Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans

As I mentioned earlier, Bloomberg reported that if the US defaults and loses its AAA rating, investors might begin to sell off government-backed student loans. The value is a drop in the bucket. It's merely $250 billion in government-backed securities. So . . . yeah, no biggie. But perhaps being so nonchalant about  the issue is wrong? Hmmm . . . I wonder. Since I have been wondering and reading some piss-poor 'analysis' on the subject, I asked people who actually know what they are talking about.

I've spoken with a few economists as well as with a savvy financial reporter, and asked them what they think would happen to student loan debtors if the US defaults. Here's what they had to say:

I'm leaning toward believing that a complete collapse of the financial system, as well as the dollar, would be a *good* thing for the indentured educated class (in a narrow respect), as systemic failure might be the only thing that would cause actual *big* corrective actions to be taken, e.g. a blanket debt forgiveness/Jubilee or other such things. In addition, if the banks collapse, our bought-and-sold-passed-her​e-passed-there debt instruments might simply disappear within the system, as the chain of ownership collapses!

Quite intriguing and optimistic even though the collapse will be, obviously, cataclysmic.

Someone else asked me what could happen to loans that have been consolidated and have fixed rates. Certainly nothing will change with those loans, and the rates in place won't change. But it would be insane if that turned out to be false. Can you imagine the number of people who would be ruined financially if they changed those terms and conditions?

I am, by the way, not trying to be alarmist. In addition, I am not suggesting that this will happen. We - all of us - are merely theorizing, because no one really knows what will happen if the US defaults.

Finally, another reliable source suggested that variable rates could skyrocket. The cost of new loans would most likely balloon.

Thinking about the ramifications of investors selling off government-backed loans is just wild!

Related Links


Julie Haviv, "Dollar hits record low versus Swiss Franc in debt standoff," Reuters (July 25, 2011)


"The Debt Ceiling: Why It's A Real Issue For The Indentured Educated Class," AEM (July 25, 2011)

"Steve Eisman Blasts For-Profits, Arguing 'Subprime Goes To College," AEM (May 28, 2010)

 "We don't want those mutha-f$#%!-ing indenture instruments! Sell! Sell! Sell the indentured educated class off! 

Student Loans and Debt Deal

AEM was first to report about the debt ceiling fiasco and how it would effect student loans. CNN has picked up the story and provided information about what students can expect with the outcome of the debt deal (full story here).

Here are a few points worth noting:

Congress would scrap a special kind of federal loan for graduate students. So-called subsidized student loans don't charge students any interest on the principal of student loans until six months after students graduated.

Congress would also nix a special credit for all students who make 12 months of on-time loan payments. 

The other big cut that Congress is targeting is a credit that all students get on the origination fee they pay the federal government to process their loans. Students pay 1% of the loan as an origination fee, but all students get half of that back unless they miss one of their first 12 payments.

The loss of that credit would cost a student who borrows $5,000 from the federal government $25. This would cost students $3.6 billion over the next decade, according to the budget office

Our politicians clearly have their priorities straight and care about educating citizens. Go Congress. You're looking out for all the right things and entities.  No word on what will happen to variable interest rates and current borrowers. One thing is certain. We aren't even in line anymore when it comes to Congress. The indentured educated class has truly been betrayed and on so many levels by this debt deal. It's time we unite and do something about it. Stay tuned for strategy plans.

Related Links


"Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans," AEM (July 31, 2011)

Pedro Nicolaci da Costa, "Default cloud hangs over U.S. job market," Reuters (July 31, 2011)

Progressive Co-Chair Rep. Raúl M. Grijalva Statement on Emerging Debt Deal, Official Statement (July 31, 2011)

Gregory Floyd, "It's Time to Question Labor's Ties to Democrats," HuffPost (July 30, 2011)

"Debt Ceiling Fiasco and Student Loans," AEM (July 30, 2011)

"Who's Terrified? Debt Ceiling Fiasco and Student Loans," AEM (July 29, 2011)

"Call to Action: Tell Leaders in D.C. to Raise the Debt Ceiling," AEM (July 28, 2011)

"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (July 25, 2011)

"The Debt Ceiling Fiasco and Student Loans," AEM (July 25, 2011)

Steve Eisman Blasts For-Profits, Arguing "Subprime Goes To College"

As a result of a lot of reading and research on this topic, I've mentioned the same thing, i.e., that the subprime mess looks pretty much the same when it comes to the student lending industry. In fact, I made a point to discuss the way in which Deutsche Bank and others have invested in student loans. I think it's all well and good that Steve Eisman is turning his attention to for-profit schools and blasting them for carrying out the same sort of unscrupulous activities as those  did on Wall Street. (Mr. Eisman, incidentally, was chronicled by author Michael Lewis in the Big Short for his open criticism of the subprime gambling on Wall St). Indeed, this problem needs to be exposed. However, I find this sole focus on the for-profits to be disconcerting for one important reason. It's great that Mr. Eisman has noted, as I have countless times (along with other student loan advocates) that we're on the "cusp of a social disaster." I would actually disagree with Mr. Eisman and say we're not on the cusp, we're there. It is noteworthy that he compares this situation to those who lost their homes. Even worse, as most of my readers know, student loan debtors can't flee from their debts (in some cases it follows you to the grave). If we can't make education affordable, as I've said countless times, we can say hello to becoming a Third World Country. This crisis is problem that I think needs to be addressed and needs to be solved immediately. I write that with different and deeper views on education as a result of the time I am spending here in South Korea as an instructor. But I digress. My biggest concern is this: it's not just the for-profits who should be scrutinized. The entire system is a disaster, and that means that all universities and colleges should be forced to reconsider the way in which they are allowed to increase tuition whenever they so choose.

On another note, I've referred to us for a long time as the indentured educated class, and it turns out . . . student loan-backed securities are labeled as indenture instruments. That's right! Now, if that doens't make your stomach turn as an indentured educated citizen, I don't know what does . . . Yikes.

Your thoughts - The Debt Ceiling Fiasco and Student Loan Debt

AEM has interviewed several experts about the debt ceiling fiasco and student loan debts.

There are indicators that the triple A rating that that U.S. has enjoyed will be downgraded to AA. What do you think will happen to interest rates on student loans, i.e., the ones that do not have fixed rates?

Jerry, thanks for the helpful link about the issue on the Facebook pages. (Jerry interviewed me months ago, and it was a delightful interview).

Related Links


Janet Novack, "Debt Ceiling Plan Take Aim At Graduate Student Loans," Forbes, July 27, 2011


"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (July 25, 2011)

"The Debt Ceiling Fiasco and Student Loans," AEM (July 25, 2011)

Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans

Default is still a possibility as the August 2nd deadline nears. Regardless of the outcome, the average American will be hurt by whatever happens. So-called compromise is a euphemism for selling out the poor and the middle-class. At least there are a few folks on the Hill, like Senator Bernie Sanders, who won't accept such measures. But we have seen something unprecedented occur, and when a "Democratic" president willingly puts Social Security on the table, the feeling of betrayal spirals into fury.

The triple-A rating will most likely be downgraded, and that means, as AEM has been reporting, that interest rates on student loans will spike. 

CNN reiterated the point today:

If the debt ceiling isn't raised, many, including President Barack Obama and the Treasury Department, warn that the country will risk unprecedented default. That default could cause Americans to face rising interest rates. It could also mean that the value of the U.S. dollar would drop compared to other currencies. As interest rates increase, the cost of borrowing rises, so individual mortgages, car loans and student loans could become significantly more expensive. As individual Americans' personal finances take a possible hit, some financial experts have warned that America's AAA credit rating could also be downgraded, threatening an already drooping stock market.

Brace yourself.

"Someone was telling me about these people . . . these . . . citizens. I don't get the term. Do you?"

[UPDATE] 

Krugman reminds of us a very interesting question and answer session between the President and Marc Ambinder last December:

Obama, at his press conference last December, announcing his surrender to the GOP on tax cuts; the questioner was Marc Ambinder:

    Q Mr. President, thank you. How do these negotiations affect negotiations or talks with Republicans about raising the debt limit? Because it would seem that they have a significant amount of leverage over the White House now, going in. Was there ever any attempt by the White House to include raising the debt limit as a part of this package?

    THE PRESIDENT: When you say it would seem they’ll have a significant amount of leverage over the White House, what do you mean?

    Q Just in the sense that they’ll say essentially we’re not going to raise the — we’re not going to agree to it unless the White House is able to or willing to agree to significant spending cuts across the board that probably go deeper and further than what you’re willing to do. I mean, what leverage would you have –

    THE PRESIDENT: Look, here’s my expectation — and I’ll take John Boehner at his word — that nobody, Democrat or Republican, is willing to see the full faith and credit of the United States government collapse, that that would not be a good thing to happen. And so I think that there will be significant discussions about the debt limit vote. That’s something that nobody ever likes to vote on. But once John Boehner is sworn in as Speaker, then he’s going to have responsibilities to govern. You can’t just stand on the sidelines and be a bomb thrower.

 And so my expectation is, is that we will have tough negotiations around the budget, but that ultimately we can arrive at a position that is keeping the government open, keeping Social Security checks going out, keeping veterans services being provided, but at the same time is prudent when it comes to taxpayer dollars.

Related Links


Pedro Nicolaci da Costa, "Default cloud hangs over U.S. job market," Reuters (July 31, 2011)


Progressive Co-Chair Rep. Raúl M. Grijalva Statement on Emerging Debt Deal, Official Statement (July 31, 2011)


Gregory Floyd, "It's Time to Question Labor's Ties to Democrats," HuffPost (July 30, 2011)


"Debt Ceiling Fiasco and Student Loans," AEM (July 30, 2011)

"Who's Terrified? Debt Ceiling Fiasco and Student Loans," AEM (July 29, 2011)

"Call to Action: Tell Leaders in D.C. to Raise the Debt Ceiling," AEM (July 28, 2011)

"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (July 25, 2011)

"The Debt Ceiling Fiasco and Student Loans," AEM (July 25, 2011)

Wall Street Journal: S&P Affirms Some Student-Loan ABS

When the country faced the debt ceiling fiasco, AEM discussed what could have potentially happened if the U.S. defaulted on its debt. I also talked with several experts, and the analysis was grim. Then S&P downgraded us, even after we raised the debt ceiling, and it remained to be seen how that would impact student loans. That was discussed from the vantage point of the market place, i.e., how would investors respond to the downgrade, what that could potentially do to variable interest rates on student loans, and what the would mean for people seeking student loans. More importantly, however, I wanted to touch upon the way it could affect current borrowers.

The outcome still remains uncertain, but the WSJ provided some information on S&P's ratings of student loan ABS.*

According to the Wall Street Journal, despite the sovereign cut, S&P has affirmed some student loan ABS. But what does it mean that "some" have been affirmed by the agency, and not all of them? Of course, it's one agency, and one that might be in trouble for the subprime housing crisis with the DOJ. What's even worse? According to Zeke Faux and Jody Shenn at Bloomberg News, S&P " is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government."

The reporters added, "[the agency] is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties."

Sooooooooo, let me get this straight. This company, that most likely played a role in bringing the world economy to its knees, destroying the financial security of millions of homeowners, is back at it again?!? To add insult to injury, they have downgraded the U.S., and now their going to give a triple-A rating to subprime home loans again?!? What in the f--k is going on here?!?

As for the student-loans, another agency - Fitch's (see below) - downgraded some student-loan backed securities in early July. We'll have to see what the outcome will be for the "other" loans.

I'm following this part of the story closely, talking to experts about these themes, etc. Stay tuned.

*ABS means "asset-backed securities," which were part of the now defunct FFELP program. These are loans guaranteed by the Department of Education. That means if a borrower defaults, the federal government will still pay the lender. (Sooo, I think you can see the connection here, i.e., a lenders disinterest in working with a distressed borrower? Who cares? They're gonna get the money anyway, so they have no incentive to work with struggling borrowers. Grand, right?!?) These asset-backed securities are also why Sallie Mae, Nelnet, and others lenders like to attract investors by talking about how much debt (via FFELP) they have on their books. These are seen as lucrative options for investors.

Related Links


"UPDATED: U.S. Expects Downgrade: Indentured Educated Class Officially F&$%ed!," AEM (Aug. 5, 2011)


"Quick Update: Default, The Debt Ceiling Fiasco, and Interest on Your Student Loans," AEM (Jul. 31, 2011)

"Your thoughts - The Debt Ceiling Fiasco and Student Loan Debt," AEM (Jul. 27, 2011)


"The Debt Ceiling Fiasco And Student Loans," AEM (Jul. 25, 2011)

"The Debt Ceiling: Why It's A Real Issue For The Indentured Educated Class," AEM (Jul. 25, 2011)

"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (Jul. 25, 2011)

"PHEAA - Fitch Downgrades Sub and Jr. Sub Notes for PARTS Student Loan Trust 2007-CT1," AEM (Jul. 6, 2011)

"Money Making Schemes: FFELP Loans, the Market, Sallie Mae, and Nelnet," AEM (Jul. 4, 2011)

"Steve Eisman Blasts For-Profits, Arguing 'Subprime Goes To College,'" AEM (May 28, 2010)

"In a free market world, anyone is game - even the most vulnerable," AEM (May 4, 2010)

Call to Action: Tell Leaders in D.C. to Raise the Debt Ceiling

Investors are jittery about D.C.'s inability to raise the debt ceiling, so they are seeking alternatives to U.S. bonds. AEM has been discussing the ramifications of not raising the debt ceiling and interest rates on student loans over the past week, and interviewed several experts who painted a grim picture of what will happen to indentured educated citizens if the U.S. loses its AAA rating.

As already stated, there is a likelihood that the U.S.'s credit rating will be downgraded to AA status. That means that variable rates on student loans could increase, and borrowers seeking loans will have a harder time obtaining them. Just to be clear, I do not believe people should have to take out loans to finance their education - as I have stated countless times. In fact, I am so "radical" that I believe higher education ought to be free. But neoliberalism has triumphed, and turned higher education into a market, and one that has been highly lucrative for people like Albert Lord and [insert for-profit President's name here]. But I digress.

The Nation has written a great piece about the situation. It's called, "Shut Up. Raise The Ceiling." 

Call your representatives in D.C. and politely tell the ones who are refusing to act on this simple, procedural mater immediately. Send them tweets asking them to raise the debt ceiling. Tell them you don't care if they signed a promise to not raise taxes. Tell them you are tired of them working against the interests of the American people. Tell them that, if they have been opposed to raising the debt ceiling, they are economic terrorists and victimizing millions of people in the U.S.

Some quick facts on the debt ceiling. Right-wing "wonks" are conflating it with raising taxes. Anyone who understands the difference knows that's crap. The debt ceiling was raised under Bush seven times. It was raised under Reagan eighteen times. 

As a struggling, underemployed freelance writer and activist, the needless focus on the debt ceiling infuriates me. I blame both parties, too. Moreover, most of these clowns make no mention joblessness anymore. This shows the level of dysfunction and corruption in D.C. While I am looking forward to reconnecting with my contacts on the Hill, and meeting new folks there, I am discouraged by our leaders' inability to actively solve problems.

Related Links


"Sell Those Indenture Instruments Immediately! The Debt Ceiling Disaster and Student Loans," AEM (July 25, 2011)

"The Debt Ceiling Fiasco and Student Loans," AEM (July 25 ,2011)