What are the odds a college kid can beat Wall Street? My money is on Jim.
Jim is a good kid. He showers, calls his grandmother and wants to go to college. Jim’s parents help as they can, but their savings and home equity were lost in the Great Recession.
Public U is crumbling, Online U is a scam and Community U is taught by adjunct faculty paid less than what Jim makes bagging groceries, so in order to go to Private U, Jim signs a piece of paper that purports to be a private student loan.
How quaint and unabashedly American? Private. Student. Loan. Strung together, it sounds wholesome and promising.
The several pages of print are small and in legalese. Jim is tired and in a hurry to get to class and then to work, so he signs the document and justifies the expense with Private U’s promise of a corner office in a someday-successful business with the smart, well-connected best friends he hopes to make.
The loan for $40,000 had an origination fee of a couple percent, plus deferred and capitalized interest at a rate several points above prime. All told, the full cost of one of Jim’s $40,000 loans is close to $90,000 if he pays it back according to plan, and more if he defaults. Much, much more.
Student loan debt in the United States exceeds $1 trillion, and increasingly larger proportions of borrowers are in default. Mixed in with earnest students like Jim are far more bleeding-heart drama majors who got loans they could never be able to afford, and where there’s blood, there are sharks.
The bank that loaned Jim the money is not interested in his academic success or career. A private “student loan” is really just a euphemism for what is now the staple of the American economy: a bet.
Before Jim gets back to his dorm room, his loan is bundled up with thousands of other student loans and sold to investors on Wall Street who use these cute little “bundles” as collateral to sell securities.
The machinations and documentation are mind numbing. Fuzzy but not warm bundles get transferred to trusts that sell notes to investors, who collect dividends and repayment while reinvesting and hedging. The trusts hire “servicers,” who contract with “subservicers” to monitor and collect loans like Jim’s. If he has a question, an 800 number leads Jim nowhere. He no longer recognizes any entity that communicates with him about his loan while people around the globe are betting on it. Some wager Jim will repay his loan, and others bet he won’t.
When Jim graduates cum laude as an English major, he searches far and wide for a job with a salary to support his humble life plus loan payments, but he comes up short. Thousands of online applications are lost in a black hole.
Jim is demoralized and moves in to his parents’ basement while working as a “manager” for a retail chain store for 75 hours a week without health insurance and a salary of $23,000.
Despite his best efforts, Jim defaults on his student loan and enters that place in hell known in the United States as “debt collection.”
Jim’s phone rings day and night. He gets lots of threatening letters that worry his mother. His FICO score takes a huge hit and in turn lowers his ranks in the world of online dating. When Jim is finally served with legal papers, he’s in a stupor of alcohol-induced self-loathing and despair and doesn’t recognize himself or the party bringing the lawsuit.
The debt collector hired by the subservicer of the servicer appointed by the trust on behalf of the investors garnishes Jim’s wages and sends a check for $5.83 every two weeks to Wall Street, where the fat investors are disgusted by Jim. “What a loser,” they write about him and millions of others in emails back and forth in their plush office after a three-martini lunch.
“Good thing we bet against Jim at the same time we were betting for him! He is so dumb! I bet Jim even pays taxes. If only he had studied shadow banking in Panama instead of English, Jim could be rich like us and our shell corporations – dirty stinking rich, right Biff?” they typed and smirked as their personal investment accounts rose higher and higher on their computer screens.
Thankfully, in college Jim did meet smart friends who, meanwhile, are using their entrepreneurial wits to master hacking after fits and starts in Silicon Valley got boring. They remember Jimbo fondly from college, so for fun they hack into the investors’ computers and send boatloads of incriminating documents to another buddy who’s making 10 bucks an hour as an investigative journalist.
Tomorrow or the day after that, the investors’ dirty laundry is hung out to dry for all the world to see like underwear on a clothesline. The Justice Department investigates, and lawsuits are filed and won by the good guys.
Jim writes a best-selling memoir and gets married. His mother cries.
Pascal’s Wager, to paraphrase Wikipedia, is the argument that it is in one’s own best interest to behave as if God exists, since the possibility of eternal punishment in hell outweighs any advantage of believing otherwise.
In the technology age of the Panama Papers, you can bet your life any secret you hope to keep on your computer will be hacked.
Alone, Jim can’t beat Wall Street, but the odds get a little better if the 7 million college students currently in default of predatory loans swim together as the sharks begin another feeding.
America was fooled once when Wall Street hedged its bets on predatory loans and robo-signed their way out of red ink, abusing the foreclosure process. I bet we won’t be fooled again.
Cynthia Dill is a civil rights lawyer and former state senator. She can be contacted at:
Twitter: dillesquire
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