Risk and the Indentured Servitude of Student Loans (December 22, 2011)
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 Success) I 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.
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.
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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