The administration of UC Davis has decided to partner with US Bank, which now has a branch open in the student union building on campus. All UC Davis students now potentially carry a US Bank ATM card as their student ID card.
But US Bank didn’t come to campus for student checking accounts.
How will US Bank make money at UC Davis?
As this public university becomes more and more expensive, students will need to take out more and more in student loans. Federal student loans do not cover all of the expenses for many students, and their only recourse is to privatize student loans, most often borrowed from the bank where the student has his or her personal bank account.
US Bank allows students to take out up to $50,000 in private student loans. A 2003 report from the Inspector General found that between 19 and 31 percent of first-year and sophomore students would default on their loans at some point over the life of the loan. A follow-up investigation by the Chronicle for Higher Education found that fully 20 percent of people who had left school in 1994 had defaulted on their student loans as of 2010. Keep in mind that the people who left school in 1994 went into a much better job market than the one you are facing right now. Good luck.
US Bank makes money on every student who defaults
Defaulting on a student loan does not mean the loan goes away; it’s not like bankruptcy. It means the bank – in this case US Bank – can sue you for the full amount of the loan, plus associated penalty costs, plus collection costs, plus legal costs. It means the bank can garnish your wages until the increased amount is completely paid off.
For federally-subsidized student loans, the recovery rate (or amount the student-without-money is forced to pay) is 123 percent of their actual student loan debt, according to studentloanjustice.org. For comparison purposes, the recovery rate on defaulted credit card debt is roughly 25 percent. I have not been able to find data on private student loans, such as those US Bank gives out. I was similarly not able to find information on US Bank’s policy on defaulted student loans on their website. My guess is they don’t want you to know.
As a note, while researching this article I found a lot of stories along the lines of $5,000 in student loans turning into $15,000 in repayment. If you have a similar story, please share it (even just briefly) with the Aggie. E-mail campus@theaggie.org.
How much they make
What does seem clear is that the major players in the student loan industry make a lot of money. Sallie Mae is currently the largest student lender, but there is plenty of room for US Bank to make a lot of money in this hundreds-of-billion dollar industry, especially as tuition increases drastically. Americans currently hold some $830,000,000,000 ($830 billion) in student loans, and that number is getting a whole lot bigger. This industry is so profitable that Sallie Mae was able to pay its CEO an estimated $225 million between 1999 and 2007, or roughly $77,000 a day for eight years, according to Fortune.
Make no mistake, the banks want you to borrow. They want you to borrow more. They want your tuition to go up again. And when you default on their loans, they make even more money.
Why is an institution whose purpose is to serve people and to serve California allowing access to a corporation whose sole purpose is to take money from those same people? Why is the campus not even educating the students on the dangers of taking on a private student loan? (As part of the contract the bank is supposed to provide money management classes for first-year students. And I’m sure next year the admin will contract with Marlboro to do a skit about respiratory health.) Why are we allowing US Bank to put their logo on our football scoreboard?
Conflicts of interest
It would seem there is a possible conflict of interest between people who run banks/their shareholders (who presumably would like to make money) and students. Why, then, are roughly half the people who control the University of California (the UC Regents) bankers and investors? Eight out of 17 of our current regents work in the field of finance, either holding positions with banks or with investing firms.
Even if these people can show that they are not benefiting personally, it would seem that the industries they represent benefit hugely from their actions on the Board of Regents.
As a final thought to Davis students – take care out there. The UC Administration is feeding its students to the wolves for the sake of the institution.
The author’s argument about how US Bank can and will profit from default loans stems an interesting topic: Should those students who desire the loans, who are bound (by statistics, 19-31%) to default on them, be allowed to obtain them? Furthermore, should they even be investing in an education when it cannot pay returns on investment enough to cover the costs of such an education? Economics would dictate that this is unwise and that if the costs are higher than the returns, the market will deem this opportunity as too risky. If you come out of the University of California collegiate system with a bachelor’s degree and you must default on a loan, then either one of two things have happened: 1. The job market is poor and you have no income, or 2. You have no marketability as an employee with your degree and therefore either wasted your money or are in a career field which is shallow and fruitless.
The author does a nice job of describing the economics of the US banking system in this memorandum, and seems to quietly complain of the unfairness of this situation involing defaults on loans. Life, my dear sir, is unfair.
TJ Maxx
Derry, NI, UK