Corporate Welfare.2: Subsidizing Sallie Mae

Continuing this series on the publicly funded nature of so called private enterprise in this country….


Sometimes subsidies know how to disguise themselves.  Blackwater’s defense contracts bring them direct cash payments for no-bid contracts.  But student lenders like Sallie Mae get their government cheese in the form of regulations on interest rates.  In a double standard that fits the pattern David Graeber describes in his book Debt, banks are currently borrowing from the Federal Reserve at a rate of somewhere between 0% and 0.25%  Meanwhile, the interest rate for federally “subsidized” Stafford student loans doubled on Monday from 3.4% to 6.8%, after Congress allowed a temporary freeze to expire.

According to a recent article published by The Hill, student lender Sallie Mae received an 8.5 billion line of credit from the Federal Home Loan Bank of Des Moines, which is one of a chain of Federally subsidized banks founded in the Great Depression to help provide access to cheap mortgages.  In a congressional hearing, Senator Elizabeth Warren Warrenasked why a lender that made $2.6 billion in profits from student loans in 2012 should get a 0.23 percent line of credit from such a bank, while charging 25 to 40 times that amount on its own private student loans.

Warren has called for students to get the same low interest rates from the governments that banks do, especially since they are more likely to make real and productive contributions to the American economy than banks that typically sit on government bailout cash until they can use it rake in profits from the latest stock market bubble of speculation.  This might seem like a radical solution.  But it’s really still a compromise, even though her call is far to the left of what Barack Obama has called for, which is to tie student loan rates to market interest rates.

Besides my work as a musician, I make a living in the education racket myself.  I recently went back to grad school to build my resume, and took out a subsidized loan in the process.  When I did, I was working with a colleague from Spain who has spent most of his career teaching in the International Schools system.  He told me that he didn’t have any loans to pay off at all after finishing two masters degrees in education and economics in Spain, because tuition was publicly funded.

This is the kind of “socialism” derided as naive and idealistic in this country – and my colleague was in fact a democratic socialist, like me.  But think of the benefit to the economy overall. Doug Henwood has written in his blog Left Observer that student debt is harming the broader economy by saddling students with years of debt that prevents them from borrowing to buy homes or cars, or much else.  More radically he has written that “It would not be hard at all to make higher education completely free in the USA. It accounts for not quite 2% of GDP. The personal share, about 1% of GDP, is a third of the income of the richest 10,000 households in the U.S., or three months of Pentagon spending. It’s less than four months of what we waste on administrative costs by not having a single-payer health care finance system. But introduce such a proposal into an election campaign and you would be regarded as suicidally insane.”

Lawmakers have instead cut budgets for public universities while subsidizing folks like Blackwater and Sallie Mae.  In the same article, Henwood writes that “the real crisis of college affordability is among the public institutions. And the reason for that is pretty straightforward: sharp declines in public support. For example, the University of Virginia, one of the so-called “Public Ivies,” got 33% of its budget from the state in 1989; that was down to 12% in 2009. Tuition accounted for 19% of revenue in 1989—and 31% in 2009. Overall, as the nearby graph shows, state and local funding has fallen hard since 1980, and students and their parents have taken its place. That reversed the trend of the previous twenty years. Between 1980 and 2008, the share of higher ed expenditures coming from government fell by almost 19 percentage points—the amount by which personal expenditures had to increase.”

Lawmakers will still have a chance to reach a deal on student debt before the next school year, but even if they do, you can bet that students will not have access to the kind of 0.25% loan subsidies that the banks are.  The results are, according to the Federal Reserve Bank of New York, that student debt almost tripled between 2004 and 2012, and is approaching $1trillion.  The percentage of borrowers who were more than 90 days delinquent rose from 10% to 17% from ’04 to ’12.  Short of providing the free public higher education Doug Henwood shows is possible, economist Michael Hudson argues in the video below from The Real News Network that we need to cut student loans loose from the commercial banking system.  He also tells the tale of how increasingly profit-driven University administrators are pushing their salaries ever upward while jacking up tuition and turning the faculty into another nickel and dimed temp agency.

One response to “Corporate Welfare.2: Subsidizing Sallie Mae”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: