How Did We Get Into the Debt Trap?

No one spoke of college students being trapped in debt until rather recently. Prior to the advent of federal student aid programs, college wasn’t expensive, few Americans regarded it as important to their lives, and what borrowing they did for it was through private institutions that were careful not to lend where they perceived too much risk.

If in, say, 1971, someone had forecast that in fifty years, students would owe well over a trillion dollars in debt and many would face ruined lives because of their borrowing for college, he’d have been laughed at.

So, how did we get where we are today?

In The Debt Trap, Wall Street Journal writer Josh Mitchell gives a detailed history of America’s experiment in using higher education as a mechanism for social problem solving. He also provides many personal stories to underscore the hardships that have befallen students due to our obsession with getting college credentials. Those narratives make the book worth reading.

Unfortunately, Mitchell uncritically accepts the “conventional wisdom” about postsecondary education that propelled influential politicians to believe that they could improve upon the country’s traditional laissez-faire approach to college. That “wisdom” centered on the idea that by subsidizing a certain kind of formal education (that is offered in colleges), the workforce would be elevated to greater productivity, with the biggest gains accruing to poorer people.

Thus, the economy would gain, while poverty and inequality were lessened.  Few doubted that it would work. The key was more education.

But, before the onset of federal intervention to make college “accessible” to everyone, Americans were not undereducated. Much of their skill and knowledge, however, was acquired outside of classrooms—especially through on the job training and apprenticeships.  People found ways to optimize their education and only a small percentage concluded that they needed a college degree.

But those who had college degrees were among the wealthiest in the country. Higher education had obviously worked for them, so why not make it available to all?

The reasoning is fallacious.  Just because X is beneficial for some people doesn’t necessarily mean that having X will be beneficial for everyone. If anyone questioned the logic of “college for everyone,” his objections did not deter the politicians from going full speed ahead.

Returning to Mitchell’s history, the first expansion of government policy into higher education after the WWII G.I Bill, which was limited to those who had served in the military, came when the Russians put Sputnik into space in 1957. That caused a panic among American politicians. President Eisenhower pushed through a bill, the National Defense Education Act (NDEA), which provided scholarships for students who enrolled in college to study math or science. (In fact, the U.S. space program was only slightly behind the Russians and there was no reason to believe that helping a few American students who probably would have studied math or science anyway would tip the competition with the Soviets in our favor.)

The NDEA, however, was small and inconsequential compared with the policies that were pushed by Lyndon Johnson after he became president.  He was eager to launch his “War on Poverty” and was delighted when his advisers suggested that he make higher education subsidies a component of it. In a speech early in his presidency, Johnson declared, “higher education is no longer a luxury, but a necessity.”

Not only was college supposed to alleviate social problems, but also to make the economy stronger. Mitchell states that during the early 1960s, employers were having trouble finding enough qualified workers, but that claim strikes me as an aspect of the conventional wisdom announced by advocates of college subsidies. Mitchell cites no evidence to support it. Just as individuals were good at optimizing their skill levels, so were employers good at finding or training people to do the work they needed.

But how best to go about promoting increased college access? Should money go to students, or to schools? The administration settled on the former, based on the dubious notion that if students got the money, colleges would then have to compete vigorously on price and quality to get them. Nothing of the sort happened, but the die had been cast.

Back in the 1960s, it was still thought important to keep down federal deficits, and with many other spending projects plus the Vietnam War consuming tax money, the administration wanted to find a way to keep the cost of its higher education program hidden. The solution was to create a nominally private entity, the Student Loan Marketing Association (known as “Sallie Mae”) that would buy up student loans made by banks. Crucially, Sallie Mae could borrow from the government at just a shade above the government’s own borrowing cost. Thus, lots of federal dollars were siphoned off into student loans, but it didn’t appear so.

As Johnson had hoped, Sallie Mae took off. College enrollments began to rapidly increase. Within a few years, however, the first sign of unanticipated trouble arose. Many educational scams were popping up, as companies were created to provide training for high school grads. A great many students were lured in and later defaulted on their loans when their “education” proved valueless.

Mitchell reports that taxpayer losses on defaults doubled each year in the early 1970s, with thousands of student debtors declaring bankruptcy. That was very bad for the budget and for Sallie Mae. This was, he writes, “the first red flag that the government’s loose lending encouraged risky behavior.”

Relying on its carefully cultivated relationships with key members of Congress, especially Representative William Ford of Michigan, Sallie Mae was able to get legislation to protect it and increase its profitability. No more bankruptcy for students, and payments of 3.5 percent on each student loan it purchased. And in 1978, the law opened student loans to wealthier families. Borrowing at low rates for college, investing the money during that period of high inflation, and repaying it became a good financial strategy for them. College enrollments and borrowing kept growing rapidly.

How did colleges respond? In what I think is Mitchell’s best chapter, he explains that officials chose to capitalize on the boom by increasing tuition. Most of them realized that by charging students more, they could spend the additional money on student amenities and things designed to enhance the prestige of the school. Prestige became increasingly important after the creation of the U.S. News college rankings in 1983. Low cost, quality instruction did not help a school’s rank, but spending on better facilities and star faculty did.

Just because X is beneficial for some people doesn’t necessarily mean that having X will be beneficial for everyone.

Throughout the 1980s and 1990s, the trends accelerated. More students went to college, costs kept rising sharply, and many borrowers (both those who had graduated and those who hadn’t) were struggling with their repayments.

President Obama strongly encouraged college when he set a national goal of becoming the nation with the highest percentage of college educated workers. Under his administration, the switch was made from nominally private loans through Sallie Mae to direct federal loans, but that did nothing to change the dynamics. Increased student lending was in fact claimed as an economic benefit since the money would, according to Obama’s higher education adviser James Kvaal, “ripple through the economy.”

Again echoing the conventional wisdom, Mitchell credits Obama’s “investment” in higher education as having given the U.S. the world’s most prosperous economy. The trouble with that notion is that the U.S. had the world’s most prosperous economy long before the government began pushing college education as a national elixir.

This was the time of the housing bubble collapse and Mitchell sees that the exact same forces were at work—risky lending with no consequences for the government, but lots of bad consequences for both the borrowers (i.e., homeowners and students) and the taxpayers. Although the feds stopped (for a time, anyway) their imprudent housing policies, all that Obama did on the student loan front was to make it somewhat easier for students to repay. That palliative eased the pain for some, but many still borrowed to excess and found themselves deeply in debt after graduation.

One such student was Derek, who thought that getting a law degree would get him and his family out of poverty. He borrowed heavily to attend Charlotte Law School, a for-profit school that accepted applicants with low LSAT scores. (That’s another of the unanticipated effects of the “college for all” policies that Mitchell doesn’t address, namely that colleges accepted academically weaker and weaker students, often resulting in declining rigor and grade inflation to keep them in school.) Although some of Derek’s classmates did become lawyers, law school didn’t work out as Derek had hoped; he wound up teaching kindergarteners.

The lesson Mitchell draws is that schools must do more to “ensure” the success of their graduates. The problem is that we’ve so oversold higher education that it is impossible to ensure success. There simply aren’t enough “good” jobs for all the graduates.

What should be done?

Mitchell suggests three sound ideas: requiring colleges to accept some of the risk if their students default, expanding postsecondary opportunities other than college, particularly apprenticeships, and to stop subsidizing grad school. But he also suggests three poor ones: forgiving the accrued interest on student loans, making community college completely free, and guaranteeing that all Americans have “access” to higher education. Any such guarantee is certain to have undesirable side-effects, just as the federal student aid programs always have.

The only certain way out of the debt trap is for the government to stop financing higher education entirely.

George Leef is director of editorial content at the James G. Martin Center for Academic Renewal.