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Saturday, February 24, 2024

Guest Opinion: The collapse of private student loans

As everyone on campus knows, UC systemwide tuition has increased dramatically in the past decade, particularly in the last three years. In the face of that problem, one big topic of the month is protests that led to the closure of the U.S. Bank branch on this campus. The theory behind these protests is that banks are complicit in high tuition because they are greedy for student debt. After all, total outstanding student loan debt in the United States has reached a sobering $1 trillion. The protests and the bank closure have been controversial, mostly concerning whether they were a legitimate form of protest. The university administration does not think that the protests were legitimate, and neither does the Yolo County district attorney. Some faculty members and some students support the protesters.

Whether or not the protests were legitimate, as of the past several years, the underlying theory is wrong. Private educational loans have collapsed, leaving the federal government with a near monopoly. Private lenders still take payments on a lot of old student debt, but they make very few new educational loans. If anything, U.S. Bank would want lower tuition, because money that you don’t spend on tuition is money that you might spend with a credit card. U.S. Bank only issues Visa cards, but you can’t use Visa to pay tuition at UC Davis (or at any UC campus other than UCLA).

Student debt mainly means educational student loans rather than credit card debt. Student loans and grants are surveyed annually by the College Board, which is the same organization that writes SAT and AP tests. The main base of student loans in America has always been federal loans, which last year totaled $103 billion, or about $5,000 per full-time-equivalent student. Historically, these loans were divided between direct federal loans (FDLP) and privately administered loans (FFELP). In 2010, President Obama terminated FFELP on the argument that the banks were a wasteful middle agent. (The decision was announced in 2009.)  I have no particular devotion to banks and I agree with Obama. But that story is now over.

Banks also lend money to students through their own unsubsidized loans. This private loan market reached 23 percent of total student loans in 2007-08. Then it crashed. It went up and down with the mortgage market for houses. In the first half of the last decade, banks had an enormous supply of credit that supplied both home mortgages and student loans.  Then the credit bubble burst and both types of loans became hazardous to the lender. In 2010-11, private loans were only 6 percent of federal loans.

So that’s banks in general, but what about U.S. Bank? Besides the fact that you can’t pay tuition with their credit cards, a few weeks ago they stopped issuing student loans. That’s not just in Davis or in California, that’s for all 3,000 branches of U.S. Bank across the United States. This would have been a drastic step if the loans were highly profitable; I was told that they were not profitable. Actually, I do not know their specific motive. A business might well quietly end a marginal service in response to criticism, whether or not the criticism is correct.

With this backdrop of facts, I am left wondering whether the only way to make sense of the bank protests is not as resistance to privatization – since there have always been many private vendors on campus – but simply as retaliation for tuition increases. However, UC Davis does not control systemwide tuition. Even as systemwide tuition has risen, the educational grant that tuition supports has fallen. (That’s per student, adjusted for inflation; it’s easy to tell a false story using just nominal dollars.) The bank protests were a wrecking ball of misplaced blame.  They can only make UC Davis more expensive in the name of making it cheaper. Above all, for anyone who truly cares about higher education, it does not make sense to financially attack UC Davis in order to save it.

23 COMMENTS

  1. Let me say first, a hearty kudos to Dr Kuperberg for taking a stance against the actions of several students/faculty/staff/affiliates who blockaded the bank for their ‘clear’ reasons. He makes excellent arguments that are based on logic AND economics, including those governing financial institutions.

    Where to begin with all this hate from, I’m assuming, are extremely liberal commentators on this board.

    As for “Common Jane”‘s accusation that banks are “not food providers, or education providers; they are toll takers. They make nothing but profit.” This is an egregious over-generalization by someone who obviously is so jaded in his/her beliefs that they cannot see outside their tunnel vision. Sure, some banks are less ethical than others. But there are just as many out there that provide quality services, loans, and the foundations for small businesses. Places like US Bank branches so often provide small business loans to people in cities like Davis to open a new medical practice, or to open a boutique retail shop. Without the savings and money that they have ‘profited’ from others – which are basically just transaction fees for the services they provide of security and convenience – they would not be able to provide these loans. And then where would new businesses emerge from? I can only venture to guess your answer would be “the government” with a hearty hoorah. Eck. Government is already enormous in our country and specifically this state, and the ramifications of its ballooning are becoming clear as the mass exodus out of California begins. But I digress; private banks are necessary in order to keep the economy and businesses in small, medium, and large towns, thriving and expanding. They provide this credit/loan to others by establishing their own with customers who choose to bank with them, be it with credit or debit cards.

    Common Jane’s caustic and frankly immature rebuttals are an eyesore to read, and are shameful for those who support his/her issues. But then again, that is the climate of political debates in this country, which sadly benefits neither side.

    Thank you, Dr Kuperberg, for taking the minority stance on this issue that hopefully many people will thoughtfully read without condemning it to hell because they simply abhor private business and some free market practices.

    • You’re welcome. But just to be clear, I’m a liberal, I’m not for or against banks per se, and nothing that I have to say is truly a minority position. I did not intend any sweeping endorsement of free-market ideology, I only meant to stick to the facts regarding student loans and US Bank.

    • There are more things in heaven and earth, James Madison, than are dreamt of in your free-market ideology.

      Small businesses exploit workers just as well as big ones. And they usually pay less, with fewer benefits.

      Common Jane isn’t a liberal—you are.

      http://en.wikipedia.org/wiki/Liberalism

      But whatever, carry on. Heil Rand, save the boutiques, etc.!

      • Obviously, Mr/Ms Lukacs, you know that I use the ‘liberal’ term in its relation to modern day American politics, not the textbook definition of the term. I refer to liberalism as the group of persons in the USA who believe that more government, more regulations, and more taxes is better for America. Which, if you are involved in American politics, you’ll know is a hilarious opposite of the actual American ‘liberals’. They are not anywhere near the Libertarian-esque definition which you cite.

        But you know, I’m glad to see you were interested in making intelligent rebuttals to my points, other than just poking fun at something you don’t like or better yet probably don’t even understand fully.

        So what is your stance on businesses? I really have no idea, after your phrase: “Small businesses exploit workers just as well as big ones. And they usually pay less, with fewer benefits.” You hate both the small business and big corporations? Do you think business should be run by the government? Do you have no faith in economy? Are you a trade/barter system supporter? I’d venture to guess, based on your statement, you probably support widespread arbitrary price ceilings and subsidies on various goods, services, and commodities. I’d love to hear your explanation but I’m sure I’ll get some soapbox lecture about how free markets are bad and that they suppress the common man. Oh well, one can hope.

        JM

        • Oh, Jamesie: “I refer to liberalism as the group of persons in the USA who believe that more government, more regulations, and more taxes is better for America.”

          That group of persons is called Paul Krugman. The rest of the people you’re caricaturing actually just want really rich people to stop stealing from really poor people. A business (big or small) profits by enabling the relatively wealthy to exploit the labor of the relatively poor. This is capitalism, and this is what I oppose. The reason this isn’t clear to you is that you think that Democrat-Republican-Libertarian comprises the entire spectrum of political thought, when in fact those positions represent only those who are cool with an economic system whose growth depends on increasing inequality and environmental degradation.

          You should jettison the parochial definition of liberalism; it will help your thinking, James Madison, “Philosopher and Practitioner of Liberal Democracy.”

          http://www.loc.gov/loc/madison/symposium.html

          • So, Mr/Ms Lukacs, you still skirted my direct questioning of if you consider all businesses evil, and your vague comments towards it in your most recent rebuttal serve to support that theory of mine. I will now address some of your claims in your post, which is what worthy debaters do when challenged. I would hope you do the same.

            When did I say that Rep-Dem-Lib comprised the entire spectrum of this country? You placed those words in my proverbial mouth without me ever having typed them. I was simply directing my comments towards the groups that believe that government is bigger, and that the rich should pay for being successful, regardless of how they earned their incomes and wealth. Those tend to usually be Liberals, or Democrats, or Progressives, or whatever term they choose to self-identify with.

            Indeed, increasing inequality is occurring in this economy and country. But sadly, it is not due to the ‘rich people…stealing from really poor people’. It is rather due to a smaller percentage of Americans adopting a hardworking and determined attitude towards success in life, work, and benefiting their communities. What I assume you are suggesting by your quote, is to take from the rich and give to the poor. This old adage, which likely goes back to the lore of Robin Hood, is not healthy for the entire spectrum of the community. Let me briefly explain my thoughts behind this comment.

            Taxing the successful, penalizing them, regulating them, etc, only serves to upset them, and further deter them from success. The government (which I’m assuming is the entity which you are choosing to use for this purpose) serves as an obstacle to impede the businesses that the ‘rich’ are organizing. This is all in the name of giving back to the lower class. Now, when you continually give and subsidize the ‘really poor’ you nurture them into a life of welfare and dependence on the government. Increasingly, economic studies have shown that welfare communities rarely use the benefits and subsidies they are given to improve their quality of life. They don’t go out and find jobs, they continue to collect unemployment, and furthermore, don’t teach their children that living off the state is only temporary, and a horrible way to live. But I sense that you are also uneasy with the idea that the ‘labor of the really poor’ is something that should be equalized in value with all other positions. Without digressing too much, I would venture to say that most students on this campus would be appalled if you offered them a job that required their degree and knowledge, but paid minimum wage. This goes to the idea that we invest in an education for ourselves to procure a better standard of living (or income).

            But alas, I realize now that my arguments are in vain, since your rebuttal will a) probably not even address any of the facts I present here b) contain more thesaurus-laden jabs, and c) will probably talk about the equalization of all persons in the economy, venturing closer to a communistic economic view. I need only point to history to observe how well communism has done in practice.

            If you oppose capitalism, then you oppose the very ideas that this country was founded on. I would suggest you read Milton Friedman’s “Capitalism and Freedom” to get an idea of what capitalism has brought our country, and the ideals that it embodies. If you still disagree, then maybe I suggest defecting to one of the few communist nations left in the world.

            One of my favorite quotes of Mr Friedman’s goes:

            “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

            Happy reading.

            JM

  2. From the article:

    “If anything, U.S. Bank would want lower tuition, because money that you don’t spend on tuition is money that you might spend with a credit card.”

    Uh…This is just…uh..wrong.

    If tuition is low (or let’s take it to the extreme: free), that’s more money that students have to spend elsewhere. What follows is that more money on hand equals a decreased demand (or need) for credit. As has been pointed out by Common above, the massively increasing trend in consumer debt (i.e. credit card debt) since the early-mid 1970’s closely follows the stagnation of real wages since the same time period. *When people have less money to spend, they require more credit.* To think the opposite is idiotic.

    ALL Banks want tuition to go up. When a larger portion of a student’s loan or income is going toward tuition, they won’t have money to pay for other little things like food, rent, clothes. That means they will be *required* to pay for those things on credit, thus running straight for the open jaws of whichever bank will offer the kitschiest reusable water bottle upon opening an account.

    • Without data, you could argue it theoretically either way. However, two things — beyond the key fact that they stopped taking student loans — really sharpen the argument that US Bank has no connection to high tuition. First, that after going to all the trouble of a 10-year contract with UC Davis, they don’t even have a card that you can use to pay UC Davis tuition. Second, that their co-branded ID card is a debit card, not a credit card. To the extent that US Bank wants students to have debit cards, they truly have nothing to gain from a tuition increase.

      Which is not to say that they aren’t greedy or that I love them or anything like that. Only that their business model is completely different from the central accusation against them.

  3. It is very puzzling (o be generous) what Greg Kuperberg thinks banks do. It is also profoundly unserious, intellectually, Let’s clarify, briefly. Banks do not make money. They make profits by charging fees to move money from one place to another, and by investing money and trying to secure a share of some other firm’s profits (this latter function is at the core of what sent the global economy into crisis five years ago). That is to say, they take a portion of money as it moves, or fail to do so. But no new money appears.

    So we might reasonably ask, if we were serious thinkers and not apologists: from whence comes the money that this branch was to give the university? It would have to come from this branch’s profits, or they wouldn’t have entered into the deal. And let us remember that, because of its location, its customers are exclusively students (and perhaps a few staff; not many, we can assume, as they would likely have already had an account off-campus).

    So the money that “the bank” was supposedly giving the university isn’t some magical profit that was appearing mystically to benefit the university. It was always already student money that was to be passed through the bank — with the bank taking a share for the privilege — and then passed on to the university in the deal. There is no new money, no new source of funding. This supposed income from the bank is in fact simply money the students are paying themselves — except the money then goes only in small fraction to educational expenses for students.

    That is say, the bank deal is a way of moving money from students to the university, with the added friction of private profits and the students’ loss of control over how that money is spent. That is the deal here. This is precisely what is meant by “backdoor privatization.”

    If the bank leaves, no money leaves with them — they don’t have their own money, dude. They’re a bank. The money, rather, stays with the students (which the university and bank would rather be student-customers). Stop trying to defend private profit on campus via some fantasy about a chunk of money that magically appears out of nowhere. It’s not intellectually serious.

    • Well yes, just like any business, a bank makes a profit from its customers. But in the case of the campus ID card, from student equity, not from student debt. That’s the difference between a credit card and a debit card. Besides, whether the card is debit or credit, the first and main profit comes from the transaction fee, not the equity or debt itself. I have a credit card which has yielded my bank a lot of money in transaction fees, but never even one cent in interest fees.

      But US Bank never earned any transaction fees from student tuition, since you cannot use a US Bank card to pay tuition at UC Davis.

      The point is not that US Bank’s profits come out of nowhere. The point is that there is no reason to blame the bank for either student debt or high tuition. They profit from students only in the same way that Pizza Hut profits from students. I maintain that grasping the difference between equity and debt, and the difference between interest fees and transaction fees, is in fact intellectually serious.

      • As for the idea that fees from a debit or credit card stay with the students if you chase the bank off campus, that’s only true if the students shop less because the bank is off campus. If they use a card from an off-campus bank branch — which the protesters chose to spare — then the transaction fee is still there and the university gets none of it.

      • Student equity? Are we to believe that students saddled with five- or six-figure debt and no job prospects have stock portfolios?

        Today’s students work more than Dr. Kuperberg’s generation of students ever did. That’s a fact. Yet it’s also a fact that the jobs they work don’t pay enough to cover tuition and living expenses, so rising costs = rising debt. A substantial portion of whatever money students deposit in US Bank will be loan money. Equity? Give me a break.

        Dr. Kuperberg seems to think that because the bank didn’t literally mug students for their wallets that its presence on a public university campus was entirely benign. He also wants us to believe that banks have nothing to do with the rising cost of tuition. Well . . .

        Banks over-leveraged themselves and caused the housing market and the world economy to crash. Families who had refinanced their homes to pay for their kids’ exploding tuition found themselves jobless and in foreclosure.

        Banks are the bondholders for UC capital projects (construction). They can legally force the UC to maintain its current bond rating. Guess how the UC does it? By raising tuition.

        Banks lobbied to make student loan debt exempt from bankruptcy, meaning that students can never discharge these loans, no matter what the circumstances. Ever.

        US Bank is under investigation for racist foreclosure practices.

        I could go on.

        UC Davis administrators want us to believe that the bank was giving money to students through royalty fees. How generous. But that was always money that US Bank and other banks had stolen from the most vulnerable people. We should celebrate because UCD made a deal to sell its students for a bit of spending money to replace the massive sums that the corrupt Regents’ lost in their shady deals with investment bankers?

        http://www.berkeleydailyplanet.com/issue/2010-09-21/article/36292?headline=The-Investors-Club-How-the-University-of-California-Regents-Spin-Public-Money-into-Private-Profit-An-Eight-Part-Investigative-Series

        By all means, Dr. Kuperberg, continue to ignore all this context in order to make your silly argument.

        • Obviously, if it gets to the point that students have to take out loans to deposit money in US Bank, then they would deposit more money in US Bank if they were less in debt. When I said “equity”, I didn’t mean stock, I meant any kind of savings. At least with its debit accounts, US Bank profits from savings, not debt. They have no reason to want student debt, among those students who have debit cards.

          Yes, banks are among the bondholders for UC construction projects. But not necessarily US Bank, and certainly not the campus branch of US Bank.

          US Bank is not under investigation for racist foreclosure practices. It was accused of racist auctions of foreclosed properties, specifically that it auctions too many foreclosed properties in white neighborhoods. I do not know whether black and Latino neighborhoods deserve more foreclosure auctions — I’d rather see fewer foreclosures. In any case, this has nothing to do with student debt.

          • Students don’t have savings. Maybe you are confused about this because you make over $100,000 a year. Students get a loan check, which they then deposit in a bank to pay bills, use a debit card, etc. Without these loans they have no money with which to pay tuition and living expenses. Please stop your embarrassing mental contortions. Next you’ll tell us that US Bank really doesn’t want to make money at all, and that its profits are just an accidental result of the its humanitarian work.

          • If making more than $100K makes you the suspect rich, then I’m not sure who is left as the victim of UC tuition, because in-state families with less than $80K don’t have to pay UC tuition. Is the issue just the slice between $80K and $100K?

            Of course US Bank wants to make money. So does Pizza Hut. They aren’t charities. But they are not making money from high tuition at UC Davis.

          • Dr. Kuperberg, apparently you are unaware that the UC Blue + Gold program (for families who make under $80K) is funded by increasing the total amount that all students must provide as self-help (loans and work study).

            Yudof’s magic PR solution only works by increasing the total amount of student loans.

            The sordid details:

      • Oh dear. This makes me worried indeed for the state of UCD education: “They profit from students only in the same way that Pizza Hut profits from students.” — Greg Kuperberg.

        We certainly hope your gift for analogies isn’t indicative of this person’s teaching. In fact, even if one feels great about the place of profit in a public, non-profit university (as Mr. Kuperberg so avidly does), his analysis is quite embarrassing. Pizza Hut provides food for money. Now I trust we could all agree that a student would get better and healthier food for less money by not going to Pizza Hut, and that a student-run food center would also benefit students directly without siphoning student funds away from the university community.

        But let’s bracket all that. Greg, humans need food to survive. In fact, we at the university think that food, shelter, education and healthcare are basics of human existence, the foundation both for staying alive and flourishing. Even without profit, we can assume safely that there would still be exchange, and sharing, and that they would involve these things.

        Banks, Greg, don’t provide any of these things. In fact, they add another layer between humans and these things, and take a profit when you are forced to pass through this barrier. They are not food providers, or education providers; they are toll takers. They make nothing but profit. And of this you are, it is increasingly evident, very very fond.

        You are an embarrassment at logic, economics, and ethics. We hope you have a better grasp of sums, and stay on topic in the classroom. Because we believe in education —

        • I chose the example of Pizza Hut with exactly these issues in mind. Yes, people need food to survive. But Americans do not need fast food to survive, in fact, they’d live longer without it.

          Corner banks might not provide some essential survival commodity — just as Pizza Hut doesn’t either — but they do provide important, convenient services. It’s easier to buy things with a credit or debit card than to carry around a lot of cash. It’s not just easier, it’s safer. That’s why I have a credit card and why most people have credit or debit cards.

          As I made clear in the original posting, I have no particular devotion to banks (or privatization). Obama removed banks from the federal student loan system, and I agree with his decision. I don’t care if US Bank or Pizza Hut is on campus. But once the vendor is on campus, I won’t stand in the way of students who want to do business there, because students are legal adults. They aren’t babies who can’t be trusted with pizza or debit cards.

          • …and the revelations continue. For the man for whom “freedom” is the freedom to frequent the business of his choice, rather than, say, an educational system free of profiteers — well, that isn’t an analysis, it’s simply a belief system. Market theology, I believe is the term. But I am glad we have Greg, lest me somehow be uncertain what neoliberalism thinks.

            Meanwhile, the torrent of glaring mistakes continues. If you’ll care to review the actual data (you know, like competent researchers do?), you’ll discover that revolving debt (98% of which is credit card debt) has increased 80-fold since 1973. It’s not like everybody suddenly decided, round about then, that credit cards were a more efficient way to carry money around.

            There are a few people who carry credit cards because it’s easier, as you believe — we call them “rich people.” The vast majority of credit card use is because people don’t have enough money each month to meet their expenses, because individual pay for the non-rich has been stagnant or declining since 1973. In short, credit card issuers profit from declining relative wages, which is also good for those who have to pay the wages. But it’s very bad for the poor, including poor students.

            Greg, you have the worldview of bosses, profiteers, and the wealthy — at every single turn. Please stop embarrassing yourself; it gets worse each time you write.

  4. There is one other thing that I didn’t point out in this piece. The Aggie Card that carries the US Bank logo is apparently a debit card. If the main card that the bank promoted is based on debit rather than credit, on top of the fact that they stopped issuing student loans and you can’t use any of their cards to pay tuition, then they have really done everything that they can NOT to profit from student debt. Students in debt would only have less money to spend on the Aggie debit card.

    • “have really done everything they can NOT to profit from student debt.”
      By what metric? You’re honestly just making things up at this point, Greg, and it’s kind of sad (and entirely unprofessional). If they reeeeally didn’t want students to be in debt, there are plenty of options available to them- none of which involve using debit rather than credit. Debit= overdraft fees (or overdraft prevention fees) which are almost invariably going to be a large part of any broke college student’s financial life. Living paycheck to paycheck (or from one financial aid check to the next) puts one at great risk for overdraft fees. If US Bank (with whom I have an account) *really* doesn’t want to profit off of my student loan debt, I’d be more than happy to let them pay it off for me…
      Your argument here, at absolute best, could possibly be used to imply that US Bank is indifferent to student debt; but nowhere has anything you’ve said or written shown that US Bank “doesn’t want” students to be in debt. I’m baffled as to why you’re even trying to make this argument.

  5. Your conclusion is not grounded in any scientific or intellectual theory.

    When a house is on fire, sometimes firefighters have to allow part of the house to burn down in order to save the whole structure. The damaged part can be rebuilt later.

    Sometimes when fighting a forest fire, parts of ther forest are deliberately burned in order to save the rest.

    Your faulty and theoretically ungrounded conclusion makes your entire letter pseudointellectual.

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