Contract & Fairness – beyond the bargain

1. Contract & Fairness – beyond the bargain Case Study: Student Loans

2. YOUR STUDENT LOAN CONTRACT • How much is your tuition fees loan for? • How much will it cost you to repay? • How long will it take to repay? • How will it affect your future self? • So…is it an unfair contract? In what ways? • Think about contract theory you have studied so far.

3. Your contract with the student loan company • What is being distributed? • Public resources – credit instead of tax. • Debt or ‘not really debt’? • The consequences of debt (see Invisible Army video for seminar) • Autonomy, risk aversion and future choices • Social control • Distributive questions: • Intergenerational justice • Class-Based • Possibility of parents paying it off, if they can afford it • The less you earn (over £21K) the more and the longer you pay • Starting salary of £25K – repay £57K over 17 years • Starting salary of £40K -repay £44K over 9 years • http://blogs.lse.ac.uk/politicsandpolicy/archives/29978 • And you probably will have other debts

4. Student debt as product – Other Contracts • ‘Privatising the Student Loan Book’ • YOUARE PRODUCING SURPLUS RISK FOR SALE BY THE GOVERNMENT. • Securitisation • Sell right to collect on defaulted loans to 3rd party companies – who fund the purchase by selling bonds to investors, guaranteed on the income received upon payment • Advantages to Government: • Monetisation - immediate receipt • Shifts risk of default • But difficulties • Unattractive to investors – high default rate, not market-tested, unpredicatble. Inflation might outstrip the rate of interest • Impact – need to make the investment worthwhile • More aggressive debt collection • Unilaterally and retroactively altering the terms – interest rate, write-off period, income threshold (Project Hero) • Happened in New Zealand in 2012

5. Can they do that? • (Procedural fairness – WWMJRD?) • A contract of adhesion – bargaining power. • Consumers and evaluating risk. Subprime lending? • Exempted from the Consumer Credit Act • 2012/2013 Loan Agreement: When you take out a loan, you will sign a declaration form which will be a contract. This states that you have read and understood the Terms and Conditions. You must agree to repay your loan in line with the regulations that apply at the time the repayments are due and as they are amended. The regulations may be replaced by later regulations

6. Credit Default Swaps • Purchaser guarantees to cover a certain proportion of defaults, in exchange for a fee • Impact: • Would universities buy them? • How would this affect their practices? • See further: http://exquisitelife.researchresearch.com/files/rf-special-4-pt-3.pdf

7. JUSTICE BEYOND ECONOMIC DISTRIBUTION • What is the impact on public education? • What are you actually paying your £57K for?

8. WHAT’S GOING ON HERE? • Consider Unger in this week’s seminar reading - ‘The Critical Legal Studies Movement’

9. 1. Market Organization is at odds with democratic freedom • Because it gives the occupants of some fixed positions the power to reduce others to dependence. Small groups have a decisive say over the conditions of collective prosperity/impoverishment. • 2. Uncertainty/risk are not equally borne • Large entities can protect themselves from risk • The burdens of flexibility are borne by the individual • 3. Contract rights – individual or collective – are insufficient to alter this order unless they change. As it stands, contracts are covers for a power order. • 4. Need to move beyond an individualist conception of obligation to a more communitarian one • Recover counter-principles

10. ALTERNATIVES (within contractual scheme) • Loan Forgiveness? • Modifying the Terms of Contracts? • How- where does the pressure come from? • Michael Trebilcock and well-informed consumers? • Where is your leverage? • Political activism • ♯copsoffcampus • Displacing risk • Insurance