SLABS, Student Loan Asset-Backed Securities, are private and federally insured student loans that are bundled, rated, and sold in tranches to institutional investors as bonds. In other words, the private debt of student debtors and their families is turned into investments that are considered low risk, but in some cases high yield. The most lucrative investments are the most toxic loans.
This cache, a mix of old FFELP government backed loans (the program ended in 2010) and private sector loans may be valued at about $245 billion but is referenced in untold billions more of complex financing instruments such as structured investment vehicles, stocks and unsecured corporate debt and repurchase facilities. About 11 million people still owe money from the FFEL program.
SLABS are rated from AAA to B (junk) but all are marketed as safe and the demand is greater than the supply. No one outside of the industry knows who actually owns the financial instruments, but it's assumed they are almost always large institutional investors such as banks, state and municipal funds, and retirement funds.
In May 2020, Morningstar accepted a $3.5 million fine for failing to separate its credit ratings and analysis operations
from its sales and marketing efforts. But they denied any wrongdoing.
Who oversees the SLAB industry? Three raters: Moody's, Standard & Poor's, and Fitch Ratings. These companies are paid to rate the SLABS, and are also tasked for government oversight as Nationally Recognized Statistical Ratings Organizations (NRSRO's). The credit rating agencies not only rate SLABS, they are paid to rate them by the loan issuers, like Navient and Nelnet, causing a potential conflict of interest.
Metaphorically, SLABS are like Soylent Green, the subject of the dystopian movie that came out in 1973 and portrayed a chaotic New York City in 2022. It's not until the end of the film that audience is told that the food that people were fighting for, Soylent Green, was actually people, processed for consumption.
In 2021, SLABS are human lives, in the form of crippling debt, packaged for consumption: consumed by a range of big investors including big banks and pension funds.
"It is up to each and every one of us, to decide where we wish to direct our focus. Is it fear, or forgiveness? Suffering or thriving? When we accept the principles of quantum physics, we understand that we are all entangled as one singular organism," said Allison Pyburn, student loan expert and author of the upcoming book, "The Great Unwind."
Capital One and Discover Financial Services have publicly announced plans to merge. The deal worth a reported $35B would give this new entity greater power, competing (or colluding) on a higher level with JP Morgan Chase, Visa, and Mastercard.
Capital One and Discover are both banks and high-interest credit card lenders. That means they are issued cheap money from the US Federal Reserve and lend it to naive and desperate consumers.
Discover student loans are used by college students who have used up their Pell Grants and federal loans and are working (and borrowing) to graduate or extend their education. The interest rates can exceed 12 percent.
Capital One does not have student loans, but college students use credit cards from both of these companies to make their way through school, paying the price later.
While there may be regulatory challenges for the Capital One-Discover deal, it's not likely that the merger, or any other financial consolidation, will be prevented--no matter how onerous it is to consumers.
The latest report by the Government Accountability Office (GAO) about wrongdoing by higher educationonline program managers (OPMs) felt disappointing to social justice
advocates who watch the space and know the bad actors who were unnamed in the GAO document.
US higher education has always been a racket, but its latest
pursuits have gone untouched and even unmentioned.GAO’s behavior, though, is no worse than the
many other corporate enablers who are supposed to be minding government funds wasted –or worse
yet—used to prey upon US working families.
The US Department of Education
has done little lately to safeguard consumers from predatory student loan
servicers like Maximus and Navient, or subprime
universities like Purdue University
Global and University of Arizona
Global, and hundreds of small players who offer marginal education leading
to less than gainful employment.
The Department of
Veterans Affairs has done little lately to protect veterans and their
families from being ripped off by subprime schools.At one time, VA was a leader in tracking GI Bill complaints and making them public, but transparency and accountability are far
from what they were.
The US Department of Defense(DOD) has
been asleep at the wheel with its distribution of DOD Tuition Assistance funds
to subprime colleges. Its complaint
system is close to nonexistent.
The US Department of Justice
(DOJ) and US Securities and Exchange
Commission (SEC) have done little to rein in bad actors in higher
education, leaving the work to states attorneys general. Hate crimes on campus have also been ignored. In other cases, elite university endowments have received little notice despite eyebrow
raising profits. Student loan asset-backed securities are also below their radar.
During the pandemic, The Department of Treasury has failed to adequately oversee funds issued to the Federal Reserve and the Small Business Administration funneled to subprime schools.
The Federal Trade
Commission (FTC), which had done an adequate job investigating predatory
lead generators and marketing and advertising false claims has been hamstrung
by a recent court decision and can no longer fine higher ed wrongdoers. Predatory companies know this and will act
accordingly—as criminals do when cops are not on the beat.
What lack of oversight have you seen with federal agencies
tasked to protect higher education consumers?
The collapse of 2U and its subsidiary edX has put Sallie Mae (SLM) on the radar. Many of those elite brand certificate programs (under the name Harvard, MIT, Cal Berkeley) were propped up by Sallie Mae private student loans.
When the adult learners who took these certificate courses from edX did not get better jobs that they were promised, some ended up struggling to pay their loans. Some have defaulted on their loans. And a ripple occurs. As part of a larger edtech meltdown, and with IT jobs being lost each month, the situation promises to get worse.
As a hedge for SLM, most of these loans are processed into
Student Loan Asset-Backed Securities (SLABS) and sold off as assets. Large investors, including pension programs are
invested directly or indirectly in this mess.
Sallie Mae Boom and Bust
Sallie Mae (SLM) is a private lender that has had a number of problems. Despite being bailed out by the US government and spinning off part of itself, SLM has a poor credit rating that's bad and getting worse.
In 1972, the Nixon administration created the Student Loan Marketing Association, or “Sallie Mae” — a government-sponsored enterprise empowered by the government to use U.S. Treasury money to buy government-backed student loans from banks.
As a publicly traded corporation Sallie Mae has benefited from decades of close government connections.
SLM was very profitable (and very predatory to consumers) when there was little oversight, and the US economy was booming. But when the Great Recession hit in 2008, SLM had to be bailed out when the US government purchased billions of dollars in government-backed student loans. After that bailout, Sallie Mae returned to maximizing profitability. Over the last 5 years, SLM shares have gained 144 percent in value as student borrowers have suffered.
While the economy is doing well enough for the middle class, that could change for the worse, not just for consumers, but also Sallie Mae.
In 2011, Sherry Li hatched the idea to create a $6 billion Chinese
Disneyland in the Catskills, with a for-profit college, a casino,
shopping venues, eateries, Chinese-themed rides, and a community full of
wealthy Communist Chinese immigrants...just a few miles away from
nearby villages of American peasants. The ideas were Trump-like, and
like several of Donald Trump's business efforts, most likely to fail
without political ties at all levels, and lots of money. In this case,
Li needed hundreds of millions just to start, most from wealthy Chinese
investors. Together with her business associate Mike Wang, Li paid out large sums of money to establish political ties,
but politicians claim not to know her. In 2019, this fantastic scheme,
whittled down to a school with no buildings, no students,
and one person sitting at a desk, looks more like a swindle. But without
victims coming forward, and most are unlikely to come forward, this
relatively unknown businesswoman will continue what can now be called a
scam.
(Note: I have tried communicating with Sherry Li and Mike Wang,
her media director, several times via phone, email, and social media.
Someone at the Thompson Education Center does answer the phone, and says
"they are out of the country." But this person cannot tell me when they
left or when they are returning to the US. When I mentioned that their
social media was not updated or even monitored, she admitted "we're not
operating anything.")
China City of America is a multi-phased construction project planned for the town of Thompson, Sullivan County, in the Catskill Mountains region of the U.S. state of New York. The current project, Thompson Education Center (TEC), is a proposed college for foreign students, situated in a 573-acre parcel which borders a state-protected wetland.
In December 2011, China City LLC applied to be a USCIS recognized EB-5 visa Regional Center, but the business was never approved by US Homeland Security. The EB-5 immigrant investor program grants permanent residency
to foreign investors in exchange for job-creating investments in the
United States. The 880 Regional Centers sponsor capital investment
projects for foreign entrepreneurs seeking green card status.
Approximately 85 percent of EB-5 participants are Chinese, but there is a
quota system, and waits for Chinese applicants can be as long as 15
years.
More than a year later, China City America publicly
presented its idea to build a 2,200-acre Chinese theme park, hotel, and
casino for an estimated $6 billion. According to The Economist,
the plan "would attract 1.5 million visitors annually" and "transform
the struggling economy" in upstate New York while seducing thousands of
wealthy Chinese investors through the federal EB-5 visa
program. The initial capital investment of $325 million would include
$127.5 million from EB-5 investors, $132.5 million from equity
investors, and $65 million from the U.S. government.
According to
the scheme, each Chinese client would pay a small investment up front: a
$65,000 non-refundable deposit. One catch was that in return, Li's
business would have to quickly create at least 10 new jobs per investor.
Local, national, and international media articles conveyed a variety of
interests and concerns about the project while local officials and
residents expressed both hope and skepticism.
[The initial
presentation by Sherry Li starts at about 7:15 in this Youtube video.
The comments are in some cases brutally honest, in other cases racist.]
Sherry Xue Li, an Oyster Bay, Long Island businesswoman, has been the chief executive officer and
founder of China City of America. Li reported to the Associated Press
that she came to the US in 1991, at the age of 19, and has a background
in development and finance. Everything about her wealth seems to be a
mystery that can only be gleaned from detective work by media outlets
and groups like Defeat China City of America on Facebook.
According to her LinkedIn page,
Sherry Li has a master's degree from NYU and was a Vice President of
Hengli International Corporation (1995-1998), Executive Assistant at
Money Securities (1997-1999), and President of China Financial Services
(2003-2011).
SEC records show that Sherry Xue Li had been
a major shareholder in BRS Group, Inc., a Delaware company dealing in
scrap copper imports to China and China Electronic Holdings. Sherry Xue
Li sold her stake in China Electronic in 2010 and BRS in 2011. In the
video you will see in a moment, Sherry Li also mentions that she has a
young child.
According to Lachlan Markay at The Daily Beast,
"Li rarely, if ever, talks to the press, issuing her statements mainly
through press releases in which she boasts of her meetings with
Republican officeholders and Trump administration officials." The other
officer of the Thompson Education Center is Mike Lianbo Wang who has appeared in a few TEC press releases.
At
a 2013 town council meeting where Sherry Li first pitched the plan, she
stated that "Each dynasty will have its building and will have rides go
with it," China City’s website features golden dragons, and projects an
initial investment of $325 million — with $10 million going to a
"Temple of Heaven," $24 million on a hotel and entertainment complex,
and $20 million to construct a 'Forbidden City.'" In its second meeting
with the town council, Thomas J. Shepstone represented China City.
Shepstone was known in the region as a defender of fracking. According to Paula Medley of the Basha Kill Area Association the project couldn't be developed on the scale proposed by China City without damaging environmentally sensitive wetlands.
In
2014, Town of Thompson supervisor Bill Rieber became frustrated with
Li's constantly shifting plans and the Town of Thompson declined to
approve the project, but the project was granted approval for three
wells in 2016. In the same year, Sullivan county lawyer Jacob Billig
sued China City of America for failing to pay him fees for service. A
settlement was reached out of court for $25,000.
Thompson Education Center
While the larger China City project has stalled, the Thompson Education Center (TEC) is still being planned. The proposed for-profit college campus is on a 573 acre parcel of land near Route 17, Exit 112, which borders Wild Turnpike in Thompson, New York and extends to the town of Mamakating. The mostly undeveloped land for the project is in proximity to an environmentally protected wetland, the Harlen Swamp Wetland Complex. It is also near Monticello, New York,
a village with a poverty rate of about 36 percent. TEC press releases
have promised that the "high-end" project would create at least 20,000
jobs.
Thompson Education Center plans to have a school of
business, a film & arts school, and programs in nursing and medical
training, culinary arts, high school equivalency and executive and
vocational training. The project includes four classroom buildings,
student dormitories, student townhouses and a student center. TEC claims
to have entered into agreements with US and Chinese high schools,
colleges, education institutions and systems to provide students to the
institution. TEC claims also that it has been working with several U.S.
accredited colleges on undergraduate programs and ESL programs.
In
a January 2017 presentation to the Monticello Rotary, Sherry Li claimed
that China City had executed letters of understanding with the Catskill Regional Hospital for its nursing program, and with Phoenix, a Chinese media company that has educated 80,000 students.
According to the Wall Street Journal, in June 2017 Lianbo Wang donated $329,500 to a joint fund between President Donald Trump’s campaign and the Republican National Committee (RNC). About $86,000 was diverted to the RNC’s legal fund. Politico also reported on the large donations by Wang and Li.
In
August 2017, Thompson Education Center appeared before the Town of
Thompson, with a plan for a campus that would include 732 dorm rooms for
2,508 students, 276 homes for faculty members, and a college
president’s house to be built in a “Founding Trustee Village.” Another
source stated that the campus would also include a community center,
three recreational buildings, three playgrounds, a sports stadium, a
performing arts center, a library and museum, a conference center, a
business center, a medical center and an inn for visitors.
In
September 2017, TEC sponsored a golf tournament benefiting the Catskill
Regional Medical Center (CRMC) Foundation. Ms. Li also visited
Congressman Steve Stivers, Chairman of the National Republican Congressional Committee, in Washington, D.C.
In 2018, residents sought for a revocation of a permit that the Fallsburg, New York
building department had granted for a 9,000-square-foot building,
claiming that the building was not a residential structure. The property
is adjacent to the Thompson Education Center and is owned by Sherry Li.
Epoch Times
reported that Sherry Li was featured in Chinese media promoting the
school "as an 'easy' way to get an American green card." The May 17,
2018 Economist
issue noted that Chinese media said that "investors in the scheme will
find emigrating to America 'so easy.'" But the current wait time for
Chinese nationals to receive an EB-5 visa is a decade and a half, and a
new regulation for EB-5 visas may substantially raise the price for
obtaining a green card.
In January 2019, at the Ivy Football
Association Dinner, Sherry Li's Thompson Education Center said they
planned to provide application counseling, exam preparation and tutoring
for students by The Butler Method. Then in February, TEC announced
plans to offer the Ivy League Prep program, to give students with sports
trauma treatment-related classes, noting that the courses could be
"transferred to Ivy League universities for college credits." At the
time, TEC also reported that the project received three well permits,
and that the construction road was completed, which should not have been
news--the permits had been issued in 2016. The for-profit college with
no buildings and no students also reportedly signed contracts with
schools in China "to deliver 2,700 nursing program students every year."
On a trip to Thailand in March 2019, Ms. Li met with the president of Thonburi University
and discussed educational cooperation between TEC, its partners schools
and colleges, and the Bangkok school.
In the same press release, Sherry
Li's organiation reported that
"College Town covers an area
of 650 acres, with over 5 million square feet of the construction area
for educational campus and ancillary facilities. TEC has partnered with
many prestigious universities in Unites States, planned to establish
courses including, business schools, media arts, medical academies,
culinary, various MBAs, special license training, high schools and their
affiliated facilities to create an intelligent high-end university
community. In 2019, Thompson Education Center will work with
International University Alliance under the Ministry of Education to open 50 Thompson Education Center Extension campuses in China."
Meanwhile
the Facebook and Twitter accounts for Thompson Education Center lie
dormant: a giveaway that something is very wrong with this picture.
[FEC documents show that Sherry Li and Lianbo Wang have made major contributions to Donald Trump, the Republican National Committee, and key Republicans.]
Preliminary research results in many more questions: about the
citizenship status of Lianbo "Mike" Wang, capital flow from China
through the 15 China City businesses and other enterprises, the tax status and detailed plans
of the Thompson Education Center, and their possible ties to the Chinese
Communist Party.
I just about had a heart attack reading the headlines from two NY Federal Reserve researchers in Buffalo, that college was still a "good investment" despite the costs. The authors, Jaison R. Abel and Richard Deitz, showed a few graphs indicating that college completion still resulted in significant wage premiums, and muttered something about “back of envelope” projections to prove their point.
Are these people mad? Have they not read Annie Nova (CNBC), Jillian Berman (Marketwatch) or Mike Vasquez (Chronicle of Higher Education)? Have they not glanced at Wikipedia
or thelayoff.com or bothered to use IPEDS help? Have they read Suzanne
Mettler’s “Degrees of Inequality”? Have they ever heard of the
layoff.com or College Meltdown? Don't they listen to Dave Ramsey on the radio? The answer is no and probably no, no, no, no, no, no, definitely not because it’s too heavy, no, no, and no.
Have these guys no understanding of the outrageous costs of higher
education: tuition, housing, board, text books, transportation,
computers, fees, officially licensed college t-shirts, football tickets,
concert tickets, pizza, beer, drugs, pregnancy tests, and who know what
all else?
If you read the small print in the NY Fed article, these two wise
guys from Buffalo oh so briefly mention that the wage premium doesn’t
apply to 25 percent of the people who start. They note that the wage
premium is muted in the 40 percent who don’t finish college. And the wealth premium, you know, the actual return on investment after trying to pay off the loans? Forget about it.
They don’t mention that college students are selling their bodies ("Sugar Babies") across the US or selling drugs to get through college. (For the record, I sold my body very cheap to the US Army for an ROTC scholarship to get out of Western Pennsylvania).
These guys don’t mention that more than 40 percent of all student
debtors are not paying off their principal. Or that millions of
Millennials with student debt are delaying marriage and kids, not
starting families or businesses. And by having fewer kids, they are
setting the nation up for another phase of the College Meltdown in
2026.
Nor did they note that peak enrollment was in 2010-11 and that
numbers have decreased every year since then. I suppose they’d say that
was all due to a great economy, like so many others who do not live near
reality, even in Buffalo. Really, it would never have anything to do
with outrageous prices or record-setting inequality.
Perhaps the men are talking about the business of education, which
has been a good investment for some. The higher ed “racket” involving
dorm building, restaurant building, gyms and climbing walls. Or the
student loan business that’s booming and student loan asset-backed
securities also known as SLABS. Or the online program managers that
actually run colleges online. Or the marketing and ad agencies that are
profiting hand over fist, as some students literally live in their cars
or struggle with hunger. Or maybe they are talking about the bright
future behind unregulated “human capital contracts” (What could go wrong?).
But why should I be so angry, literally fed up? The NY Fed is not the
only organization feeding the “College Mania!” It’s everyone, aside from
Dave Ramsey, Thomas Frank, and too few others. But who reads Thomas Frank? Hopefully it’s the same people who read the two guys from the NY Fed.
If the student loan debt bubble blow ups in coming months, it will be because the US economy had been seriously compromised for decades.
The College Meltdown continues in 2020. This phenomenon is deeper than the coronavirus, the temporary closing of campuses across the US, and the cancellation of NCAA basketball's March Madness. What we are seeing in the news should be a smaller entry in the History of American Higher Education compared to larger trends and social problems that preceded the pandemic.
College and university enrollment has been declining slowly but constantly since 2011, with for-profit colleges and community colleges taking the largest hits. And it follows larger demographic trends which include a half century of increasing inequality, including "savage inequalities" in the K-12 pipeline, crushing student loan debt, decreasing social mobility and the underemployment of college graduates, smaller families, and the hollowing out of America.
There are many parts to the current Coronavirus crisis and its effects on US higher education. But they all boil down to the Trump mantra (defund, deregulate, and privatize) and the opportunity for the elites to capitalize from the crisis, as they did during and after the Great Recession.
[Image below from Wikipedia. Higher education in the US has increasingly relied on for-profit mechanisms for growth and revenues. This includes privatized housing and services and for-profit Online Program Managers (OPMs).]
Higher education is a small but significant part of the US economy, which includes much larger sectors like Health Care and Finance. While the working class will not get bailed out, these sectors likely will, with the sudden crisis used as a rationalization. The crisis of crushing student loan debt and the much larger problems related to 50 years of growing inequality may be more disruptive in the long run, but these matters continue to be ignored.
Whether the next President is Donald Trump or Joe Biden, things could get worse for working families, unless there is mass resistance--right now I don't see that happening. For the moment, many young people are responding by living with family, not going to college, and delaying child bearing. Those who do get an education are also making economic sacrifices. Some, for example are selling their bodies as Sugar Babies to get through school.
Many state economies also look bleak in the near future. Not enough in revenues and increasing Medicaid costs make investments in education difficult to do without increasing taxes or state-level debt. And it's not likely that the wealthy will be willing to pay their fair share, unless they feel economically threatened. If that happens, rich companies and rich people can just move out of state or out of the country.
Higher Education and the Student Loan Mess
In October 2019, Trump Department of Education official Wayne Johnson resigned, recognizing that student loan debt mess was worse than anyone had imagined. US higher education enrollment is supposed to be countercyclical (improving when the economy drops) , but don't bet on it without government help.
Haven't heard any rumors in months, but it should also be interesting to see if President Trump tries to unload the $1.5T in federal loans to his banking friends using an executive order. McKinsey & Company have been tasked to determine the possibilities of such a maneuver, but there is radio silence on that front.
In the education sector, I'm watching student loan servicers and private lenders Sallie Mae (SLM), Navient (NAVI), and Nelnet (NNI) closely. Student Loan Asset-Backed Securities (also known as SLABS) are also worthy of scrutiny given the low rates of student loan repayment.
Insiders in higher education and at bond rating agencies know how bad the College Meltdown has become. They have been tracking it for years, and know the most vulnerable schools by name. What indicators do they use, and why aren't the People privy to the information?
In May 2017, I posted the short piece, Charting the College Meltdown. The article included a spreadsheet of key variables that could be used to gauge the direction and intensity of the downturn in US higher education.
Three years ago, revenues were the only variable in the green, and those numbers were from 2015. Clearly, even revenues had been declining earlier at many institutions, especially at for-profit colleges, community colleges, and smaller private schools.
Additional information has been compiled and analyzed since 2017. For example, Gary Roth's "The Educated Underclass" (2019), painted a disturbing picture of US higher education and gainful employment, and the larger economy that had been producing lots of low-wage jobs and fewer good jobs with security. And enrollment data from the National Student Clearinghouse point to a hollowing out of America and significant declines in state enrollments.
Nathan Grawe's analysis of demographic trends also projected a dramatic loss in the college enrollment pipeline in 2026, a ripple effect of the 2008 Great Recession.
One of the problems with even doing an analysis is the lack of data and the quality of data. As part of their plan to deregulate, defund, and privatize higher education, the Trump Administration has discouraged transparency and accountability measures put in place during the Obama Administration.
Student loan defaults, measured by the 3-year student loan default rate, is a poor indictor of problems in the student loan system. Colleges and universities have learned how to game the system, offering deferments to students to keep debtors from defaulting in the three-year window. Student loan repayment rates, a good proxy for long-term defaults, have been eliminated from the College Scorecard.
Variables, like the actual quality of Student Loan Asset-Backed Securities (SLABS) can only be gained through inside information.
The New York Federal Reserve had been a source for the College Meltdown, but recently they appeared to be more like cheerleaders of the industry rather than objective analysts.
In addition, US Department of Education data is released at a plodding pace, often lagging about 2 years. That's why data from the National Student Clearinghouse are so important.
What variables do you think are the most important in gauging the higher education business? And what variables should be added or removed from the chart? More resources from College Meltdown
