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.