The Real Reason Biden Doesn’t Want to Cancel Student Debt
The Secretive Financial Market Built on Student Loan Asset Backed Securities (SLABS)
Make no mistake about it: the student loan industry is a predatory market that leverages government power to create profitable financial packages with no risk. That is not how a free market operates.
If you’re like me, you’re one of many Americans who hoped, even against hope, that President Biden would take executive action to relieve student loan borrowers of their debts. In recent days, calls by Senator Elizabeth Warren, Senator Chuck Schumer, Representative Ayanna Pressley, and Representative Ilhan Omar, along with others, gave that dream a breath of fresh air. Biden’s press secretary, Jen Psaki, even responded to the press conference our representatives held to talk about canceling student debt on that cold day at the Capitol.
Then came the silence from the Biden camp. By now, after years of centrist politics, liberal supporters of Dem politicians know that silence well. It’s the silence that follows any gesture to decent policy. It’s the silence that speaks volumes: “We’d love to help you, but we can’t — and more importantly, we either think you’re too dumb to understand why, or we really don’t want you to understand why.”
So here I am, writing a post on Medium about something I don’t really understand. I consider myself to be pretty intelligent, and I’m an engineer, so you’d assume I understand numbers (or maybe not) — but this shit is complicated. Forgive me if I’m wrong. That said, aboslutely no one is talking about this, it’s frustrating, and I want to know more. I really do, even if I’m wrong. So here goes. This is what I think is going on, and please correct me where I’m wrong.
I do not believe that politicians are against forgiving your student loans because of some moral high ground (be that becuase it’s regressive, which is false, or that it’s not a good way to stimulate the economy, which is also false) or because it’s just what the other side is doing (looking at you, Republicans). It seems to me that they have a very specific reason, which none of them are talking about. If you do a bit of digging, you discover that federal student loan servicers, companies like Navient and Nelnet that distribute your loans and process your payments, pool all of our collective debt into financial packages called Student Loan Asset Backed Securities, or SLABS for short.
In the abstract of a forthcoming paper titled, “The Next ‘Big Short’: COVID-19, Student Loan Discharge in Bankruptcy, and the SLABS Market,” authors Samantha Roy and CJ Ryan do a good job of outlining what SLABS are:
Like mortgage-backed securities, student loan asset-backed securities, or “SLABS,” are the securitized form of student loan debt, repackaged as a marketable financial instrument. Also like mortgage-backed securities, SLABS are backed by income streams generated by loans to individuals. As with any investment vehicle, asset-backed securities like SLABS come with risk, particularly when borrowers default on their loans or have their debt discharged through bankruptcy proceedings. However, historically, SLABS have been a relatively sure bet — yielding consistent returns on investment — given that student loans are guaranteed by the government and that student loan debt obligations are difficult for borrowers to escape. This is because there has been a long-standing prohibition on student loan discharge via bankruptcy proceedings.
Besides this suddenly sounding a lot like the 2008 mortgage bubble, what does that really mean? Let me do my best to break it down for you.
The student loan hustle has three parts:
1. Make it practically impossible to discharge loans through bankruptcy (ambiguous legal language, high legal fees, unforgiving courts). See here and here.
2. Flood the market with student loans for every type of education imaginable (including education at for-profit colleges), for as much as possible. See here.
3. Work with major banks to issue SLABS (Student Loan Asset-Backed Securities), which allow investors to prospect in and profit off of student loans, which have no risk because of 1. SLABS are issued by the same businesses that caused the 2008 mortgage bust, and they face similar, if not exactly the same, problems. See here.
Once you understand that simple hustle, it’s easy to see why lobbyists for the student loan industry are freaking out about debt forgiveness. The system they’ve built since the 70s, when they began to make it difficult to discharge student loans through bankruptcy, is facing its first real risk in decades.
Make no mistake about it: the student loan industry is a predatory market that leverages government power to create profitable financial packages with no risk. That is not how a free market operates. (Just look at how SLABS are traded — privately between brokers, free of any sort of market-determined price like typical investment packages.)
And that explains the silence. Even if centrist politicians like Biden do feel a moral obligation to cancel student loan debt (like they should!), they’re also wary of the risk: its seems to a layman like me that there is a real possibility that canceling student loan debt via executive action, which would mean ending regular interest payments to SLABS investors with no recourse, could trigger an economic downturn (at a moment when we are already on the precipice) by instantly wiping out a secretive, ever-growing section of the financial market. I think it is likely that the real reason Biden wants Congress to forgive student loans is so that they can simultaneously buy SLABS investors out of their precarious position, similar to the 2008 bailout of big banks that got caught in their predatory mortgage lending practices. (This also likely the reason Biden will not erase the interest on these loans — in that scenario, SLABS investors still lose their investment.) But hey, I’m just an engineering-type guy with a ton of student loans and a computer. What do I know? Maybe all of these people speculating about a student loan bubble know something?
Still, if you don’t think I’m not quite hitting the mark, let me offer one more piece of evidence. Moody’s and Fitch have both recently downgraded ratings for some of the SLABS out there:
In summary, your student loans have been amassed into predatory, and likely corrupt, financial packages that, if erased, could affect the entire market.
However, none of this changes the moral obligation to forgive student loan debt. In fact, it makes a stronger case. Former students now laboring under insurmountable debt did not arrive at that position because they made bad life decisions. They came to be in debt as victims of a predatory system bent on exploiting their ambition, their intelligence, and their labor for the benefit of a corrupt few. Even more treacherous, that predatory system has used our government to eliminate risk for investors.
It is time to end the federal student loan program, erase the debts, and make college affordable. This is the only way to make education free and fair, as it should be.
Like I said at the beginning, please correct me where I’m wrong. I’m not a financial expert and have no experience with this. I just wanted to write out my thoughts because I’m frustrated, no one else is talking about this, and I’m hoping that someone out there in the world who really understands these things can explain SLABS, student loan debt forgiveness, and how these systems relate to our economy better than I can.
Finally, here’s info on Navient and Nelnet SLABS:
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