The May 10 Economic Analysis column, “Nation’s student loan crisis was created by government,” makes a patently false claim: “98% of private loans are repaid, and banks make a normal rate of return.”
A quick analysis of the former First Marblehead Corp. (now Cognition Financial) demonstrates that private student loans were as problematic as federal student loans. First Marblehead created SLABS (student loan asset-backed securities) and ultimately defrauded both investors and students. The majority of the Delaware statutory trusts linked to First Marblehead’s fraud are now under investigation as well as a quasi-governmental agency named Pennsylvania Higher Education Assistance Agency, which was instrumental in the fraud.
In short, the derivatives associated with private student lending are far more detrimental to society than federal loans, although the latter are hardly effective or successful either. The reality is that both derivatives-based student lending and federal lending in the student loan market are inherently flawed due to the inability of students to declare bankruptcy, as is their constitutional right. The preclusion of bankruptcy spurs unchecked rises in tuition and violates the anti-peonage precedents of the late 1800s. This phenomenon is no more complex than Economics 101 and Political Science 101, and I am surprised that the writers of the above article did not catch it.