How did we get into the Student Loan Mess?

For all of the words devoted to our student loan mess (or “crisis” or “bubble”), little has been written on its origins. We know that student loan debt now exceeds $1 trillion and that many young Americans are struggling with a heavy burden, but how things got that way is largely a mystery.

Fortunately, a very readable and enlightening book has recently been published that clears up the mystery, namely The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem.

The authors are University of Delaware sociology professor Joel Best and his son Eric Best, who is assistant professor of emergency management at Jacksonville State University. They do an excellent job of explaining the genesis of our student loan system and how we have blundered our way through four distinct “messes.” But when they have concluded the history lesson and get around to offering solutions, the book disappoints.

Let’s go through the history. Best & Best cover it thoroughly.

The GI Bill in 1944, with its college benefits for veterans was the government’s first move into direct assistance for students. That’s widely known, but just what effect did it have?

Not as much as most people probably think; fewer than half of the vets used their benefits, and most of those who did used them not for college degrees, but instead for vocational training. GI Bill benefits also spawned exactly the kind of scams, hoaxes, and overcharges that we hear so much about these days.  Nothing new under the sun: when the government makes lots of money available, schemers will figure out ways of getting some.

Nevertheless, in post-war America, the authors write, there was “general agreement that society needed more highly educated people.” It’s not clear whether or not the agreement was that government subsidies for college was the best route, but it’s the one politicians chose. By the mid-1950s, a number of states had begun guaranteed loan programs for students who wanted to attend colleges or universities in their systems.

Enrollments continued to slowly increase, as they had been doing before the war. And then came Sputnik.

The Soviet space triumph immediately led politicians to champion legislation that would address this perceived calamity, the National Defense Education Act of 1958. “The Cold War,” the authors write, “demanded that America stop wasting its brainpower.” Thus, Congress passed the NDEA, which made federal funds available to colleges (on a matching basis—one of their dollars for nine federal dollars) to lend to students “with superior academic background” who either wanted to teach or study science, math, engineering, or a modern foreign language. Such students were able to borrow up to $1,000 per year through the program.

That program also contained an idea that we hear much about today—forgiveness of a large portion of the debt for those who went into an approved line of work, public school teaching in this case.

The NDEA was responsible for popularizing the concept that it was perfectly fine to borrow for college, something that many Americans had previously regarded as inappropriate. If you wanted your children to go to college, you saved for it.

Politicians (most of them anyway) looked upon the NDEA and liked their handiwork. It was popular, so why not go further?

After Lyndon Johnson’s 1964 landslide victory, the big majority in Congress that wanted to help more students passed the Higher Education Act of 1965. Students wouldn’t have to meet the restrictions of the NDEA to qualify—since going to college was assumed to be good, why limit government help just to future teachers, mathematicians, scientists, and engineers?

And there was also a big change in the program. Rather than the federal government giving colleges money to lend to students, the HEA had students take out loans from private lenders, which the government would in turn guarantee. And when market interest rates rose to the point where the government had to pay banks a premium to induce them to make student loans, Congress promptly acted to sweeten the deal.

While student loans had originally been mostly a Democratic idea, by Nixon’s time both parties were claiming credit for this rapidly growing middle-class benefit.

Exactly what was the “mess” in all this? The authors refer to this period as the “wasted brainpower” mess, meaning that too few young people were failing to expand their brainpower by going to college, a problem that required the federal government to get into college lending.

Those efforts, however, had some unintended consequences that led to the second “mess.”

That was what the authors call the “deadbeat” mess. Its key feature was the fact that a rising percentage of the students who had taken out college loans were defaulting. The authors see that rising defaults were inevitable because the expansion of “access” meant an increasing percentage of students would be academically weak, but when politicians saw that, they felt the need, as usual, to do something.

Naturally, they held hearings, where much attention was focused on the high percentage of defaulters who had gone to proprietary institutions. Congress came up with two remedies for this “mess.” One was to limit the ability of students to avoid college debts through bankruptcy. (At first, the rule was no bankruptcy in the first five years after graduation, later changed to seven, and finally in 1998 to an almost complete prohibition). The other was to limit the amount of revenue a proprietary institution could take in federal student aid. Initially, the rule was no more than 85 percent, later raised to 90 percent.

The cost of college kept rising rapidly and the number of students who decided to borrow heavily so they could go rose as well. As a result, the third “mess” began impressing itself on American minds early in the new century. Best & Best call it the “crushing debt” mess. It focused on “students who had pursued the American Dream of higher education, only to find themselves in hock to their eyeballs.”

We’ve been grappling with this mess for the last few years, with interest rates cut to 3.4 percent, the move to all direct government loans, and greater lenience regarding repayment.

The authors’ fourth mess is mingled with the third; it’s the current trouble with high default rates at for-profit schools. They’re surprisingly hostile toward them, writing, “Academia’s traditional system of trust goes out the window when the major purpose of a university is to make as much money as possible.” The trouble with their view is that for-profit management is not incompatible with educational integrity; nor is non-profit management any guarantee of it.

All right, so what do we do?

Our authors understand that the current student aid system is badly flawed because “it leads students to running up a tab for higher education without thinking through just what might go wrong.” But they don’t think there is any political will for significant change, and in any event they believe that the government needs to help students get into college. For that reason, their suggestions for change are pretty tame.

One idea is to limit student borrowing based on projected earnings after graduation. The trouble is that it isn’t possible to accurately project how well a student will do.

Another idea they advance is that state governments should reverse course and start to increase their support for state schools. That, however, merely shifts the costs of our wasteful system around. It does nothing to address the essence of the problem—many students now go to college who derive little or no benefit from it.

A similar idea is for the federal government to give more student grants so “vulnerable, risk-risk students” won’t have to borrow so much. Again, however, that just shifts the costs. Instead of taxpayers possibly having to pay for dubious education, they will definitely have to pay.

I couldn’t agree more with the Bests that we must control the costs of higher education. As long as federal money remains abundant, however, there will be little incentive for college officials to cut down on administration, slice away at instructional costs (i.e., make the faculty more productive) or reduce non-instructional costs like sports.

The book is valuable for its history of the federal student loan system and the problems it has caused. But because the authors believe that the government must help students get through college, they only offer palliatives that can’t clean the mess up.