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.