The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Wall Street’s rip-off of students

Jan 7, 2008

In the coming year, college students are going to find it a lot harder to pay their sky-high costs. And their only alternative to pay those costs, private loans, are drying up because some of the biggest companies that provide loans are in financial hot water.

In many ways, the student loan business resembles the housing and mortgage scams. As colleges and universities hiked their tuition and fees into the tens of thousands of dollars per year, the only alternative for many students was to take out enormous college loans. Students were saddled with unspeakable amounts of debt once they left school, debts that were a source of enormous profit for the lenders – and the biggest banks behind the lenders.

In other words, the student loan business became an enormous rip-off, just like the mortgage business. The biggest student loan company, Sallie Mae, both originated the loans and then bundled them up into financial securities. Sallie Mae then sold these securities to big investors. These securities were highly prized, not only because the student loans carried high interest rates, but because the loans were also guaranteed by the federal government – a no-lose investment, to say the least. So investors bought and sold these securities in a speculative frenzy.

The profits from its student loan business fueled the vertical lift-off of Sallie Mae’s stock price, which quadrupled from 1997 to 2005. James Lord, the CEO, who was granted millions of shares of company stock, went into partial retirement, with ambitious plans to build a 30-million dollar golf course in Maryland’s Anne Arundel County for his own private use and to buy a major league baseball team. In April, Sallie Mae’s fortunes peaked when it announced that it was going to sell itself for 25 billion dollars to a private buyout group.

Then in August the mortgage crisis hit and froze up all the other financial markets – including the funding of student loans. Sallie Mae’s deal to sell itself fell through, and Sallie Mae could no longer get funding, or could not sell off its securities. Just like all those mortgage companies and banks in the housing business, Sallie Mae, which had looked to be so profitable only months before, suddenly deflated like an old balloon. Sallie Mae is now in danger of being gobbled up or dismembered by other big financial companies and so-called vulture funds – which can only mean that student loans will become more expensive.

Thus, students pay... and pay... and pay – for Wall Street’s profits and crises, just like homeowners. And of course, this hits the students from the working class and lower middle class the hardest, since they are the ones who most depend on student loans.