be an opportunity to permanently sideline profiteering banks and student loan intermediaries from feeding at the federal trough even as they stand on the backs of indentured-student borrowers.
The Obama administration's budget proposes to eliminate private lenders from the market and to have the federal government provide direct loans to students. By eliminating the subsidies to well-heeled intermediaries, the government can reconstitute the U.S. Department of Education, fulfill its promises to promote – and actually facilitate – higher education and not disadvantage workers who too often pay dearly for skills they desperately need.
[Editor's Note: Money Morning Contributing Editor Shah Gilani is a retired hedge fund manager and an internationally recognized expert on the credit and financial crises that continue to sweep the globe. More than 2 million readers have perused his analyses of deregulation, problems with the debt-rating process, and the bailout and stimulus plans put forth by the Bush and Obama administrations. Indeed, Gilani just unveiled a banking-system repair plan that he says would fix the U.S. financial system – and at a much lower cost than the government bailout plan now being proposed.
Gilani is also the editor of The Trigger Event Strategist, which identifies profit plays that continue to be created by "aftershocks" from the financial crisis. Uncertainty will continue to be the watchword for at least the first part of the New Year. Little wonder, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn't been seen since the Great Depression. It's almost enough to make you surrender and give up the investment game forever.
But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat right? You'd know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting and finally profiting from the very marketplace events you anticipated.
That's just what Gilani, a nationally known expert on the U.S. credit crisis, attempts to do with the Trigger Event Strategist. He has predicted five key "aftershocks" of the financial crisis that he says will create substantial profit opportunities for investors who know just what to look for, and how to play the. In the Trigger Event Strategist, Gilani uses these "trigger events" as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the profit strategy they feed into, check out our latest report.]
News and Related Story Links:
NorthStar Education to suspend FFEL lending: report.
Student Borrower Bill of Rights (Senate Bill 511).
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.