Why Do Students Have So Much Debt?

September 25, 2019 0 By Stanley Isaacs


At the University of Pennsylvania, where I
went as an undergrad, the average tuition and fees in the 2018-19 school year for a
private four-year college are over $50,000. And at public four-year university, like U.
of Michigan in Ann Arbor, the cost for out-of-state students is around $49,000 and in state students
over $15,000. Of course, these numbers do not include room,
board, or other expenses, such as books, transportation, and the personal technology that is increasingly
required to keep up with all of the work. When you throw in all of these, the final
numbers can be truly staggering. So how, on earth, do American students pay
for this? As most of you know (all-to-well!), most rely
on scholarships, grants, and loans to cover their costs. Scholarships do not need to be repaid; grants,
sometimes do; and student loans, like death and taxes always come back to bite you because
they always need to be repaid. According to Forbes Magazine, student loan
debt is the second highest consumer debt category next to mortgage debt. 44.2 million borrowers owe $1.52 trillion! The numbers are mind-boggling! But how did our society get here? The answer is two-fold: the US government
and private lending companies have made accruing student loan debt very easy –and- the cost
of American higher education has risen enormously (a situation related to many factors, not
the least of which is the availability of student loans!). Today, I will break down the history of student
loan debt and explore why such debt has come into being and become so commonplace for so
many of us. In their book on student loan debt, sociologist
Joel Best and quantitative researcher Eric Best, a father-son duo, explain the evolution
of student loans as a series of snowballing “messes.” The first “mess” they identify began as
a result of WWII, as the government wanted to ensure that more Americans had access to
higher ed. (and also to prevent them overloading a labor market that might not have room for
them). In 1944, the Servicemen’s Readjustment Act
(commonly known to us as the GI Bill) offered benefits for veterans, including loans to
help purchase homes, farms and businesses. It also sent payment directly to schools up
until 1952 to cover tuition and fees; book costs; and room and board and it gave veterans
a living allowance. 7.8 million veterans received some educational
benefits from this program. Sadly, a third of the money in the educational
part of the GI Bill was wasted on fictional institutions, job-training scams, and real
schools that inflated their fees. Clearly, more oversight was needed. But instead of turning their eyes to the bottom
line, the US government turned their eyes (and educational ambitions) to the stars. After the Soviets launched Sputnik (and threatened
to dominate the space-race), the federal government passed the National Defense Education Act
of 1958. This was the first large-scale federal student
loan program for higher education in the US. Its rationale was lofty—to cultivate an
army of super-nerds who could deploy their mad science, tech, and language skills to
defend the nation during the Cold War. The Act states: The Congress hereby finds and declares that
the security of the Nation requires the fullest development of the mental resources and technical
skills of its young men and women. The present emergency demands that additional
and more adequate educational opportunities be made available. The defense of this Nation depends upon the
mastery of modern techniques developed from complex scientific principles. It depends as well upon the discovery and
development of new principles, new techniques and new knowledge. So… here’s how the first student loans
distributed under this program worked: the federal government made money available to
colleges. Colleges would then match at least one dollar
for every nine that the government provided. Students could then borrow this money as a
loan to cover costs. It seemed like a good fix. In 1965, the Higher Education Act added scholarships
and work-study programs into the mix. That same year, the National Vocational Student
Loan Insurance Act established federally guaranteed loans for vocational training. More students than ever had access to loans,
which meant that more people had access to higher ed. But here’s the rub: The cost of higher education
was not only rising, but it was also outstripping the rate of inflation or the percent that
prices change from one year to the next. Here’s a crude example of how inflation
is supposed to work: Imagine that tuition and fees for a given school year are $30,000
and the cost of grocery trip is about $100. If inflation were say 2%, we might expect
the same groceries to cost about $102 during the next year. We would therefore expect tuition and fees
to reach $30,600 if they rose at the same rate. However in reality, tuition and fees in the
US were rising at a much higher speed than inflation of other products. But why was this happening? In part, it was due to colleges were making
extravagant changes to attract and keep top students because they were more statistically
likely to land high-paying jobs and repay their debts on time. This involved updates to infrastructure, like
dorms, classrooms, eating facilities, and fitness centers in order to increase their
posh appearances and justify sky-rocketing costs. It was also because students were being treated
more like customers and less like students and they were willing to pay these higher
fees in order to get the perks. In fact, it became so easy for low-and mid-
income students to finance college with loans, that many stopped paying attention to the
cost of higher ed. The availability of student loans meant that
colleges could raise prices without really affecting enrollments. As a larger number of people took out loans,
there was a greater chance that more individuals would default on those loans. Add to this one more wrinkle: vocational schools
were generally for-profit, so they were more focused on enrollment numbers to increase
their access to government money. As some institutions lowered admission standards
to fill seats and line pockets, they filled their classes with people who were more likely
to dropout of school, causing a spike in student loan defaults. One response to these defaults was for the
federal government to offer more grants (as opposed to loans) to students from low-income
families. In 1972, Senator Claiborne Pell created the
Basic Educational Opportunity Grant program (later to be renamed Pell Grants). As historian Andrew Delbanco reports, in 1976
the maximum federal Pell grant covered nearly 90 percent of attending a four-year public
institution. By 2004, these grants would cover less than
25 percent, causing students from this demographic to supplement their grants with even more
loans. Another federal response to the spike in defaults
was creating the Student Loan Marketing Association (also known as Sallie Mae), an entity mandated
to manage student loans. So, here’s how Sallie Mae worked: A bank
lends a student money. The bank sells this loan to Sallie Mae, enabling
that bank to re-lend the money to a new customer. Sallie Mae issues a government-guaranteed
debt on the loan, which makes the loan a relatively-safe long-term investment. Sallie-Mae bundles these loans and sells them
to investors. Though Sallie Mae has since been privatized
and basically none of what I told you still holds, it was a convenient arrangement, with
an unexpected side-effect on the number of individuals that would leave school in debt. If this is the first “mess” that the Bests
identify related to student loans, the second has to do with how the government handled
those who defaulted on their loans. In 1976, an amendment to the Higher Education
Act made it illegal to declare bankruptcy within the first 5 years of one’s repayment
period. (In 1990, this ban was extended to 7 years). Later amendments made borrowers ineligible
to discharge their student loans through bankruptcy unless they could demonstrate undue hardship. Other policies made it easier to repay one’s
debt by delaying the start of payments or by reducing the size of installments–options
that would ultimately cost the borrower more in interest payments. And today, there are two main categories of
student loans: subsidized and unsubsidized. Subsidized loans are for those who can demonstrate
financial need. For years, the Federal Perkins Loan Program
provided funds for college or career school for students with financial need. The Perkins program ended on September 30,
2017. Today, students who demonstrate financial
need can apply for Subsidized Stafford loans, which are available regardless of one’s
credit score (because, let’s face it, most 18 year olds don’t exactly have credit scores
yet!). With these loans, the government pays any
interest that accrues on the loan while the student is still in school. Unsubsidized loans are for students who need
help paying for higher education, but have a smaller financial need. With an Unsubsidized Stafford Loan, students
are responsible for paying back the interest that accrues while they are in school, but
they don’t have to make payments until they leave school. Parents can also take out loans to pay for
the education of their children called PLUS loans. PLUS loans are made by private lenders or
can be direct loans from the federal government (if the borrower proves financial need). These require a review of credit history,
are not subsidized or guaranteed, and repayment begins immediately. PLUS loans are also available to graduate
or professional students. Finally, there are a wide variety of direct
loans available, which can be taken from banks or other lending institutions. Many students find it annoying to keep track
of so many different kinds of loan payments when they graduate and they consolidate, or
combine, their loans with one agency for a fee. This makes it easier to track payments. It also allows individuals to lower their
monthly payments by extending their repayment period. In February 2019, the Federal Reserve Bank
of New York’s Quarterly Report on Household Debt and Credit reported that outstanding
student loan debt was at $1.46 trillion. And it had increased, if you can believe it,
$20 billion since the third quarter of 2018. It also reported that 9.08% of student loans
were 90 days or more delinquent. This debt can lead some into another “mess”….as
the Bests describe it… financial paralysis for the individual. So the historical Catch 22 that is student
loan debt in the US plays out in a couple of ways. Because the government and private banking
institutions created student loans in order to increase school enrollment and spread access
to education. But the ballooning costs of university and
vocational training, plus the increased complexity of loan initiatives means that more students
are defaulting on loans, dropping out, and leaving school in debt. So a solution that was initially meant to
make education more accessible and affordable has created an environment where exactly the
opposite is true for many looking to get higher degrees. But turning students into customers has also
created expected push back from frustrated debtors. Take for example the Occupy Student Debt Campaign,
which was launched in 2011 as a student debt abolition movement. And it’s based on four basic principles: 1. Free public education, through federal coverage
of tuition fees. 2. Zero-interest student loans, so that no one
can profit from debt. 3. Fiscal transparency at all universities, public
as well as private, 4. The elimination of current student debt, through
a single act of relief.