Reposted from www.democraticrepublicanparty.co.uk

DEMOCRATIC REPUBLICAN PARTY NEWSLETTER – 6th October 2012

Student Loans – The Giant Scam That Robs The Nation

 Peter Kellow writes

It was one of the grand projects of current JP Morgan Director, Tony Blair, in one of his previous employments as British Prime Minister: make university education open to the many. The many here was meant to be 50% of the young now going through education. The plan included making students pay for their higher education through loans. In the earlier years of the project, they paid just a little, then a lot, then practically the whole of the cost of the education.

Students now going through university will emerge up to their eyes in debt and this debt will dog them for years. Debt is not a superficial aspect of life. It drags you down. R.W. Emerson whom I cited in Newsletter 109 put it aptly when he said back in 1836 “Debt, grinding debt …  which disheartens a great spirit with cares that seem so base..” Debt is a scourge of our lives.

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Leaving aside the question of whether we really need 50% of our young going to higher education, let us ask whether there is any alternative to making people pay for higher education and let us ask whether it might be more sensible for the nation to pay for it. All the four main parties (we have to say “four” now with UKIP at 10% in the poles) support the current system, the only debate being about whether former students should pay for the education with loans or whether they will should do it through taxation – the so-called “graduate” tax.

Education is an investment. Everyone is agreed on that. An investment, let us remind ourselves, is simply this. You place money in a certain way by purchasing a good or a service and you expect to see a return, a payback, at some later date on the money you placed. If the investment is sound, the payback will cover, or more than cover, the costs involved in the investment, that is, the money placed and the charges (interest, fees, etc.) incurred. In short, a good investment shows a profit.

Let us consider education as an investment in two ways:

one, as an investment by an individual
two, as an investment by the state.

At present, it is the individual who makes the substantial investment in higher education, with the state just contributing some financial support through capital expenditure and some fixed costs. Essentially it is the student who buys his or her education by taking out a “student loan” and then has to repay that loan during their working life. The payback comes, in theory, in the form of higher salaries than would have been the case without the education. If that does not happen the investment loses money and the individual has debts that will be difficult to pay off.

Thus, at present, the state invests relatively little in higher education. The investment is seen purely as an individual matter.

Now look at education as a different kind of investment: an investment by the state, ie, by the nation. In this, the government finances the education of students itself and also gives the student a grant to enable them to support themselves during the period at university. In any current discussion by the main parties on the subject, that situation would be considered as a straight loss for the government with no payback of any kind in the future. Thoughts would be directed only to the increase in government debt today. That is all. It was not so in Britain in the past and it is not so in other countries today (eg. France).

Investment, as I said, is where you place a sum of money today in order to see a payback and a profit in the future. So how does a government investing in education today get its money back? Simple. Through future taxation. The economy needs an educated workforce in order to compete and prosper in the future. Without that, we will go into decline and as the economy falters so will government tax revenues. But can we be sure that the money invested in education will be recovered in the future through taxation? For,if it is not recovered the government will be out of pocket and the national debt will rise.

Well, clearly we will never be able to carry out a watertight accountancy exercise to show that investment in education is a “good deal” for the government. Any attempt to put figures on the matter is foolhardy. You cannot estimate the benefits that ensue from having a well educated population. But equally you cannot overestimate them. If you want to appreciate all the benefits you have also to put into the equation that free education means social mobility and so the nation benefits from talent that would otherwise be wasted. The social mobility also creates a financial benefit for the nation by reducing isolated deprived communities that nurture delinquency and crime. I could go on. The associated benefits are as enormous as they are unquantifiable.

But leaving aside the larger societal perspective, the strong likelihood is that the government will collect sufficient returns on its investment simply and visibly through taxation. After all, if it works for the individual, it must also work for the government, and for this reason. By the government investing it has one big advantage over the individual – the interest rate on the loan. Under the present economic model the government would finance the education through bond issues which would attract a much lower interest rate that the individual student loans.

Now a Democratic Republican Party government will do better than that. It will change the whole financial system and the government will not raise the money through bonds issues but through direct money creation. This will eliminate the interest charges so making the investment much more profitable for the government. Once this system is in place, there will overall be no increase in the money supply, as collection of taxation directly and indirectly will pay back the investment. (It is, by the way, vital to control the money supply because too big an increase would result in economic damage.)

We now come back to the question: why do the current parties favour putting people into debt in order to take higher education? To answer this we have to bring in our old friends that feature so often in these newsletters: the banks and the non-taxpaying global superrich. These are the real drivers behind the current policy of massive student indebtedness. They have an insatiable need for debt that they can buy and profit from and the JP Morgan Director we mentioned at the beginning of this piece was an enthusiastic promoter of their interests when a holder of political office, prior to taking up his £1 million per year official position among their ranks.

It works like this. It is all down to the magic of securitisation, the financial instrument dreamed up in the 1960s but that really took off in the 1980s and reached stratospheric proportions in the noughties. All, yes, all, student loans are now subject to securitisation. The high street bank that offers you the loan is just an agent collecting the fees for “originating” the loan.

The student signs up for the loan and is then in long term debt. This makes this individual’s financial life perfect for securitisation. The banks transfers a big bundle of student loans to a company called a special purpose entity (SPE) so they are shifted off its balance sheet, freeing it up to make more similar loans. The SPEs are located in tax havens, usually, the British Cayman Islands, and the fact that they are in tax havens is integral the high profitability of the deal. The SPE then performs the “securitisation” process, whereby it takes the bundled up loans and divides them up into sellable units called collateralised debt obligations (CDOs). These are then offered on the global market. Many will be bought by individuals who avoid tax in a variety of way such us by hiding behind shell companies registered in tax havens or secretive low tax countries like Switzerland. Meanwhile the student tries to get on with his or her life and in doing so supports the global banks and their superrich clients.

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Flag of the Cayman Islands 

Many people think that the reason for students paying for their education is to avoid government debt. But this is not the real driver and never was. JP Morgan Director Blair, expanded the student population and at the same time forced them all into debt. This was neither an educational programme nor a social mobility programme but part of the ongoing process of  the “financialising” all of our citizens lives burdening them with grinding debt that can be securitised so transferring  wealth from working people to the superrich.

But there is a further major aspect to student loans that has to be emphasised. Financing higher education through student loans means that the government effectively abrogates any responsibility to direct education into areas where is it likely to be needed and away from those where it is not. If it is the state that invests in higher education then it has an interest in making sure that its investment will result in good employment for the graduates so that it can recoup the investment through taxation. With the individual funding their own education this direct line between investment and return does not exist. The state simply washes its hands of the matter.

Also universities are forced to design their courses to attract students and increase their income. Long term interests of the nation are therefore not a part either of the students’ or the universities’ calculations as to the choice of subjects and syllabuses. While it is desirable for the universities to have a good degree of independence they should not be forced to have to make choices simply to increase student intake. If they are then those courses are likely to be ill-conceived in relation to their likely usefulness.

As an example to illustrate this, I can cite my own profession of architecture. A few years ago there was a glut of students doing architecture. There were fees at the time but they were affordable for many. Architecture was popular amoung the young as a future career and so the universities provided a lot more places in order to collect lots of fees. This increase was quite unrelated to the demand for architects in the profession and so a glut of recently qualified graduates was produced and many could not find jobs. This meant they could not advance their experience and in many cases the resulting big “hole” in their CV meant that their career was in ruins before they started. As they aged employers would take the more recently qualified and they could be left “on the shelf”.

Now the situation is the reverse whereby not enough are studying architecture, especially because it is a five year course and so you emerge with huge debts. Coupled with this is the thought that if you do no complete the five years (many don’t) you will have incurred a debt for nothing.

This argument has no traction with any of the main parties. It is just part of the competitive market for them. The waste of lives and resources does not enter into their thinking.

The proposal, I put forward here, that the state must see education as an investment in the nation is not in any way radical. It used to be received opinion. The Conservatives started to reverse policy under Thatcher but it was with the demand for securitised debt in the 1990s that began the big spur to more and more student debt. Since then, it has ballooned unstoppably as the financial markets have cried out for more and more financialisation of every aspect of our lives. Their servants in politics have contrived to deliver exactly what they want.  Regardless.

Think Left agrees with the Democratic Republican Party on the need to change the whole financial system, and specifically, that government should raise the money not through bonds issues but through direct money creation.  As Peter says of student loans:

‘This was neither an educational programme nor a social mobility programme but part of the ongoing process of  the “financialising” all of our citizens lives burdening them with grinding debt that can be securitised so transferring  wealth from working people to the superrich.’  

The 99.9% must join together to take back that wealth for the good of the global population and the natural world.