According to the latest student loan debt statistics, there are 45 million student loan borrowers who collectively owe $1.7 trillion of student loans.
"As is so often the case, what began as a creative solution to a social inequity became corrupted by greed and mismanagement," a professor of the history of social work told us. "Sallie Mae was the main facilitator when Congress created the student-loan program back in the 1970s during the Johnson administration. It was a profit-driven enterprise that essentially funneled money from taxpayers to colleges and universities. Congress envisioned it as a partnership between the government and banks to broaden the American dream of a college education for children of modest means."
GVT: How did it get so out of control? I don't even know how many zeros are in $1.7 trillion. A simple associate or even a bachelor’s degree doesn't provide the kind of income it would take to repay such an enormous sum.
SWP: That's the problem, of course. How did 45 million students qualify for $1.7 trillion of loans without any visible income? The question itself is absurd so the answer ventured will be equally absurd.
GVT: The original intent was good. What went wrong?
SWP: Here are the twists and turns this social program took along the way that turned a social solution into a social problem:
- Because of the government guarantee, the banks subjected no one to credit analysis. In fact, if the parents' ability to repay these loans was considered, the program would become regressive. Only financially qualified people would be able to access the funds and the entire purpose of the program would be eradicated. So, it was up to the colleges. If they admitted a student, the student qualified for a loan guaranteed by the federal government through Sallie Mae.
- Increased access to student loans is a double-edged sword. Easy access to federal student loans means more people can attend college and live the American Dream. At the same time, colleges and universities have increased tuition because they know everyone will pay increased costs to get access to higher education. Simply put, consumers are less price-sensitive to tuition hikes if there is available money to pay for school.
- Also, state support for higher education declined. Many states facing budget cuts and a decreasing tax revenue were unable to offset increasing tuition, room and board at many state colleges and universities.
- In addition, state flagship universities developed an identity crisis. They became exclusive. The whole purpose of state universities was to educate everyone in the state with equal opportunity. When the student loan program kicked in, exclusive state universities began to raise their tuition and fees because more money was available. In other words, enormous amounts of money flowed out of the federal government into state coffers laundered through Sallie Mae.
- Private for-profit universities began to explode across the country admitting students by simply filling out the student loan applications for them and then providing a sub-standard education and granting diplomas not recognized by employers in the field of study.
- Parent PLUS Loans and Graduate PLUS Loans were too easy to get. Parent PLUS Loans were only capped by the cost of the school. Again, PLUS Loans weren’t based on an ability to repay the student loans. Parents often borrowed as they approached retirement age and those loans have the highest interest rate among federal student loans, which made them prohibitively expensive to repay.
GVT: How can we fix this mess?
SWP: As you can imagine, the suggested solutions are controversial. However, since the corruption of this well-intentioned student loan program in effect swindled a whole generation of aspiring students, most of these loans will go into default. In effect, the taxpayer is already on the hook for a large portion of the $1.7 trillion. Fair mitigation steps that place responsibility on the right shoulders are the only solution.
- Loan forgiveness across the entire system is a bridge too far. However, the current administration's program of loan forgiveness for anyone who goes into public service is a good starting point.
- Calculating the up charge at state universities that came from the state's attempt to transfer federal funds to state coffers and refunding that amount to the student borrower would be fair and a substantial mitigation.
- Expanding Pell Grants that were replaced by student loan guarantees would cut back on the pretense of student borrowing (loaning amounts of money to students that they will never be able to repay is a pretense designed to hide the true cost of equitable educational opportunity and turns a needed grant into an impossible loan) and make the cost clear to the taxpayer upfront.
- Disqualify all private universities from the student loan program.
Even these mitigation steps are controversial, but I think they are a reasonable beginning. We must start somewhere.