Tuesday, July 24, 2012

The student loan bubble

The left-leaning web site ProPublica specializes in long-form journalism — labor-intensive, 3,000-plus-word articles dedicated to serious treatments of big subjects. Think of the long pieces that appeared in The New Yorker during the 1970s and early 1980s and you get the idea. While I find ProPublica’s reflexive and unexamined bias in favor of statist schemes irritating, I do read its articles. They are usually earnest and sometimes worthy efforts.

Lately, a ProPublica article about a semiliterate gardener’s struggles to manage his dead son’s unpaid college loans got some traction in the mainstream media. (While I don’t understand ProPublica’s business model completely, it seems to involve licensing its long stories to other news organizations.)

This gardener’s woes fit neatly into the mainstream media’s narrative that student loans are an evil, evil thing about which Good King Barack needs to do something. And, by “do something,” moronic opinion-shapers mean without saying: subsidize borrowers’ bad choices with capital redistributed from taxpayers.

This proposition is wrong on many levels. It also reflects faulty assumptions and bits of specious logic that are worth some examination — because they explain many of the problems that plague America today.

First, a quick review of ProPublica’s telling of the gardener’s tale.

Francisco Reynoso lives in Palmdale, California — a dusty far suburb, north of Los Angeles. He doesn’t speak much English (though he is a naturalized citizen) and earns about $20,000 a year from his labors. While the story doesn’t offer many details about Reynoso’s work, in southern California “gardener” is often a euphemistic way to describe a causal day laborer — the kind of guys you see milling around Home Depots and such outlets, looking for work.

On this meager income, Reynoso supports his wife and daughter. He used to support a son, too. But, in a tragic turn, that son — Freddy — died in a one-car accident in September 2008.

Freddy had recently graduated from Berklee College of Music, a school in Boston that combines elements of a conservatory with the rigors of a traditional four-year college.

It was a bit strange that a gardener’s son had matriculated to a place like Berklee. It’s no community college . . . or even a state university. Rather, its reputation has long been as a pricey second-tier Julliard. The school’s comprehensive fee is nearly $50,000 each academic year.

A lazy person might describe Freddy’s enrollment at Berklee as a version of “the American Dream.” The son of a laborer enters a world traditionally reserved for the elite, etc. But it sounds like Freddy never really entered that world. In 2005, after he’d been admitted to Berklee, the young man needed to borrow significantly to enroll. Reynoso cosigned on a series of student loans that allowed Freddy to attend. By 2008, when Freddy was finished at Berklee, he moved back to Palmdale and was driving into Los Angeles most days. Trying to find work. According to his family, Freddy was driving back from the city on the night that he ran off the highway, rolled the car, and died.

The principal amount of the money Freddy and his father had borrowed was nearly $170,000. With interest and fees added, the amount they’d have to repay would be closer to $300,000. The lenders didn’t mind much that Reynoso didn’t have the means to repay those amounts because, as we’ll see in more detail later, various government subsidies that support the student-loan market make rigorous underwriting unnecessary.

So, lenders lend. But why do borrowers borrow? Why did a gardener making little more than minimum wage agree to guarantee so much in college loans? His answer: “As a father, you’ll do anything for your child.”

It may not seem sporting to criticize a simple man’s devotion to his son . . . but what if that devotion is ignorant and misguided? According to a survey of music industry salaries produced by Berklee itself (and based — tellingly — in the “Parent Questions” section of its web site), most of the jobs its graduates pursue offer starting pay of less than $25,000 a year. That’s not enough income to support the debt service on nearly $200,000 in student loans.

As a father, perhaps Reynoso should have told Freddy that borrowing hundreds of thousands of dollars to get a degree in music was a bad financial decision. Some people are poor because they make bad financial choices. An unintended consequence of government programs that give material support to such poor people is that they’re free to make more bad choices. In the hands of Francisco Reynoso, Freddy’s government-subsidized student loans were a loaded gun . . . or a hangman’s rope.

A few months after Freddy’s fatal accident, collectors started calling Reynoso to demand payment on the student loans for which he’d cosigned.

The loans that allowed Freddy to attend Berklee fell into several categories — as they do for most borrowing students. There were some direct government loans, which carry the lowest interest rates and most favorable terms for the borrower. In most situations, they don’t require parents to cosign. But there are limits to the amounts available on these favorable terms; in most cases, a student can only get a few thousand dollars each academic year in this “cheap” money.

After that, a borrowing student needs to go to so-called “private” lenders. These are banks and specialized finance companies that offer loans with higher interest rates and less-favorable terms for borrowers. But the “private” loans are still subsidized heavily by the government and share unique traits with the direct government loans — most importantly, the loans cannot be discharged in bankruptcy.

This is the major reason why the “private” student-loan lenders don’t bother with rigorous underwriting. Since the loans can’t be discharged in bankruptcy, the lenders or their agents can hound borrowers and cosigners for repayment endlessly.

In Freddy’s case, he borrowed about $8,000 in private money from Bank of America and about $160,000 from a company called Education Finance Partners. Neither lender kept the loans for long; as is typical in the market, the “loan originators” sold Freddy’s paper to other firms that focus on servicing debt or bundling it with other student loans and “securitizing” those bundles.

According to ProPublica, Bank of America sold the loan it made to Freddy to a student-loan financing specialist called First Marblehead Corp.; Education Finance Partners, which has since declared bankruptcy, sold the loans it made to Freddy to a unit of the Swiss banking giant UBS.

The loans purchased by UBS may have been sold, in turn, to the Swiss National Bank (analogous to the U.S. Federal Reserve) when the National Bank made a Fed-style bailout of UBS in 2009. Details are sketchy because of Swiss privacy laws.

So, if the ownership of the debt was unclear, who were the collectors calling Reynoso for repayment? A separate company, called ACS Education Services, which owns some student debt and contracts with other lenders to manage and collect on their loans for a fee. ACS is a unit of Xerox Corp. and one of the bigger players in the student-loan servicing market.

But Freddy was dead — and one might think that that fact would have an effect on the lenders’ collection efforts. Some student loan companies have a policy of canceling loan balances when a borrower dies. (Direct student loans from the government are generally cancelled if the borrower dies.) But, since Reynoso had cosigned for his son’s “private” loans, the lenders have the legal right to pursue payment from him.

It’s easy — and emotionally satisfying, perhaps — to focus outrage at lenders like Bank of America and Education Finance Partners, or behind-the-scenes operators like First Marblehead or ACS Education Services. The establishment Left and media outlets like ProPublica certainly focus on them.

But these lenders and finance outfits are really just service providers, working the levers of government to find ways to make a few points here or there while helping to facilitate state-sponsored transactions.

The core transaction in the ProPublica story was between Freddy Reynoso and the Berklee College of Music. Freddy was pursuing a dream of being a professional musician and Berklee was selling an expensive credential that might help in that pursuit.

Freddy died. But Berklee is doing well. It has an endowment of nearly $200 million and is in the midst of an ambitious expansion of its campus — which at present comprises of some 21 buildings in the Back Bay area of Boston.


The decline and fall of clear thinking

One of the myths that helps to sustain our vertically-structured culture is that academia houses the clear-headed, rational thinking necessary for an intelligently run society. Since at least the days in which Plato created the blueprint for a world managed by "philosopher kings," this premise has been embraced – particularly by academicians who fashion themselves such intellectual monarchs. FDR reinforced such thinking during the New Deal, as Ivy League "experts" constituted his "Brain Trust" to formulate state-imposed rules for bringing society to order.

The idea that academia is comprised of men and women who employ focused reason – rather than fear-driven reaction – in addressing social problems is an article of faith embraced by most people who have never spent much time on university campuses. The reality is that a PhD confers upon its recipient no greater capacity for wisdom and thoughtful reflection than is to be found off-campus.

The truth of this observation was revealed in a newspaper story informing us that the Big Ten Conference – a group of twelve of some of the most prestigious universities in America – is considering a proposal that would give its commissioner the power to fire coaches at any of the conference’s schools. The proposition is being advanced, of course, as a knee-jerk response to the recent scandal at Penn State University. Some may object to coalescing athletics and scholarly pursuits; that sports programs are not synonymous with what goes on in academic departments. But the reality is that such extra-curricular activity – particularly the football team – brings far greater amounts of attention, money, and alumni support to the school than do research botanists or fine arts professors. The concern underlying all of this is, as the news story informs us, to punish schools whose behavior harms the conference’s reputation. In our institutionalized world of false-front affectation, the image of those who sit atop the pyramid must be protected at all costs.

Among other thoughts being considered by some Big Ten officials is that Penn State be kicked out of the conference. Should Penn State be prohibited from playing football games in this, or any subsequent season, is another idea that might help restore the desired shine to the Big Ten name. Should those who participated in the sexual abuse of boys be punished for their actions? Among decent and intelligent persons, such a question contains its own answer. The more telling inquiry, however, has to do with what kind of response is appropriate. In a world driven by dark-side forces and reptilian reactions to events, clear thinking is too often confused with trying to justify the wrongdoing. Once the reptilian-brain has been aroused, the response of "see, act!" is all that is allowed.

The idea that the sanctity of a contract between a university and one of its coaches should be disregarded and that one who is not a party to the agreement could terminate it, is so goofy that one would have to suspect its academic origins! Perhaps such power should be bestowed upon usurped by the President of the United States. But is this enough of a sanction? Why not go further, and require Penn State alums to tear up their diplomas and, perhaps, have the rest of the academic community in America shove Penn State down the memory hole? Another option to consider is to have Penn State retroactively forfeit all of its football victories going all the way back to its first season! Do you find such suggestions troubling? What’s the matter with you: are you in favor of molesting young boys?

As I am writing this, news of the shooting at a Colorado movie theater is being brought to my attention. A dozen people have been killed and fifty-nine more wounded, allegedly by a young man now in custody. We are also being informed that he was an honor college graduate with a degree in the sciences. The television networks are bringing academicians and other "expert professionals" on camera, not so much to help Boobus understand the underlying causes of such violent behavior, but to provide him with the "official" explanation he is to internalize as his understanding.

This shooting occurred in Aurora, a suburb of Denver. In 1999, in another Denver suburb, two students at Columbine High School, murdered thirteen young people before committing suicide. The failure to ask the right questions in 1999 led some to seek causal explanations in such factors as teenage bullying, teenagers wearing long coats and, of course, guns. I can only wonder how many lives might have been saved in Aurora, last night, if just one of the other movie patrons had also been armed! But clear, rational thinking will not be heard in the mainstream media; we shall have more of the nitwitted commentary such as was expressed by one network newscaster who referred to the alleged shooter as a "gentleman." Another news channel provided details about how this young man had dyed his hair red and wore black clothing, while another voiced the Hollywood concern that this might discourage people from going to movies. (Do you really wonder whether Western Civilization is in collapse?)

President Obama’s former chief adviser – and now Chicago mayor – Rahm Emanuel once declared "you never want a serious crisis to go to waste." This is a premise upon which political behavior has long relied. To illustrate the point, Obama rushed to network television cameras to inform America that, yes, he was against these killings and, yes, he is against the terrorism and rampant violence that is destroying the sanctity of life. That neither he nor media voices suggested that America’s wars against the rest of the world; wars whose casualties include many American soldiers who, like the Columbine killers, end up committing suicide; wars whose bipartisan enthusiasm is nothing if not an all-out exercise in terror and war against life itself; that all of this might provide troubled young minds with a role model for the destruction of themselves and others.

But, alas, there was no such introspection from anyone in the political establishment; nor will there be. Mr. Obama stated that now is the time for “reflection,” but the reflection he has in mind is of the narcissistic form, not an examination of the assumptions underlying one’s thinking. How convenient it is for the Aurora killings to take place just as Congress is considering an international arms control treaty, and as federal and state gun-control efforts continue. Indeed, no "serious crisis" will be allowed "to go to waste" in our world.

On the other hand, perhaps there is something to be learned from the Big Ten Conference’s current musings. The idea that Penn State might be thrown out of the conference because of its alleged wrongdoings, might also be considered as an appropriate response to the latest Colorado mass-shootings. This is the second time the deadly violence of young people has resulted in so many deaths in that state. Perhaps President Obama could stand up for the principles he pretends to embrace, by kicking Colorado out of the Union!


Why Western Australia teachers exit 'toxic' system

SWAMPED teachers who quit the classroom say their passion has been "killed off" and they feel "overwhelmed and undervalued".  And the profession has been described as "toxic" with a possible "crisis" looming.

The damning descriptions are part of exit surveys of 261 teachers and staff who resigned from the Education Department between January 2011 and January 2012, outlined in a report obtained by The Sunday Times this week.

The report also shows:

* More teachers blame poor work-life balance and workload pressures for their decision to quit, with those reasons cited in 13.4 per cent of resignations.

* Eleven per cent cited family reasons and just under one in 10 said they wanted to pursue other interests.

* Health issues were blamed by 8 per cent of those who quit in the past year.

* Staff said the department's methods for dealing with disruptive students needed the greatest attention.

* Seven out of 10 teachers leaving the department said they would consider returning in the future, indicating most were generally happy.

One experienced teacher, who described the first 10 years of teaching as "very rewarding", said the passion had been "killed off".

"Over the past four years, I have seen a steady decline by the department on the importance of children's self-esteem and social and emotional wellbeing only to be replaced by ridiculous tests (NAPLAN)," the teacher wrote.

"The children at my school need help to develop as a whole child as they have many home- life issues.

"I believe the department is only interested in achieving results and running schools like a business rather than thinking about what is important the children.

"I want my children to have fun while learning, develop skills and be happy. Not to just be able to spew out useless information so that their school 'looks good'."

Another employee called for a "closer look at schools with extreme behaviour management problems" because the administration was "encouraged to hide/cover up the behaviour management issues in their school to look better".

"If students are swearing, bullying and attacking other students and staff, they should have consequences," the employee wrote.

A qualified teacher told the department to "get your act together" after being told to "reapply for the same job every year, offering no job security" despite forecasts of teacher shortages in the coming years.

Another leaving employee said the department "should hang its head in shame" for the way it managed its restructure, from 14 districts to 75 school networks in eight regions.

"The last six months in this department have been terrible," they wrote.  "It is such a toxic work environment in here that it has affected me physically and emotionally. It upsets me greatly to sit back and watch such hard-working, dedicated officers treated so appallingly.

Another employee said "after many years of teaching", they felt workload pressures had become a "forgotten issue".

"Morale in schools is very low and as the baby boomers retire I fear a crisis will happen as younger teachers will not put up with the demands that are increasingly placed on teachers' time and efforts," they wrote.  "Much of the goodwill that teachers used to have has gone as they feel overwhelmed and undervalued."

Another teacher said they had simply "run out of steam to keep going" when they saw the "debacle with the national curriculum".

Some said they wanted more job security, better pay and greater recognition, while others said they loved their job and seeing the children flourish.

"My days at work were very happy and rewarding ones," one wrote. "I felt true achievement when in the classroom teaching students," another said.

Education Department workforce executive director Cliff Gillam said "only a tiny proportion" of leaving staff completed the voluntary survey, with 978 resignations, including 366 retirements.


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