Student Loans, Debtfare and the Commodification of Debt: The Politics of Securitization and the Displacement of Risk

Abstract

Student loans represent the largest and fastest growing segment of unsecured consumer debt in the US; yet, the literature is silent on the power relations of the industry. Who benefits from the expansion and reproduction of student debt to low-income students, and how? To address these questions, I explore two key features of the industry: the high level of upstream repackaging of student loan asset-backed securities (SLABS) and the high default rates. By historically contextualizing SLABS, I reveal the intrinsic political nature of the processes surrounding the commodification of debt. Through the temporal displacements inherent in the commodification of debt (i.e. accelerating the repayment schedule for lenders), SLABS serve to reduce financial risk for private lenders, whilst relocating the social dimensions of risk onto student debtors. The neoliberal state plays an integral role in attempting to mediate, discipline, and depoliticize the social fallout involved in the relocation of risk, primarily through regulatory reforms.

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Critical Sociology
2014, Vol. 40(5) 689 –709
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DOI: 10.1177/0896920513513964
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Student Loans, Debtfare and the
Commodification of Debt: The
Politics of Securitization and the
Displacement of Risk
Susanne Soederberg
Queen’s University, Canada
Abstract
Student loans represent the largest and fastest growing segment of unsecured consumer debt
in the US; yet, the literature is silent on the power relations of the industry. Who benefits from
the expansion and reproduction of student debt to low-income students, and how? To address
these questions, I explore two key features of the industry: the high level of upstream repackaging
of student loan asset-backed securities (SLABS) and the high default rates. By historically
contextualizing SLABS, I reveal the intrinsic political nature of the processes surrounding the
commodification of debt. Through the temporal displacements inherent in the commodification
of debt (i.e. accelerating the repayment schedule for lenders), SLABS serve to reduce financial
risk for private lenders, whilst relocating the social dimensions of risk onto student debtors. The
neoliberal state plays an integral role in attempting to mediate, discipline, and depoliticize the
social fallout involved in the relocation of risk, primarily through regulatory reforms.
Keywords
asset-backed securitization, student loans, debtfare, neoliberalism, Sallie Mae, credit-led
accumulation
Introduction
Registering US$1 trillion in April 2012, student loans in the USA exceeded the total amount of all
other forms of unsecured consumer debt, representing more than all credit card debt and auto loan
debt combined. Educational loans remain the only form of consumer debt to markedly increase
since the peak of household debt in late 2008 (Federal Reserve Bank of New York, 2012). Policy
pundits and economists have been concerned about student loans because educational loans act as
a drag on housing recovery, as highly indebted recent graduates cannot afford to purchase a home
(Bloomberg, 23 February 2012). Other groups such as the National Association of Consumer
Corresponding author:
Susanne Soederberg, Department of Global Development Studies & Department of Political Studies, Queen’s University,
Mackintosh-Corry Hall, A-406, 99 University Ave., Kingston, ON K7L 3N6, Canada.
Email: soederberg@queensu.ca
513964CRS0010.1177/0896920513513964Critical SociologySoederberg
research-article2014
Article
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690 Critical Sociology 40(5)
Bankruptcy Attorneys are concerned about what they call the ‘student loan debt bomb’, as they
view current debt levels of recent graduates, parents who co-signed loans, and older students
returning to school for job training, as unsustainable. Defaults on student loans have steadily
increased from 6.13 percent in the first quarter of 2003 to 8.69 percent in 2012, with delinquency
rates higher than that of mortgages, auto loans, and home equity lines of credit (Federal Reserve
Bank of New York, 2012). The growing numbers of student debtors who have been subjected to the
devastating and humiliating social consequences of default have also vented their anger and frus-
tration with the student loan industry through various acts of protest, most notably within the
Occupy Wall Street movement (Collinge, 2009).
A key, yet implicit, theme running throughout the above discussions concerning the increasing
rate of default among student debtors is the credit system. The power relations in the credit system
seem to be muted in the debates about student loans, largely because the system has been assumed
by many observers to be comprised of rational economic actors entering into equal exchanges with
one another. In contrast, seen from a Marxian perspective, the credit system not only entails
exploitative relations of power, but also plays an important role in facilitating the expansion and
reproduction of capital accumulation in that it temporarily resolves the contradictions to which
capitalism is prone (Marx, 1991). Underpinning the student loan industry, there is a core tension
between the expansion of student loans and the rise of defaults. Missing from the debates is a rigor-
ous and radical interrogation of how and why this tension has been socially constituted and repro-
duced. The main objective of this essay is to address this gap in the literature by framing student
debt as an integral feature of the wider credit system and, by extension, part and parcel of the
processes of capital accumulation. In doing so, I aim to repoliticize our understanding of the stu-
dent loan industry, particularly with regard to the seemingly technical and thus neutral strategies
therein, most notably: student loan asset-backed securities, or SLABS. Before turning to my argu-
ment, it is helpful to elaborate briefly on the history and contours of SLABS.
Since the 1980s, SLABS have represented the backbone of the student loan industry; yet, despite
their centrality – representing over 100 percent of student loans in 20061 – SLABS have remained
invisible in the critical scholarly debates on student debt. SLABS refer to a technique in which illiq-
uid assets such as student loans are transformed into tradable securities through a legally created
tax-exempt entity called either a Special Purpose Vehicle (SPV) or a Special Purpose Entity (SPE)
(Elul, 2005). Despite the role played by asset-backed securitization (ABS) in the 2008 sub-prime
housing crisis, many pundits regard ABS as an important feature of the contemporary financial
system. This is because ABS is presumed to represent a highly efficient method of raising capital
and mitigating or even reducing risk for lenders (Fabozzi and Kothari, 2008; Gorton and Souleles,
2007). Moreover, ABS has been billed as an important instrument in achieving the financial inclu-
sion of sub-prime borrowers, including many students who are not considered creditworthy due to
inadequate credit history, income, collateral, and so forth (Federal Reserve Bank of New York,
2012). According to industry observers, SLABS act as the ‘main artery through which funds are
channelled from investors to students’ (Ergungor and Hathaway, 2008: 2). As I demonstrate below,
SLABS seem unaffected by the 2008 crisis. In fact, dominant financial corporations in the student
loan industry such as Sallie Mae continue to generate high profit margins as they expand their opera-
tions in both student loans and other key consumer products such as credit cards and mortgages.
Notwithstanding the significance of SLABS to the student loan industry, there has been little
scholarly work on the topic outside of economistic analyses (cf. Ergungor and Hathaway, 2008;
Fried and Breheny, 2005) and legal commentary (Simkovic, 2013). Missing is an interrogation into
questions of power and the capitalist nature of the student loan industry: What role has the state
played in facilitating the ability of private lenders to reduce their risk through SLABS? How has
the state helped to reproduce and naturalize the social consequences of this risk, particularly with
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regard to defaults? And, who benefits from SLABS and the definition of financial risk that domi-
nates the student loan industry? Taken together, these questions are aimed at repoliticizing our
understanding of the credit relations underpinning the student loan industry by disrupting the dom-
inant assumption that SLABS are an apolitical, efficient, win-win financial instrument that can
limit or reduce risk as well as raise capital by transforming student debt into assets that can be
bought and sold on the market.
To tackle these questions, I develop the following two-pronged argument. First, I demonstrate
that SLABS are not a natural, neutral, and inevitable feature of the market but instead are con-
structs that have been created and reproduced by powerful capitalist interests and the neoliberal
state. Drawing on David Harvey’s work on money, I suggest that SLABS represent a form of social
power imbued with the ability to dictate particular temporal and spatial displacements. I refer to
these processes as the commodification of debt (Harvey, 1989, 1999). As I explain more fully in
my book, Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population
(Soederberg, 2014), the commodification of debt is a tension-ridden, class-based strategy that
emerges from the contradictions inherent to the credit system within the wider dynamics of capital
accumulation. A primary paradox that underpins the student loan industry is the ever-increasing
expansion of loans to student debtors who cannot meet their payment obligations.
Seen from a historical materialist perspective, the processes involved in the commodification of
debt involve more than the buying and selling of debt to generate fee- and interest-based income.
Underpinning these processes, for instance, are highly unequal and exploitative social relations of
power that entail both temporal and spatial dimensions. Financial corporations (e.g. Sallie Mae)
possess the power to sell (and transform) unsecured debt into assets in order to accelerate the tem-
poral dimension of repayment on their initial outlay plus interest, fees, and commission. They do so,
however, by displacing the social dimensions of risk involved in this process onto student debtors.
This is not a neutral, natural, and inevitable feature of the market but instead represents a socially
constructed reality that is both highly dynamic and paradoxical in nature. This leads me to the sec-
ond part of my argument, which concerns the nature of the credit system and role of the state.
Given the anarchical nature of capital accumulation, including the credit system, capitalists can-
not resolve the core tensions of capitalism on their own. I thus argue that the displacement of social
risk that occurs through the commodification of debt is mediated, depoliticized (i.e. de-classed,
decontextualized and dehistoricized) and legitimated by the ideological and institutional (e.g. regu-
latory) features of the neoliberal state (Peck and Tickell, 2002). To add more precision to our
understanding of various forms of neoliberal state intervention, particularly with regard to the
central tension of the student loan industry, I introduce the concept of debtfare (see Soederberg,
2014). A component of the neoliberal state in the USA, debtfare serves to facilitate the expansion
and social reproduction of SLABS and the wider student loan industry by constantly revising the
Bankruptcy Code to keep student debtors from accessing its protection, and by continually expand-
ing the temporal definition of default.
I have organized my argument into four main sections. Section one provides an overview of the
student loan industry. Section two elaborates on the meaning and key conceptual tools of my histori-
cal materialist framework. Section three embarks on an historical materialist analysis of the relation-
ship between SLABS and student defaults, as well as the role of the debtfare state in managing these
tensions over the last three decades. Section four provides a summary of the argument.
The Student Loan Industry: An Overview
The student loan industry has grown steadily over the past several decades in lockstep with rising
student demand and rapidly rising tuition fees (US Department of Education, 2012a). In the USA,
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692 Critical Sociology 40(5)
the industry is comprised of two main categories of loans and lenders: public student loans, which
are issued by the federal government and represent the largest type of loan (85 percent) (Consumer
Financial Protection Bureau, 2012), and private student loans, which are issued by banks such as
JP Morgan Chase and Citibank. Private lenders, primarily banks, have played a critical role in the
industry, supplying about 80 percent of the US$55 billion to US$60 billion in new federal loans
made annually from 1998 to 2008, and US$15 billion to US$20 billion in the form of private loans
(Ergungor and Hathaway, 2008).
The Guaranteed Student Loan Program was established in the Higher Education Act of 1965
and was later renamed the Federal Family Education Loan Program (FFELP). The FFELP guaran-
teed and subsidized student loans, which were originated and funded by private lenders, most
notably commercial banks. Key loans that constituted FFELP included: subsidized federal Stafford
loans (the largest type of student loan), unsubsidized federal Stafford loans, Perkins loans, FFELP
PLUS loans, and FFELP consolidation loans (Elgin, 1993). FFELP loans can be applied to both
public and private colleges. Guaranteed FFELP loans place the full faith and credit of the govern-
ment behind a private bank loan to each student. With the exception of the unsubsidized Stafford
loans, the state pays interest on the loan during periods of grace (six months after graduation) and
deferment, in addition to paying the difference between a set low interest rate and the market rate
after graduation (known as the ‘special allowance’) (Corder and Hoffman, 2001). Aside from sub-
sidizing interest rates, the state guaranteed a large portion (97 to 100 percent) of the FFELP loan if
a parent (typical co-signer) or student defaulted (Fried and Breheny, 2005).
To help raise capital and ensure liquidity to assist in guaranteeing federal student loans, the
government set up the Student Loan Marketing Association (Sallie Mae) in 1972. Sallie Mae was
permitted to raise funds by issuing SLABS, which afforded an efficient way of raising money to
help finance low interest rate loans to students by subsidizing and guaranteeing repayment to their
private lenders (Federal Reserve Bank of New York, 2012). Sallie Mae was privatized in 1996 (and
was subsequently renamed the SLM Corporation) and eventually became the largest issuer of
SLABS in both federal and private student loans, as well as the largest educational lender of private
student loans in the US. In addition, Sallie Mae expanded into other areas of consumer finance (e.g.
mortgages, credit cards, car loans), and created Laureate, an online loan delivery system. The com-
pany has also moved into debt collection and guarantor servicing. Sallie Mae has been growing at
such a rapid and profitable pace that in 2013 it announced its intention to split into two separate
publicly traded companies: ‘an education loan management business and a consumer banking busi-
ness’ (Guardian, 29 May 2013).
The passage of the Health Care and Education Reconciliation Act in 2010 put an end to the
FFELP program, replacing it with the William D. Ford Direct Student Loan Program (or DLP).
Under this new law, public student loans originate directly from the Department of Education
(DOE), effectively ending the ability of private banks to originate – but not to profit from – student
loans backed by the federal government. Like the FFELP loans (e.g. Stafford loans), DLP loans can
be applied to both public and private colleges. I address the FFELP loans and DLP in more detail
below.
Although federal student loans remain the largest category of educational lending, private stu-
dent loans have been growing at a swift pace over the past decade. Default rates on private student
loans, which carry higher interest rates than federal student loans, are high and show no signs of
abating. The percentage of borrowers who defaulted on federal loans within the first three years of
payments rose to an average of 13.4 percent in 2011. This number was considerably higher, 22.7
percent, for students who attended for-profit colleges (US Department of Education, 2012b). For
instance, while 62 percent of students graduating from public universities held some kind of
student debt, 72 percent of students attending private universities held a student loan. Students
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attending for-profit private universities (or proprietary schools), many of whom are from a low-
income bracket, tend to have higher levels of student debt, given the comparatively higher tuition
fees and other costs (see Table 1 below) (Lynch et al., 2010; National Consumer Law Center,
2011).
The precise debt load of recent graduates is difficult to ascertain given the variation in public
and private debt as well as the variability of higher education institutions across state lines (e.g.
public colleges, for-profit private colleges, non-profit private colleges). Nonetheless, the Project on
Student Debt estimates that ‘two-thirds of college seniors who graduated in 2010–11 had student
loan debt, with an average of [US]$25,250, which was up five percent from the previous year’.
Moreover, ‘state averages for debt at graduation from four-year colleges ranged widely in 2010
from [US]$15,500 to [US]$31,050’ (Project on Student Debt, 2011: 1).
An Historical Materialist Framework
The student loan industry must be understood within the wider dynamics of capital accumulation
and, in particular, what some refer to as financialization or financialized capitalism (Fine, 2010).
This phase of capitalism, which emerged in the US in the late 1970s, emerged from the underlying
paradoxes of overaccumulation linked to Fordist forms of capital accumulation. Briefly, overac-
cumulation refers to a condition of surpluses of labor (i.e. rising under- and unemployment) and
surpluses of capital (i.e. money capital) (Harvey, 2003). Since the late 1970s, capitalists, with
assistance from states, have sought to overcome the barriers to capital valorization by temporally
and/or spatially displacing surpluses of money capital. This has resulted in a situation in which
interest- and fee-generated income from financial investments such as student loans far outpace the
profits derived from the production of physical goods (Lapavitsas, 2009). The credit system has
come to play an increasingly important role in contemporary capitalism because it temporarily
resolves the contradictions to which capital is prone (e.g. overaccumulation) and thereby facilitates
revenue generation largely based on interest, commission, and fees (Soederberg, 2014). However,
as Harvey (1999) reminds us, the credit system can only carry this task out by internalizing the
tensions within itself (see also Marx, 1991). These very tensions lie at the heart of the relationship
between increased defaults in student loans and SLABS.
The first step in moving beyond the common economistic and technical understanding of
SLABS as an efficient and neutral process of reducing risk is to grasp that money capital, which
Table 1. Unmet Need among Low-Income Students, 2007.
Type of Institution Cost of Attendance Expected Family
Contribution
All Grant Aid, 2007 Unmet Need, 2007
Four-Year
Private, for-profit* $31,976 $3,518 $3,501 $24,957
Private, non-profit $34,110 $3,911 $13,624 $16, 574
Public $18,062 $3,798 $5,676 $8,588
Two-Year
Private, for-profit* $26,690 $1,882 $3,736 $21,072
Public $11,660 $3,659 $2,523 $5,478
*These institutions attract a large segment of low-income, minority students (US Department of Education, 2012a).
Source: Education Trust analysis of NPSAS:08 using PowerStats; Full-time, full-year, one-institution dependent students
in the bottom half of the income distribution are included in this analysis (see Lynch et al., 2010: 3).
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694 Critical Sociology 40(5)
comprises SLABS, is not a thing but a historical social relation that embodies both temporal and
spatial sources of social power (Harvey, 1989). SLABS, for instance, are a form of privately cre-
ated money (i.e. credit), or more specifically, what Marx refers to as a money-form of revenue. It
should be highlighted that credit is mediated by formalized abstractions (e.g. interest rates, risk-
based pricing, fees and so forth) – all of which are enforced by the debtfare state – as opposed to
direct forms of domination between employer and employee. As such, the relations inherent to
credit (e.g. lender and borrower), or what Marx refers to as secondary exploitation, appear less
politicized and antagonistic than that of employer and employee, that is, primary forms of exploita-
tion (Soederberg, 2014). Seen from this view, SLABS represent a temporal displacement or what
Harvey refers to as a ‘fix’, given that they aim to accelerate the transaction process. A necessary
condition for this temporal power is the ability to create what Marx refers to as fictitious value
(Harvey, 1989). In Marxian terms, fictitious value does not mean ‘unreal’ or ‘imaginary’ forms of
capital; but rather a flow of money capital that is not backed by any commodity transaction (e.g.
non-collateralized student loans) (Harvey, 1999: 265ff). Fictitious value is implied whenever credit
is extended in advance, in anticipation of future labor as counter-value, that is, the extraction of
surplus value through primary forms of exploitation. Put another way, fictitious value can only be
realized when student debtors are able to secure jobs through which they can repay their loans.
Given the increase in the cost of higher education and a labor market characterized by jobless
growth and stagnant wages, the realization of increased value on this privately created money is
inherently risky (Soederberg, 2014).
SLABs not only wield temporal power over debtors, they are able to accelerate the time of the
student loan to suit capitalists’ interests and needs. A freshman at the University of California, Los
Angeles (UCLA) who gets a four-year, US$25,000 student loan from a private bank (e.g. post-
1996, privatized Sallie Mae), for example, will end up paying, depending on the repayment sched-
ule and interest rate, anywhere from US$50,545.95 (based on a 145-month repayment plan) to
US$70,259.07 (based on a 193-month repayment plan) or even US$74,126.61 (based on a 144-
month deferred repayment plan).2 On the other hand, shortly after making the transaction, the
originator (Sallie Mae) sells this loan, as well as a bundle of other student loans, to an outside
investor, thereby receiving a payment immediately, as opposed to receiving small monthly pay-
ments for 12 to 16 years from the student and taking the risk that the student may default on his/her
loan during this time. The basic belief driving this transaction is that the student loan (debt) is an
asset – a commodity that can be owned or controlled to produce value (e.g. interest, commission,
fees).
I describe this process, which shifts financial risk to debtors, as the commodification of debt.
Mitigating or even eliminating risk (default and bankruptcy) linked to lending to student debtors is
one benefit of SLABS. But there is another fee-generating perk: by receiving the funds today from
selling the student loan to investors, the educational lender has the opportunity to profit further by
originating even more loans and thereby earning origination fees (Elul, 2005). The processes
involved in the commodification of debt are not technical and apolitical, but are imbued with social
relations of power that are asymmetrical and exploitative in nature. Following Marx, the latter term
refers to secondary forms of exploitation that occur through dispossessive strategies pursued
through the credit system and aimed at modifying workers’ wages and salaries through the pay-
ment of interest, commission and fees (Harvey, 1999; cf. Sassen, 2009).
SLABS attempt to overcome the contradictions inherent in financialized capitalism by reducing
financial risk and increasing liquidity for educational lenders, so that they may continue to extend
credit to primarily high-risk (sub-prime) borrowers (students, particularly low-income students).
Yet, student debtors are afforded no protections in terms of dealing with the social consequences of
risk, such as the inability to find employment, illness, inflation of health-care and housing costs,
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Soederberg 695
inability to complete an educational degree, and so forth. Student debt burdens must be understood
alongside the unemployment rate for young college graduates, which has risen from 8.7 percent in
2009 to 9.1 percent in 2010, the highest annual rate on record (Consumer Financial Protection
Bureau, 2012; Project on Student Debt, 2011). As a result of these conditions, student debtors are
also carrying higher levels of credit card debt (Federal Reserve Bank of New York, 2012) – all of
which serves to increase pressure on students’ debt burdens. Indeed, almost three-quarters of stu-
dents who default on their loans, many of whom are minority students from low-income back-
grounds, have done so after withdrawing from school and failing to complete their studies (finaid.
org; Lynch et al., 2010).
The unequal and exploitative relations of power involved in securitizing student loans are con-
cealed in the dominant representation and depoliticization of risk in exclusively financial terms.
Risk, as conceptualized in the financial industry, is rooted in dominant neoclassical theory and its
underlying assumptions of rationality, efficiency, and individualism. Risk understood exclusively
in financial terms relates to uncertainty and/or potential financial loss for the lender (Luhmann,
2008). With regard to securitization, this prevailing meaning of financialized risk includes only
probable harm to ‘key participants’ in SLABS: securitizers, originators of the assets (educational
lenders), and investors (e.g. pension and mutual funds) (Soederberg, 2010a, 2010b; Federal
Reserve Board, 2012). Yet, if we understand SLABS and the wider credit system as relations of
power imbued with the ability to wield command over time, risk also has social dimensions, nota-
bly in the form of defaults. Thus, the social dimension of risks for student debtors is expunged from
the sanitized, mathematical, and technical understanding of neoclassical economics (Bourdieu,
2005). Indeed, in the highly abstract world of neoclassical economics and its narrow view of indi-
vidual rationality, there is a constant severance of the economic from the historical and social
conditions in which risk is created, defined, governed, and reproduced (Bourdieu, 1998; Peck,
2010). Still, risk and its strategies of mitigation are profoundly social questions of power. This is
particularly the case if we accept the premise that credit entails not only social power over time and
space but also is, in effect, a gamble with the future lives of student debtors. As we will see in the
next section, the ways in which these two versions of risk are managed is not only highly unequal,
but also entails a disciplinary element. A central force in governing risk vis-à-vis student loans is
the debtfare state and its role in displacing and disciplining the fallout of financial risk.
Tensions inherent in SLABS and the wider student loan industry are continually mediated and
depoliticized through regulatory interventions by the neoliberal state (e.g. legal framings such as
bankruptcy law) that give primacy to private consumption and the interests of capitalists over stu-
dent debtors. As I have suggested elsewhere (Soederberg, 2014), a key component of the neoliberal
state is the debtfare state. Debtfare stands alongside other roles of the neoliberal state in the US,
such as workfare (Peck, 2001) and prisonfare (Wacquant, 2009). Unlike other aspects of neoliberal
state intervention, debtfare strategies are primarily geared toward mediating and depoliticizing the
tensions and struggles that emerge from dispossessive capitalism. Debtfarism involves both insti-
tutional (e.g. usury and bankruptcy laws) and ideological (e.g. cultural tropes such as the democra-
tization of credit) interventionist strategies, which are both inherently disciplinary in nature and are
aimed at expanding and reproducing the student loan industry. In the context of this essay, there are
two specific articulations of debtfare. First, institutional and discursive debtfare strategies mediate
and secure the normalization of the conditions of secondary forms of student exploitation and the
spatio-temporal fixes therein. Second, through its institutional and discursive framings, the debt-
fare state naturalizes the commodification of social reproduction. Paralleling the neoliberal insist-
ence that there is no alternative but to rely on the market, and thus justifying the state’s declining
support for higher education, the debtfare state has normalized and backed the widespread reliance
of students on credit to augment and/or replace their current and future social wage.
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696 Critical Sociology 40(5)
An Historical Materialist Account of the Making of the Student
Loan Industry
Contextualizing Sallie Mae
Sallie Mae was established in 1972 as a government-sponsored enterprise (GSE). It emerged from
a specific political and material environment marked by Keynesian ideals of managed capitalism
and the slowing of economic growth once fuelled by Fordist forms of domestic and international
expansion of exports (Harvey, 2003). Under this configuration of state and material relations, the
US saw an expansion of the middle class in the 1950s and with it the growth of the belief that a
college education leads to social and economic mobility. In the 1960s and 1970s, social and politi-
cal pressure by the civil rights and women’s rights movements resulted in many policy changes,
not least those that challenged discriminatory access to higher education and credit. These pres-
sures coincided with increased demand for higher education and the sector experienced a period of
unprecedented growth. The state infused money into higher education to fund academic research,
expansion of colleges, and federal loans (Gumport et al., 1997).
Against this backdrop, Sallie Mae was a state-led attempt to influence the flow of capital and
credit to the student loan industry by absorbing the financial risks (defaults and bankruptcies)
involved in lending to students (Corder and Hoffman, 2001). Like other GSEs such as Freddie Mac
and Fannie Mae, Sallie Mae was a special type of government-backed, shareholder-owned, for-
profit corporation. Unlike other GSEs, however, Sallie Mae was legally permitted to purchase,
service, sell, or otherwise deal in government-issued student loans, which were, in turn, fully guar-
anteed and directly subsidized by the state (Corder and Hoffman, 2001). The official justification
for this state guarantee was the high-risk nature of student loans. Notwithstanding the subsidized
interest rates, ‘special allowance’, and other state guarantees, lenders (mostly banks) were unwill-
ing to participate in the program because student loans not only represented forms of unsecured
debt (i.e. an absence of collateral) but they were also illiquid and long-term. Indeed, in the tumultu-
ous environment of the 1970s, interest rates would sometimes fall below the rate of inflation,
thereby cancelling state subsidies.
Sallie Mae raised funds in two ways. First, it sold debt securities (e.g. bonds) on secondary
markets. Second, after the passage of the Education Amendments in 1980, it was permitted to
securitize its financial assets (student loans) (Corder and Hoffman, 2001). This second method of
subsidizing lenders pursued by Sallie Mae coincides with the notion of the commodification of
debt discussed earlier and the rise of the neoliberal state and its underlying neoclassical economic
assumption that private consumption is superior to public consumption (Peck and Tickell, 2002).
Debtfare and the Mediation of the Social Dimensions of Risk
During the period of economic instability in the 1970s and much of the 1980s, many students
graduating from colleges were unable to secure well-paying jobs to meet their loan obligations.
Indeed, as one commentator notes, many graduates at this time were either unemployed or
employed in jobs that they could have secured without post-secondary education (Wiese, 1984:
459). Unsurprisingly, default rates on student loans rose, as did student loans discharged in bank-
ruptcy. In 1975, there was a 59.9 percent increase over the number of claims filed in 1974. Toward
the end of 1975, the federal government and guaranty agencies had reimbursed lenders for US$20.9
million of guaranteed student loans discharged in bankruptcy (Birdwell, 1978: 593). Despite these
trends, the debtfare state was busily creating more demand for federal loans and, by extension,
private banks. In 1978, for instance, the US government permitted most middle-class citizens to
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Soederberg 697
access federal loans without the requirement that students demonstrate financial need (Grant,
2011).
To deal with the social risks involved in rising default rates on student loans during this period,
Congress enacted disciplinary policies to restrict access to bankruptcy relief for student debtors.
For instance, student loans were dischargeable until Congress enacted the Higher Education Act of
1976 (§439A), which in effect made student loans non-dischargeable, if the first payment came due
within five years of bankruptcy, unless the debtor could prove undue hardship. These temporal
dictates and the burden of undue hardship were further reinforced by the debtfare state with a revi-
sion to the Bankruptcy Act. Congress, for instance, repealed the Bankruptcy Act of 1898 and
replaced it with the Bankruptcy Reform Act of 1978 (the ‘Bankruptcy Code’). In terms of educa-
tional loans, the Bankruptcy Code approved the Education Amendment provision to the original
§523(a)(8): no discharge unless the first payment became due more than five years prior to the
bankruptcy filing or the debtor could demonstrate undue hardship (Grant, 2011). It should be
underlined that the undue hardship clause is specific to educational loans. In other words, debtors
with other kinds of debt are not laden with the task of proving undue hardship. Some observers
who have been critical of §523(a)(8) have pointed out that undue hardship is ‘unnecessarily harsh,
denying debt relief to all but a few select debtors, and usually only to those with dependents and
medical conditions that prevent gainful employment’ (Grant, 2011: 819).
Despite concerns of rising defaults on student loans, the debtfare state has actively promoted
and subsidized (through its federal student loans via Sallie Mae) the growth of proprietary schools
in higher education. During the 1980s, proprietary schools represented one-half of the increase in
higher education enrolment (Beaver, 2012). The proprietary schools benefitted from federal stu-
dent loans, but these loans were often accompanied by a private loan, given the high tuition fees
charged by these for-profit schools (see Table 1). As with their federal student loan counterparts,
private lenders securitized their private loans to students to offset the financial risks involved in
repayment problems. The social risks were left to the debtfare state to mediate and depoliticize,
largely through a revision of the Higher Education Act and Bankruptcy Code.
Coupled with a bleak economy, the growth in proprietary schools and the higher levels of stu-
dent indebtedness pushed up defaults on student loans. In 1985, 600 for-profit schools reported
default rates of over 50 percent (Beaver, 2012). Nonetheless, with the pro-business legislative
environment of the Reagan Administration and existing government subsidization, it was business
as usual for proprietary schools. Between 1983 and 1990 the loan volume of private student loans
increased by 83 percent, while defaults increased by 336 percent (see Beaver, 2012). Indeed, while
default rates were climbing across the higher education system, proprietary schools were the worst
offenders. ‘While proprietary schools account for 33 percent of Stafford loans, they are responsible
for 48 percent of defaulted student loans’ (Elgin, 1993: 54).
Thus, instead of mitigating the social dimensions of risk – by, for instance, taxing for education,
subsidizing public universities to help suppress the steady rise of tuition fees, allowing for greater
protection in bankruptcy proceedings, and so forth – the debtfare state facilitated new venues of
dispossessive capitalism by promoting proprietary schools, and, by extension, private student
loans, which, in turn, also carried higher rates of interest and stricter repayment schedules (US
Department of Education, 2012a).
Debtfare and the Displacement of Risk in the 1990s
The early 1990s saw further changes to legislation governing student loan debt. In 1990, for
instance, two important revisions to the Bankruptcy Code were undertaken that had important
ramifications for distressed student debtors. First, the debtfare state was able to lengthen the
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698 Critical Sociology 40(5)
temporal period in which distressed student debtors had to wait before they were permitted to file
a bankruptcy claim from five to seven years. Second, the further narrowing placed on the dis-
chargeability of educational loans was revised with an amendment to §523(a)(8) in 1990. The sec-
tion effectively exempts educational loans made, insured, or guaranteed by a governmental unit or
non-profit body (Pashman, 2001). Supporters of this amendment to §523(a)(8) noted that, unlike
other loans, educational loans are not granted on the same basis. Lenders or guarantors who partici-
pate in educational loan programs typically extend credit to students who might not qualify for
credit under traditional standards. In the interest of the state to promote access to educational
opportunities, interest rates and repayment terms are made to be very favorable to the student bor-
rower, and no security is usually required. Seen as a benevolent and public-spirited act, students
failing to respect the terms of their student loan contract are, therefore, viewed as irresponsible
market citizens who harm the good of the wider society by opting to default.
To further absorb the social dimensions of risk and to introduce more disciplinary measures
with regard to the collection of debt owed to the government, the debtfare state introduced the
Higher Education Technical Amendments in 1991. These amendments effectively removed all
statutes of limitation on the collection of student loan repayments or grant overpayments under the
Higher Education Act student assistance provisions. In effect, the 1991 Amendments protected the
profits of debt collection agencies, particularly those that specialized in student debt, by allowing
these companies to tack on hefty collection and commission fees of 25 and 28 percent, respec-
tively, to what students already owed (Ferry, 1995). Further amendments to the Higher Education
Act in 1994 (also known as the 1994 Regulations) assisted in decreasing involuntary lender
involvement in, and the need for, collection litigation by allowing defaulting student loan debtors
a new option of entering into ‘affordable’ repayment agreements that were aimed at rehabilitating
their loans, thereby permitting them to be removed from default status (Ferry, 1995).
It should be flagged here that since lenders involved in FFELP loans are protected against the
risk of non-payment, only educational lenders pursue collection on defaulted student loans to the
point of litigation. Seen in this light, the 1994 Regulations may also be understood as an effort to
mitigate the financial risks for educational lenders issuing private student loans. These measures,
which aimed at making debt collection more efficient, also reflected the increasing levels of con-
sumer indebtedness in the 1990s (US Department of Commerce, 2010; Draut, 2011). Indeed, in
1996 Congress enacted the Debt Collection Improvement Act, which, among other changes, per-
mitted Social Security benefit payments to be used (garnished) to repay defaulted federal student
loans (Pashman, 2001).
These legislative modifications pursued by the debtfare state reflected the fact that risk, under-
stood exclusively in financial terms, and thus concerning lenders, was given higher priority through
the creation of SLABS. The social risks associated with educational loans were muted and usually
represented by the media and Congress as individualized acts of irrationally, immorality, and/or
irresponsibility. It was, therefore, acceptable to garnish old age and disability benefits that fall
under the Social Security program. In the context of the bankruptcy system, the burden of proof
was placed on the debtor to provide adequate evidence, which could be reduced and tested math-
ematically, to satisfy the court’s subjective understanding of ‘undue hardship’ (Pashman, 2001).
Despite the increases in student loan defaults in the 1990s, Sallie Mae was quite effective in
managing financial risks for private lenders by operating with its implicit assumption of guarantee
and by engaging in the asset-backed securitization of student loans in the early 1990s. Notably,
while FFELP student loans were guaranteed by the federal government, there was no such explicit
guarantee of GSE debt, e.g. loans purchased from private providers and resold in the secondary
markets. Yet, there remained a strong market perception that GSE securities are very much like US
Treasury issues. This implicit perception by investors, along with changes to Sallie Mae’s charter,
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resulted in a rise in the amount of loans sold by Sallie Mae in secondary markets, increasing from
less than 30 percent from 1981 to 1985 to about 60 percent from 1988 to 1990 (Lea, 2005).
Political questions concerning the social fallout of risk rose to the foreground in the mid-1990s,
as attention began to turn to the privatization of Sallie Mae (Lea, 2005). Adhering to neoliberal
logic, it was argued that privatizing Sallie Mae would benefit lenders and borrowers as competitive
market exposure would increase the efficiency of the GSE. As a private market participant, Sallie
Mae could redirect its focus from encouraging bank lenders to sell their student loans to encourag-
ing colleges and lenders to become business partners and distributors for a Sallie Mae-branded set
of student loan-related products and services (Lea, 2005: 5; US Department of Treasury, 2006).
Debtfare and Privatizing Sallie Mae: Increasing Temporal and Spatial Fixes for
Financial Capitalists
In 1996, Sallie Mae became the first GSE in the US to privatize. The former GSE was subsequently
renamed the SLM Corporation, although it is still commonly known as Sallie Mae. Almost four
years earlier than planned, its GSE activities were completely terminated in 2004. A key reason for
this accelerated target date was due to its high volume of securitization (commodification of debt),
which, in effect, allowed it to raise capital through the selling of assets (student loans). One year
prior to the termination of its GSE status in 2004, for instance, Sallie Mae issued US$20.3 billion
of non-GSE financing, which, combined with securitization, equalled 2.4 times its student acquisi-
tions. For those in favor of privatization, this was suggestive of Sallie Mae’s ability to finance itself
in a post-GSE environment and signalled the viability of securitizing student loans. From this
period onward, Sallie Mae has continued to be the largest issuer of SLABS (see Table 2) (Ergungor
and Hathaway, 2008). The amount of, as well as the temporal and spatial displacement afforded to,
fictitious value has been affected by the policies pursued by the debtfare state (Soederberg, 2014).
It is important to note that the student loan industry is highly concentrated. Prior to 2010, when
major reforms were introduced, 91.5 percent of the new Stafford and PLUS loans and 99.8 percent
of consolidated loans were originated by only 100 lenders, with Sallie Mae dominating the industry
after its privatization (Ergungor and Hathaway, 2008). Moreover, over-the-counter (OTC) deriva-
tive markets, in which SLABS and other asset-backed securities emerged and operate, have inten-
sified in depth and breadth through active intervention by the debtfare state aimed at re-regulating
financial markets to facilitate greater speculative activities and riskier products (e.g. credit default
swaps). In 1998, for instance, the Chairperson of the Federal Reserve Board, Alan Greenspan,
argued that there was no reason why derivatives markets ‘should be encumbered with a regulatory
structure devised for a wholly different type of market process, where supplies of underlying assets
are driven by the vagaries of weather and seasons. Inappropriate regulation distorts the efficiency
of our market system and as a consequence impedes growth and improvement in standards of liv-
ing’ (Greenspan quoted in US House of Representatives, 1998). In the wider context of market-
friendly re-regulations (e.g. the Gramm-Leach-Bliley (GLB) Act of 1999), educational lenders
such as Sallie Mae thrived. Between 2000 and 2005, for example, Sallie Mae’s fee income increased
by 228 percent (from US$280 million to US$920 million), while its managed loan portfolio
increased by only 82 percent (from US$67 billion to US$122 billion) during the same time period.
Prior to the 2007 financial crisis, Sallie Mae’s stock had increased by more than 1,600 percent
between 1995 and 2005, which represented an average annual rise of about 160 percent (Collinge,
2009: 5).
At the same time that the GLB Act was signed, SLM Corporation aggressively pursued several
key acquisitions in the student loan industry, which gave the company more reach into various
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700 Critical Sociology 40(5)
aspects of lending. In 1999, for instance, SLM Corporation purchased Nellie Mae, a non-profit stu-
dent loan company, which was quickly followed by the acquisition of two of the country’s largest
non-profit student loan guarantors, the USA Group and Southwest Student Services. In the early to
mid-2000s, Sallie Mae acquired two of the largest student loan collection companies in the country –
Pioneer Credit Recovery and General Revenue Corporation, as well as Arrow Financial Services in
2004 and GRP Financial Services 2005 (Collinge, 2009: 12–13; see Table 2). Procuring some of the
largest collection companies and numerous guaranty agencies (the agencies that administer the
FFELP loans), Sallie Mae represents the largest private lender of student loans and collector on
student loan debt. It also owns the largest guarantor companies, whose lifeblood is comprised of
penalties and fees attached to defaulted loans. Sallie Mae therefore benefits greatly from all aspects
of the lending transaction: securitizing student loans, lending, and collection (Forbes, 6 June 2012).
Debtfare and the Depoliticization of Social Risks in the Student Loan Industry
While private educational lenders were enjoying the highly lucrative environment fuelled by state-
led subsidization and market-friendly framings of SLABS, the social dimensions of risk linked to
the commodification of debt were playing themselves out on the ground. Despite the promise that
a college degree would deliver a higher-paying job, the service sector proved to be the fastest
growing and largest employer from 1989 to 2000. According to the Bureau of Labor Statistics
(BLS), private service-providing industries accounted for 90 percent of the job growth in the 1990s
(BLS, 2002). Within this category, low-wage retail and service sector jobs, for instance, ‘accounted
for 70 percent of all new job growth between 1989 and 2000. And the majority of these jobs are
filled by women’ (Collins and Mayer, 2010: 6). Moreover, the BLS reported that employment in
the temporary help services industry, which predominately employs women, grew from 1.1 million
to 2.3 million during the 1990–2008 period and thus represented a larger share of workers than
before in higher skill occupations. During this period, the Clinton Administration (1993–2001)
actively pursued sharp spending cuts to decrease the budget deficit by slashing financing in key
social programs such as welfare and higher education (US Department of Education, 2012a).
Table 2. Top 10 Issuers of SLABS in Federal Student Loans (in US$ billions).
Issuer 2005 2006 2010
Sallie Mae $26,990 $33,752 $6,103
Nelnet Student Loan $ 6,540 $ 5,313 $1,183
SLC Student Loan Trust $ 4,350 $ 4,912 $ 920
Brazos Higher Education Authority Inc. $ 3,717 $ 243 $1,120
National Collegiate $ 3,487 $ 4,724 N/A
College Loan Corporation Trust $ 2,700 $ 1,700 N/A
Collegiate Funding Services Educational
Trust
$ 2,700 N/A N/A
Access Group Inc. $ 2,074 $ 1,007 $ 464
Wachovia Student Loan Trust $ 1,800 $ 1,611 N/A
GCO Education Loan Finding Trust $ 1,130 $ 2,643 N/A
Sources: Data collected from Asset Backed Alert and Wachovia Capital Markets, LLC in E. Walsh (2008) Student Loans
ABS, in B.P. Lancaster, G.M. Schultz, and F.J. Fabozzi (eds) Structured Products and Related Credit Derivatives: A Compre-
hensive Guide for Investors. Hoboken, NJ: John Wiley and Sons, p. 135; SLM Corporation (2011b) ‘ABS East Conference,’
October. Available at: https://www1.salliemae.com/NR/rdonlyres/50F355EE-8FA7-49FA-AABF-D4A4B507A89C/15130/
ABSEastConferencevFinal.pdf [Accessed on 1 October 2012]
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Low-income and middle-class Americans turned to consumer credit to deal with overall higher
living costs and stagnant wages.
Against this backdrop, defaults on student loans and increasing delinquent payments continued
to mark the consumer debt landscape of the US. In an attempt to tackle the issue of defaulting
student loans, the Clinton Administration signed into law the Higher Education Amendments of
1998, which removed the seven-year exception, leaving only the undue hardship exception to non-
dischargeability regarding student loans (Pashman, 2001). In accordance with this change,
Congress revamped the Bankruptcy Code once again in 1998 with the Bankruptcy Review Act. As
noted above, prior to 1998 student loan debts were non-dischargeable unless: (1) the loans first
become due more than seven years before the debtor filed for bankruptcy, or (2) not allowing the
student loans to be discharged would impose an undue hardship on the debtor and the debtor’s
dependents (Pashman, 2001: 605). Yet, Congress has refused to provide a definition of undue hard-
ship, opting instead to transfer responsibility for interpretation, and thus punishment, to the courts.
This has created a situation in which ‘there are as many tests for undue hardship as there are bank-
ruptcy courts’ (Pashman, 2001: 609). As one bankruptcy court observes, ‘The rigidity of some of
those “tests” (e.g. means testing) almost suggests that the solution to human suffering lies in the
application of algebraic equations’ (Pashman, 2001). The increased use of abstract mathematical
tools to deal with social problems is both rooted in, and reflected by, the dominant position of neo-
classical economics (and its pseudo-scientific mathematical modelling) in the debtfare state, as
well as the social power of financial capitalists. This method of testing is also instrumental in
depoliticizing the disciplinary nature of bankruptcy – and, by extension, those debtors considering,
or entering into, default – by expunging social considerations and upholding the myth of impartial
and expert interpretation of the legal framing of ‘undue hardship’.
It should be noted that the amendment of the Bankruptcy Code to limit bankruptcy relief only
on the grounds of undue hardship lacked any convincing empirical evidence to support the claim
that students and graduates were trying to take advantage of the bankruptcy system, or that such
bad actors actually posed a threat to the continued viability of student loan programs and the role
of the benevolent state and taxpayers in ensuring educational access for all citizens (Pashman,
2001). Congress was clearly trying to send a message to abusive student debtors and protect the
solvency of student loan programs. In particular, the state was concerned by reports of irresponsi-
ble students and recent graduates declaring bankruptcy as a way to avoid repayment of student
loans on the eve of lucrative careers. The implementation of the §532(a)(8) of the Bankruptcy Code
was a disciplinary tactic to remove the perceived temptation of recent graduates to use the bank-
ruptcy system as a low-cost method of decoupling debt from future earnings. This representation
of student debtors continued despite the availability of evidence by the General Accounting Office
that only a fraction of one percent of matured student loans had been discharged in bankruptcy, a
rate, at the time, which compared favorably to the consumer credit card industry (Pashman, 2001).
Preying on the Dispossessed: Spatial Expansion of the Student Loan Industry in the
New Millennium
In the first decade of the new millennium, under the leadership of the G.W. Bush Administration
(2001–9) and its explicit embrace of private consumption, federal funds flowed into proprietary
schools, increasing from US$4.6 billion in 2000 to US$25 billion in 2010 (Gorski, 2010). During
this period, enrolment in proprietary schools increased 37 percent compared to the 11 percent aver-
age increase during the previous decade. Interestingly, the demographic of these students shifted.
According to a study by the Department of Education, the majority of students enrolling in
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702 Critical Sociology 40(5)
for-profit private schools are more than 25 years of age. There also appears to be a gender and
racial dimension to the student bodies, as slightly more women are returning to school (US
Department of Education, 2012a). Moreover, the majority of students attending proprietary schools
are from a low-income background and stem from minority groups (Lynch et al., 2010). According
to the Project on Student Debt, African-American undergraduates were the most likely to take out
private loans, with the percentage quadrupling between 2003–4 and 2007–8, from 4 percent to 17
percent (Project on Student Debt, 2011).
Private student loans are closely linked with the rise of for-profit private universities. The for-
profit higher education sector charges some of the highest tuition fees in the country, which means
that low-income students usually turn to private educational lenders, such as Sallie Mae, to top up
their federal student loans and grants. Once grant aid is taken into consideration, the out-of-pocket
cost – or unmet need – for low-income students at proprietary schools is even higher than at private
non-profit colleges, which draw on institutional grants to defray college costs (Lynch et al., 2010:
3; see Table 1). ‘At four-year for-profits, low-income students must find a way to finance almost
[US]$25,000 each year, with only a 22 percent chance of graduating’ (Lynch et al., 2010: 3). This
means that low-income students in for-profit private schools are borrowing heavily, which results
in a large debt burden. Moreover, given that the graduation rate at four-year proprietary schools is
22 percent (compared with 55 percent at public and 65 percent at private non-profit colleges and
universities), the chances of income improvement to meet loan payments are low. Data collected
from the Department of Education’s Integrated Postsecondary Education Data System (IPEDS)
reveals that the graduation rate at the nation’s largest for-profit university – the University of
Phoenix – is only 9 percent (Lynch et al., 2010). Despite these grim numbers, proprietary schools
have expanded rapidly over the past decade. With an enrolment of 450,000 students, the University
of Phoenix is the second largest university in the country (Beaver, 2012).
The financial risks associated with the issuance of federal student loans and private student
loans for the rapidly rising proprietary sector of higher education were offset by the issuance of
SLABS in private student loans. Key SLAB issuers in the area of private student loans in 2008
included SLM Private Credit, which represented the largest issuers of private SLABS (Walsh,
2008; see also Table 2). The industry thrived off of the double-digit growth rates of private student
loans in the late 1990s and early 2000s, reaching its peak in 2007–8 with the advent of the sub-
prime crisis. According to the Consumer Finance Protection Bureau, private student lender under-
writing standards loosened considerably in this period. Between 2005 and 2007, coinciding with
its peak phase, private lenders such as Sallie Mae embarked on aggressive lending techniques in
which an increased percentage (from 40 percent to over 70 percent) of loans were made to under-
graduate students without school involvement or certification. Additionally, during this period
lenders were more likely to originate loans to borrowers with lower credit scores (Consumer
Financial Protection Bureau, 2012: 3). Private lenders could offload their financial risks, of course,
through the issuance of SLABS.
By the mid-2000s, the Bush Administration was forced to deal with the tension between support-
ing proprietary schools and educational lenders and depoliticizing the social risks inherent in the
increasing levels of educational debt and the rise of defaults on private student loans. The debtfare
state undertook at least two major moves in an attempt to resolve this tension. First, the government
implemented the Higher Education Reconciliation Act of 2005, which effectively cut US$12.6 bil-
lion from student financial aid. This made it more expensive for students to pay for their education
(finaid.org), forcing them to turn to private student loans to make up the difference (see Table 1).
Second, the Bush Administration responded to the social risks tied to increasing default rates by
implementing draconian changes to the Bankruptcy Code in 2005 with the enactment of the
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). There were at least two
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major features of this Act that are relevant to understanding the coercive features of the debtfare
state and its attempts to manage social risks generated by the student loan industry. First, BAPCPA
was designed to keep debtors out of bankruptcy. Of the two basic options of obtaining relief from
creditors, namely Chapter 7 liquidation or Chapter 13 adjustment of debts for debtors who have
adequate income to repay all or part of their debts through a repayment plan, the former was made
extremely difficult to obtain. Under Chapter 13, if the student debtor is granted bankruptcy by con-
vincing the courts of undue hardship, loan repayment plans revise the temporal span of indebtedness
and usually assign some sort of debt management plan (Soederberg, 2014; see also Coco in this
issue). This attempt to keep debtors out of bankruptcy has important consequences for distressed
student debtors who may be seeking relief in other areas of indebtedness, such as credit card debt
(Federal Reserve Bank of New York, 2012). Second, BAPCPA amended §523(a)(8) discussed ear-
lier to broaden the types of educational student loans that cannot be discharged without proof of
undue hardship. As Coco (this issue) notes, according to §220 of BAPCPA, debtors are no longer
able to discharge private educational loans, which have higher interest rates and less flexibility in
repayment. On the other hand, the debtfare state has ensured that private loans are non-dischargea-
ble pursuant to §532(a)(8) bankruptcy revisions, thereby protecting lenders such as Sallie Mae by
bestowing them with a super-creditor status (Stern and Feinstein, 2005). This status means that, like
the state, Sallie Mae has limitless powers (to garnish wages, tax refunds and even Social Security
payments) and unlimited time to collect student loan debt (Stern and Feinstein, 2005).
Mediation of Risks for Capital: Defaults, Crisis, and Corporate Welfare
The credit crunch that ensued in the wake of the 2007 crisis had an immediate impact on the stu-
dent loan industry. Educational lenders had no one to sell their government guaranteed loans to in
order to offset their financial risks. One of the first measures the federal government established in
order to deal with asset-backed securities was the Term Asset-Backed Securities Loan Facility
(TALF) in 2008. According to a 2010 Government Accounting Office (GAO) report, the TALF
program spent US$7.15 billion on propping up SLABS (Government Accounting Office, 2010).
Meanwhile, the social dimensions of risks tied to high student loan debt, especially, but not
exclusively, with regard to private student loans, intensified due to the crisis. In 2009, for instance,
the unemployment rate for private student loan borrowers who began school in the 2003–4 aca-
demic year was 16 percent. Default rates began to spike considerably following the crisis in 2008
(Consumer Financial Protection Bureau, 2012).
To ensure that liquidity (trading activity) remained stable in education lending, the Bush
Administration implemented the Ensuring Continued Access to Student Loans Act (ECASLA) in
2009. The ECASLA authorized the Department of Education to purchase FFELP loans outright if
secondary demand dipped. In effect, the ECASLA represented a major, yet largely unnoticed, gov-
ernment bailout of the student loan industry. The ECASLA was originally presented as a temporary
program, to exist only until 28 February 2009, and was to use approximately US$6.5 billion.
According to the Department of Education, ‘the Department will purchase loans [from the private
sector, e.g. Sallie Mae, JP Morgan Chase, Bank of America, and so forth] at 97 percent of the prin-
cipal interest coincidental with the standard guaranty rate for these loans’. The Department of
Education anticipated purchasing up to US$500 million in loans each week, up to an aggregate of
US$6.5 billion during the designated time-period (US Department of Education, 2011). As the
banks demonstrated continued disinterest in lending to students in the immediate aftermath of the
sub-prime crisis, the ECASLA was subsequently extended and augmented. In 2010, the Department
of Education projected that it will eventually purchase US$112 billion in FFELP loans from private
lending corporations (Department of Education, 2011).
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704 Critical Sociology 40(5)
In an effort to depoliticize growing anger over government bailouts of private student loan pro-
viders, the Obama Administration (2009-present) re-introduced the above-mentioned Federal
Direct Loan Program (DLP) under the Health Care and Education Reconciliation Act in 2010.
According to the Congressional Budget Office (CBO), the direct loan program could save the gov-
ernment US$67 billion over the next decade (Congressional Budget Office, 2010). These savings
presented an attractive cost-offset to the Health Care Reform Act for the Obama Administration.
Included, as a rider clause to the Health Care Reform Act, as of 1 July 2010 the US$60-billion-a-
year FFELP was replaced with the Federal Direct Loan Program, making it the only government-
backed loan program in the USA. From that time on, the direct lender of all federal student loans
was the Department of Education and not private banks. The Democrats touted the legislation,
which was represented as a key feature of President Obama’s education agenda, as a ‘far-reaching
overhaul of federal financial aid, providing a huge infusion of money to the Pell grant program and
offering new help to lower-income graduates in getting out from under crushing student debt’ (New
York Times, 25 March 2010).
Upon closer inspection, however, the DLP did not introduce far-sweeping changes to the stu-
dent loan industry. For one thing, the maximum Pell grant award climbed from US$5,550 for the
2010–11 academic year to US$5,900 in 2019–20 (Congressional Budget Office, 2011). This is an
insignificant amount given that it covers only a third of the cost of attending a public university,
compared to three-quarters when the program began in the 1970s. More importantly, as discussed
above, the majority of low-income students are attending proprietary schools, where tuition rates
are several times the price of public universities. Additionally, the major winners of the DLP remain
the financial markets, which continue to benefit from low-risk SLABS (i.e. due to the market per-
ception of government guarantees). Sallie Mae, in particular, has benefited from the 2010 program.
In addition to its role as the largest private student loan provider, key student loan debt collector,
and the largest issuer of SLABS, Sallie Mae, along with four other corporations (FedLoan
Servicing, Great Lakes Educational Loan Services, Inc., Nelnet, and Direct Loan Servicing Centre),
have been assigned the role of federal loans servicers (finaid.org). In 2010, Sallie Mae continued
to grow by acquiring US$28 billion of securitized federal student loans and related assets from the
Student Loan Corporation, a subsidiary of Citibank (SLM Corporation, 2010). The largest private
lender and SLABS issuer also reported that it would begin loosening its restrictive lending prac-
tices in 2010 and that ‘volumes should pick back up as the company did some “tweaking” to its
standards’ (Korn, 2011). Relaxing its allegedly strict lending requirements meant enticing more
low-income students to sign private student loans, thereby expanding its net to capture more sub-
prime borrowers (Consumer Financial Protection Bureau, 2012).
Sallie Mae provides service to 3.6 million loan customers on behalf of the Department of
Education and is prospering from its new status as service provider to the debtfare state. For
instance, in 2011, Sallie Mae earned US$63 million in servicing revenue from its Department of
Education loan-servicing contract, compared to US$44 million in 2010 (SLM Corporation, 2011a).
The combination of the government bailout and loosening lending restrictions has benefitted the
country’s largest private educational lender and issuer of SLABS. Sallie Mae reported a 19 percent
increase in loan originations for 2011 and a 29 percent increase in loan originations in the third
quarter of 2011 alone (SLM Corporation, 2011a).
Depoliticizing Risk: Tropes of Consumer Protection and Private/Public Dichotomies
One of the consequences of the financial crisis of 2007–8 was the creation of the Dodd-Frank
Wall Street Reform and Consumer Protection Act in 2010. The Act did not impose legal limits to
risk production on the part of financial markets and various sectors therein, such as the student
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loan industry. Instead, the Dodd-Frank reforms were more or less based on market-friendly re-
regulation (e.g. soft or voluntary law) initiatives such as self-reporting and minimal reforms
(Picciotto, 2011). For its part, the government issued reports to Congress about the nature of risk
in the financial system. Pursuant to Section 941 of the Dodd-Frank Act, the Federal Reserve
Board issued a Report to Congress on Risk Retention that focused on ABS, including student
loans, both federally guaranteed and privately issued. The Federal Board concluded that due to
the ‘considerable heterogeneity’ between the asset classes, it was ‘unlikely to achieve the stated
objective of the [Dodd-Frank] Act – namely, to improve the asset-backed securitization process
and protect investors from losses associated with poorly underwritten loans’ (Federal Reserve
Board, 2010). Put differently, it was unlikely that SLABS would be subject to any legally binding
or state-led forms of regulation.
Another relevant report pursuant to the Dodd-Frank Act emerged from a joint initiative involv-
ing the Consumer Financial Protection Bureau (CFPB) and the Department of Education (DOE),
which issued a 2012 report to various Senate and House of Representative committees. The report
argues that risky lending practices tied to private student loans have not only increased more rap-
idly than public student loans over the past decade but also have come to share many similarities
to the 2007 sub-prime mortgage crisis (Consumer Financial Protection Bureau, 2012). According
to the report, private lenders issued loans without considering the repayment ability of borrowers.
The lenders (i.e. private banks) securitized the loans to mitigate losses when students defaulted,
reselling the loans to investors. The CFPB and DOE estimate that there are more than 805,000
private loans in default, which amount to more than US$8.1 billion (Consumer Financial Protection
Bureau, 2012).
For the CFPB and the DOE private student loans represent a riskier form of credit for students.
The interest rates tied to these loans are far higher than on federal student loans. Unlike other con-
sumer loans (e.g. federal student loans), for instance, repayment plans for private student loans are
not based on income; also, bankruptcy laws in the US do not permit private student loans to be dis-
charged through bankruptcy proceedings. Despite the latter restriction, a growing number of desper-
ate former students have opted for bankruptcy in the hope of gaining some repayment relief in other
areas of indebtedness such as credit card debt (Consumer Financial Protection Bureau, 2012).
According to the report, there are two key reasons for the increase in private student loans and
subsequent defaults. The first reason is the lack of proper financial education on the part of students
and their families, as public student loans have lower interest rates and better consumer protection
clauses built into their loan products. For instance, private loans are purported to be designed to
mimic key product features of Stafford loans (Consumer Financial Protection Bureau, 2012). The
second reason offered for the increase in defaults is that private educational lenders have aggres-
sive lending practices, which prompted the Secretary of Education to argue that sub-prime lending
has moved from the housing market to colleges (Consumer Financial Protection Bureau, 2012).
The report wholly fails to acknowledge the role of the state and financial corporations such as
Sallie Mae in constructing and reproducing the student loan industry,
The only substantial regulation that the Department of Education has issued to deal with the
social dimension of financial risk in the student loan industry is the ‘gainful employment’ clause in
2011. Essentially, this clause suggests that private colleges will lose eligibility to participate in the
federal student loan program if less than 35 percent of their graduates are repaying the principle on
their loans, and if loan repayments exceed 30 percent of a typical graduate’s discretionary income
and 12 percent of their total earnings. However, no penalties will be imposed on schools until 2015
(Beaver, 2012: 277). In 2012, the debtfare state also sought to deal with the increasing default rates
by yet again redefining the meaning of default, by extending the default period in the Direct Loan
Program from 270 to 360 days (under 34 CFR 668.183(c)) (finaid.org).
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706 Critical Sociology 40(5)
While the predatory nature of private student loans and their servicing tactics should be criti-
cized, the distinction between private and public student loans is not as clear cut and unproblematic
as presented by the joint CFPB-DOE report and other scholarly treatments of private student loan
debt (Consumer Financial Protection Bureau, 2012; Beaver, 2012). Moreover, the literature con-
centrating on the abuses linked to private student loans, and, by connection, the for-profit private
colleges and universities, downplays the role played by the state and, by extension, public student
loans, in subsidizing capitalist interests through dispossessive practices. For-profit colleges, for
instance, derive 66 percent of their revenues from federal student loans (Lynch et al., 2010).
Through its neoliberal restructuring strategies, the state has played several key roles in promoting
and permitting the private student loan market to thrive and feed off of low-income students and
their families. The borrowing limits on public student loans have not kept pace with the rapidly
increasing tuition fees in both private and public colleges over the past several decades, thereby
forcing students to turn to private loans, which have higher borrowing caps. Moreover, as I have
demonstrated above, the debtfare state has facilitated the rapid rise of for-profit private universities
by encouraging the spatial displacement of capital through funding and (soft or voluntary) regula-
tory framings.
Conclusion
The objective of this paper was to re-inscribe the role of capitalist power, including the role of the
state, in the student loan industry in such a way so as to uncover not only the economic and social
consequences of student loan debt but also to question how and why the interests of the financial
community are given primacy over student debtors, particularly more vulnerable low-income stu-
dents. To accomplish this task, I focused my investigation on the conflict-ridden relationship
between default and student loan asset-backed securities (SLABS). I also examined the role of the
neoliberal state and, more specifically, its debtfare vector in not only mediating the connection
between SLABS and defaults, but also facilitating the intensification and expansion of the student
loan industry over the past several decades.
Through an historical materialist framing, I sought to reveal the intrinsic political nature imbued
in these relations by identifying the commodification of debt as a key tactic in the student loan
industry. Through the temporal displacements inherent in the commodification of debt (i.e. accel-
erating the repayment schedule for lenders), SLABS serve to reduce financial risk for private lend-
ers, whilst relocating the social dimensions of risk onto student debtors. The debtfare state has
responded in several ways to the tensions emerging from the management of risk involved in the
expansion and intensification of the student loan industry, most notably by making it more difficult
for student debtors to declare bankruptcy.
This analysis has sought to complement the rich and informative scholarly debates on the cor-
poratization of education in the United States. I hope that some of the insights offered here will
further stimulate debate on the political and capitalist nature of student debt, including its temporal
and spatial dimensions. Critical analyses of the educational lending industry must also re-examine
the common sense assumptions surrounding SLABS, and the wider economistic treatment of the
credit system and the private-public dichotomy, both of which sever questions of power from debt
and leave the lives of students and their families hanging in the balance.
Funding
This research received funding agency from the Social Science and Humanities Research Council of Canada
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Soederberg 707
Notes
1. Annual securitizations may exceed the yearly origination of new loans because new securitizations can
include seasoned loans (i.e. a loan that has been out for a year) on the balance sheet (Ergungor and
Hathaway, 2008).
2. These totals were based on a high-end (i.e. higher risk debtor), fixed interest rate with the following
rates: The total amount of US$50,545.95 is based on 11.88 percent interest, the total of US$70,259.07
was calculated using 12.38 percent (fixed payment) interest, and the deferred payment plan amounting
to US$74,126.61 was based on a 12.88 percent interest rate. Available (accessed 10 October 2012) at:
http://smartoption.salliemae.com/Entry.aspx
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