Learning from the Housing Crisis of 2008: Debtors Must Unite and Fight Back
Kari Hensley, Financial Researcher, The Debt Collective
We often hear that everyone in the US can live “the good life" if we work hard and play by the rules. It’s a powerful idea, the American Dream. At its core it’s a story about equality, opportunity, and living a middle-class life. It’s the idea that no matter where you come from or who you are, if you work hard enough, you can live comfortably.
And part of the idea is that education offers everyone a way into the middle class or better. Education is supposed to be a path towards a good job and steady income. Similarly, home ownership is supposed to be the way that people can build wealth and pass it down to the next generation. These are pillars holding up the American Dream: education leads to income and home ownership leads to wealth accumulation.
But for too many people in the U.S., the dream of upward mobility is a far cry from reality. The insidious side of the American Dream is not only that it doesn’t deliver on its promises, but it also places the burden of failure on the individual. If someone is poor, the story goes, then they just didn’t work hard enough; it’s their responsibility and not the unjust system that creates those conditions.
What was the mortgage crisis anyway?
The 2008 global financial crisis was brought on, in part, by the widespread practice known as subprime mortgage lending. Lenders targeted low-income people and people of color for loans which could never be repaid. But to make matters worse Wall Street financiers created complicated financial products that were based on these loans. These financial products, including securities and derivatives, were highly risky. They were like a house of cards upon the shaky foundation of subprime mortgages.
When people started to default on these subprime mortgages, the whole system came crashing down. Approximately 6.7 million homes were lost to foreclosure between 2006 and 2015, and roughly 8.7 million jobs vanished between 2008 and 2010. Shock waves were felt across the financial industry because so many banks and hedge funds were trading in these “mortgage-backed securities.” In 2008 after one major Wall Street bank folded (Lehman Brothers), it looked like the whole financial industry would have to make big changes in order to survive.
But what happened instead was unprecedented. Rather than help needy families, the U.S. federal government stepped in and injected $700 billion into the very banks and investment funds that created the crisis. And this bailout was just a drop in the bucket when compared to the trillions of (secret) funds that would follow.
Rather than taking a hard hit for their reckless behavior, the “too big to fail” banks were allowed to grow even bigger. The six largest, JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley, together grew by 39 percent between September 2006 and September 2011 to control a total of $9.5 trillion in assets.
In the end, the lenders that were responsible for the recession came out of the so-called “crisis” by profiting billions of dollars. As we’ve heard so many times, the banks got bailed out and the people got sold out.
But things could have been different. The federal government could have assisted homeowners in a way that made a real difference. The mortgage lending industry could have been forced to make serious changes. The banks could have been broken up. Predatory lenders could have been prosecuted.
As the effects of the recession spread throughout society, a number of people who were unemployed decided to turn to education to improve their financial circumstances. After all, we're all told that education is the key to a better job.
A New Crisis: Student Debt
When millions of people lost their homes and jobs as a result of the financial crash of 2008, many of them turned to education to learn new skills to find better paying jobs. In short, a bad economy meant more people returning to school. And since most people must borrow to pay for education, this meant more people taking out student loans.
For many living in the Great Recession, for-profit schools seemed to offer an opportunity to learn new skills and find a better paying job. The years following the 2007-2008 financial crisis were boon times for for-profit colleges. These schools are traded on the stock market and are typically owned by large firms on Wall Street (like the banks involved in trading the risky mortgages mentioned above). These schools actively preyed upon people of color, the poor, military service men and women, single mothers, and those who would be the first in their family to attend college.
For-profit schools make up to 90 percent of their revenues from student loans and most of them charge high tuition and pressure students into taking out huge amounts of debt. Many of these schools have been charged with fraudulent recruiting and lending practices, and they have a track record of exploiting their students while making billions for their Wall Street owners and investors.
In the years following the financial crisis, tuition at traditional schools has risen sharply, as well. Between 2007 and 2014, non-profit schools raised tuition rates by 28 percent. And due to decreases in state funding for schools, the burden of payment has shifted from public to private sources, such as you and me and our families. Further, the middle (median) income (accounting for inflation) has decreased by 8 percent in those same years, making it more difficult for people to pay off their student loans.
So, just as tuition has gone up, wages have gone down creating a desperate situation for those trying to live the American Dream.
Today over 41 million people have student loan debt. Education debt now totals over $1.3 trillion. That’s an 80 percent increase in the total owed since the recession (Forbes, "Student Debt Crisis" 2016). And this number grows by about $3,000 every second of every day.
And because the Department of Ed rakes in $12 billion in profit, it has little motive to push for student debt relief programs. The paltry programs that the Obama administration recently instituted, like Income-Based Repayment (IBR), can actually yield more profit for the Department of Education in the long run, sucking former students dry for decades. Meanwhile, administrators and executives reap millions in compensation.
The same poor people and low-wage workers who were hit hardest by the mortgage crisis who are also disproportionately non-white, are now suffering through crushing levels of student debt. Data show lower-income families struggle more with their debt payments, as those payments represent a higher percentage of their income. For example, in zip codes where the income is $20,000 a year, student debt payments equal about 7 percent of income, but in the highest-income areas student debt payments are equal to just 2 percent of household income.
In other words, even though wealthier households may have a much higher level of debt, they can more easily afford to pay it off, while the less fortunate are stuck choosing which basic needs to pay for and which to go without.
In many ways, student debt for low-income students parallels the subprime loans that homebuyers took out. Both groups were made more vulnerable by those debts that could never be repaid. The difference now is that people with student debt are organizing and working together to make sure that the creditor class does not get rewarded again.
We will not stand for another Wall Street bailout!
Alternatives exist. In the current moment, across the country, thousands of students and former students are collectively organizing around the issue of student debt and taking a stand against the financial injustices of the education system.
The Debt Collective began as a group of students who attended Corinthian College. It has grown to include thousands who attended scam schools in every state. It also includes solidarity members from private and public schools across the country. Campaigns to come could include debt strikes, debt payment slow-downs, and other methods for pushing back against predatory lenders.
If homebuyers had been collectivized in 2008 they may not have lost their homes. If student debtors organize, they might be able to get their debt cancelled, stop wage and tax garnishment, challenge their decimated credit scores, insist on better bankruptcy laws, and champion real solutions like free higher education. With over 40 million Americans carrying student debt, that $1.3 trillion can become a powerful instrument in the hands of organized debtors poised and ready to strike.