Student Loans and a new Wall Street Trick: “Plunge and Dump”.

An old trick with a new, beltway wrinkle.

Last week President Trump signed an executive order to shut down the Department of Education, and announced he was moving the student loan portfolio to the SBA Administration. This looks suspiciously like an attempt to massively devalue the loans, so that they can be sold to private investors at the lowest price possible.

We’re all familiar with the classic “Pump and Dump” trading technique, where unscrupulous traders artificially increase the value of their holdings through PR campaigns, dubious/false claims, and other tricks, only to quickly sell them to unsuspecting investors who buy into it. This would be a new, perverse, beltway wrinkle on that trick.

Call it the “Plunge and Dump”.

In 2019, the Trump administration brought in McKinsey & Company and others to estimate the market value of the federal student loan portfolio. This was a curious move at the time that showed there was an interest in selling off the loan portfolio to Wall Street. While the onset of Covid likely scuttled any plans that may have been hatching, it’s quite obvious that such designs are back on track.

Project 2025 illustrates the interest in moving the portfolio- and the $107 Billion in annual interest it generates- from the books of the Taxpayers to those of private investors.

The federal student loan program was already in catastrophic failure prior to Trump’s announcement. Payments went to zero under Covid, and my best estimate is that not even 20% of borrowers have resumed making payments today.

The Small Business Administration has no experience/expertise in running the program, which is much, much larger and orders of magnitude more complex than their existing, much smaller portfolio. With the recent layoffs at SBA, they were already going to have a tough administrative challenge. Now, it is an impossible one.

This- and all the other bureaucratic moves we’re seeing to effectively kill most-if-not-all of the Income Driven Repayment plans- is certain to drive up defaults and even further erode borrower (and public) confidence in the lending program. We’ll likely see well over half of borrowers in default on their loans in a year’s time, and potentially far more, depending on how many deferments/forbearances expire in the coming months.

At this point, the politicos in Washington DC are essentially shackled to a corpse.

The Wall Street vultures love this and are surely doing a full court press on Trump. The market value of the portfolio is a fraction of what it was in 2019, and this current move will drive that value down even further- potentially to pennies on the dollar. This is prime hunting grounds for them, assuming they can convince the government to give up the loans, and keep both bankruptcy rights and statutes of limitations stripped from the loans, possibly with an expensive government guarantee on the debt.

Trump needs to think very carefully about such a move. 40 Million Americans are underwater on these loans, including 20% of the MAGA base, and they are pissed. Many, if not most have repaid the original principal but still owe more than they borrowed. These predatory loans- from which the constitutional right of bankruptcy, and other bedrock protections like statutes of limitations, fair debt collection laws, and even Truth-in-Lending laws have been stripped- have infuriated the borrowers like no other loan scam in US History.

This debt is now a true national threat. Over half of US States now owe more than their entire state budgets to the Department of Education (which still exists and has legal administrative authority over the loans, make no mistake). Interest taken from the states is often more than the revenues of major state industries.

• Interest for the State of Maine, for example, exceeds the value of all the lobsters harvested annually in that state.
• Interest greatly exceeds the combined, annual revenue of all professional sports franchises in New York and California.
• The people of West Virginia would have to give all their coal export revenue to the Department of Education for 7 years just to pay off the principal of the student loan debt in that state (not including interest).

The law does give the President (Secretary of Education) authority to sell federally owned student loans. Ironically, this is the same law that gives broad authority to cancel federally owned loans (law that President Biden chose not to invoke for his cancellation attempt). But the Fair Credit Reporting Act stipulates that such sales cannot result in a net cost to the government.

The Wall Street/Beltway schemers will have to do some very creative accounting, in hilariously, direct conflict with all of their past rhetoric (not to mention GAO/CBO analyses) which claimed that student loan cancellation would be a cost to taxpayers. But where there’s a will, there are always ethically bankrupt “experts” in Washington and Wall Street willing to contradict themselves, and tap-dance this 180 degree about-face into reality.

But the naked, “Go F Yourself” hypocrisy of the republicans calling student loan cancellation a “cost” to the taxpayers, but then allowing Wall Street to take the debt for pennies on the dollar will not be lost on the public. People are smart.

He is playing with fire. It will not go well for Trump or the Republicans if they allow Wall Street Swamp operatives to go through with this plan.

If standard bankruptcy rights and statutes of limitations were to be returned to the loans as a part of such a sale, this would be a good thing for student loan borrowers (although likely not for the taxpayers). Clearly, the Department of Education has no business being in the lending business. But Wall Street investors would almost certainly never make such a concession.

A far better solution: The President should immediately suspend the lending program, and (with Congress) implement a temporary (1–2 year) direct funding plan for the colleges at significantly reduced funding levels. During this hiatus, the Department of Education, Congress, Executive Branch and other stakeholders (which must include/emphasize affected citizens) should develop and deploy a new funding model that maximizes educational attainment and minimizes cost. If loans are to be retained in such a model, they must have all of the standard consumer protections (i.e. bankruptcy rights, statutes of limitations, etc) as other commercial loans, and be free, or nearly free of interest, as originally intended when the Higher Education Act was passed in 1965.

Congress should repeal 11 USC 523(a)(8) entirely, and remove the essentially-impossible-to-prove criterion of “Undue Hardship” from consideration in bankruptcy proceedings for student loan borrowers. This will ensure that student loans are treated in the same, uniform manner, as all other loans.

Until such legislation is passed, the President should immediately order the Department of Education to suspend its “new” bankruptcy process, and instead simply stop opposing student loan borrowers’ Undue Hardship claims in bankruptcy court, “Undue Hardship” is sufficiently vague/ill-defined to justify this action.

For discharged debt, the colleges, collectively, should be compelled to reimburse the government for at least half of the amounts originally borrowed, with wealthier colleges assuming a proportional share of the financial burden.

Finally, the President should be prepared to invoke section 1082 of the Higher Education Act, and cancel federally owned student loans as deemed necessary, depending on the volume of bankruptcies that result.