The Student Debt Crisis and Its Deniers

The year 2016 seemed to begin with the promise of actual reform to federal student loan policy, with meaningful consequences for the industry. Bernie Sanders thrilled ...

The year 2016 seemed to begin with the promise of actual reform to federal student loan policy, with meaningful consequences for the industry. Bernie Sanders thrilled many students, and more than a few parents, when he promised free college. Liberal and conservative pundits dismissed that idea, but Hillary Clinton couldn’t ignore voter enthusiasm. She announced a plan last summer to eventually make going to school debt free.

In Clinton’s plan, families making less than $125,000 wouldn’t pay any tuition at four-year state institutions. And, for those who had already borrowed, Clinton promised an immediate three-month repayment holiday to give alumni a chance to refinance their loans and enroll in existing income-based repayment plans. She also pledged to make it easier for employers to offer student-loan repayment benefits. Entrepreneurs starting businesses could also get some forgiveness, the kind of exoneration currently available only to people working in the public sector for at least a decade.

Those tepid, feel-good reforms didn’t get much coverage as the rancorous general election really got under way. Donald Trump already had made a smattering of vague statements during the primaries about getting universities to cut costs, forgiving loans after 15 years, and capping monthly payments at 12.5 percent of monthly income (even though the federal government already offers a repayment option that cuts off at 10 percent). His supporters, opponents, and most journalists didn’t care about those suggestions then and don’t seem to now. Obamacare’s impending repeal has instead taken center stage, whenever the press hasn’t been distracted by late night tweets, victory tour photo-ops, and potential appointees being treated like contestants on The Apprentice.

Betsy DeVos initially didn’t get as much attention as the men paraded around in competition for the Secretary of State, until her contentious confirmation hearings. Neither senators nor citizens trusted this wealthy Trump donor who had never worked in education, either K–12 or postsecondary. Democrats certainly grilled her on that during confirmation hearings; but she was never formally asked to defend her financial ties to the student loan industry.

Today’s financial aid doesn’t lessen inequality—but actually exacerbates it.

DeVos’s family has indirect investments in a private loan refinancing company. Until recently, such firms acted as the middlemen between creditors, policymakers, schools, and students, adding confusion and additional expenses to a federal loan program that had brokered deals between banks and undergraduates. Some of these firms have closed, or at least lost a lot of money, after the government’s so-called Guaranteed Loan program ended. These financial institutions (including the one in which the DeVos family has a financial stake) subsequently started lobbying the Trump transition team to permit such institutions to once again be involved in government loan programs.

The disinterest in student loans right now might actually be a good thing. For the past several months, a debate—over whether a student debt crisis actually exists—has spilled out of the confines of departments of economics and sociology, with some casting aspersions on whether wholesale change or significant reforms were even necessary. The war was oddly about how to approach the topic. Economists embraced aggregate statistics collected over the last few years. Those numbers defied the horror stories that made headlines. Economists agreed that there might be problems, but nothing that couldn’t be fixed by fine-tuning the financial-aid system. Sociologists, in contrast, combined long-term economic trends with on-the-ground research. Their findings indicated that a catastrophe was coming, perhaps already here. Such fights didn’t seem to make much of an impact on the presidential race, but did find its way into newspaper opinion pages, podcasts, and even late night comedy news shows.

Sandy Baum, an emeritus Skidmore College economist and current Urban Institute fellow, appeared on NPR to dismiss fears that mounting student debt was a coming or present-day catastrophe. Her short, terse, but still dense Student Debt: Rhetoric and Realities of Higher Education Financing dismisses the very idea. She blames journalists for writing the sensational stories that inspire politicians, like Sanders, to irresponsibly demand free tuition and debt forgiveness. She reprimands reporters for failing to realize that college is an investment “which pays off very well on average and for most people,” and for focusing instead on the minority of borrowers (usually unemployed and/or homeless) who are many thousands of dollars in debt. These stories pair horrific accounts with aggregate statistics: 40 million Americans with college debt and $1.3 trillion total owed.

Baum considers those numbers insignificant, and the individuals in question to be merely “outliers” generally at fault for their plight. After all, a little more than 40 percent of Americans have never pursued any kind of postsecondary study. The rest may still owe money years after leaving college, with or without a degree, but the vast majority of the almost 60 percent of Americans with some postsecondary schooling didn’t borrow more than $25,000. They seem to be doing not just fine but better than citizens without advanced degrees. Only 7 percent owe more than $100,000, and that high bill is generally for graduate studies. Monthly payments, she reports, are usually relatively low, and have only been shown to correlate with—not contribute to—declining marriage and home-ownership rates. Degrees tend to guarantee the higher personal income needed for repayment and eventual homeownership. Plus, a myriad of repayment options already exist to help ease the burden in the case of job loss, permanent disability, or some other hardship.

As such, Baum wants students to bear the burden of correcting the current system’s problems. For example, she blames defaulters for “borrowing for programs of study that are unlikely to pay off,” singling out expensive majors or master’s degrees in the fine arts. She has no compassion for Americans underwater from not finishing the degrees needed for the better-paying work necessary to afford repayment. Many drowning in debt also foolishly chose for-profit institutions, like the now-defunct Corinthian, whose completion rates were notoriously abysmal even before federal investigations deemed their loan offerings to students predatory. Enrollees, she asserts, should have asked themselves serious questions about their coursework’s purpose, feasibility, cost, and marketability. She also wags a finger at students for succumbing to “the temptation to go beyond … basic expenses,” borrowing too much for more luxurious living than anyone in school really needs.

Since Baum really doesn’t think there’s a crisis, she just offers a litany of limited technocratic prescriptions directed at policing, not helping, borrowers. Ideas include: more guidance for students, stricter borrowing limits (especially for independent students less likely to finish and be able to pay), easing the ability to take out less than the maximum allowance, more federal regulation of degree program eligibility, easing the ability to select the income-driven repayment option, deducting student-loan payments from paychecks, making loan rates variable, and making student debt forgiveness easier for those declaring bankruptcy.

Such reforms target those statistically at risk for default. That pool includes graduate students seeking degrees that don’t guarantee well-paying work, people with serious medical problems, alumni whose skills lose value due to automation or outsourcing, and especially unprepared undergraduates enrolled in for-profit institutions. Many consider those sorts of schools predatory, an opinion left out of Baum’s analysis. She’s more concerned that dropouts are more likely to be deeply in debt without the ability to repay their loans. Baum is nonetheless confident that Americans don’t need free tuition or debt relief, since loans, “if designed or administered appropriately, are likely to be a cost-effective means of helping students.”

Like Baum, the Brookings Institute’s Beth Akers and the Urban Institute’s Matthew Chingos don’t want to absolve students and alumni from their loan obligations, but the pair does want more state-level spending to bring fees down, perhaps even to zero. Nevertheless, like Baum’s Student Debt, Akers and Chingos’s Game of Loans: The Rhetoric and the Reality of Student Debt makes recommendations directed at national, not state, reforms. Like Baum, they presume that the federal government could iron out any wrinkles in the current financial-aid system by regulating more and by increasing the data on colleges available to prospective borrowers. These economists also want a repayment system that relies on employers withholding student-loan payments from paychecks. Replacing the confusing mix of federal loans and grants with a single more-generous grant and unsubsidized loan program would also simplify the system. Streamlining financial aid is important since policymakers in the 1960s originally designed the federal program to help just poor and working-class Americans. Now, however, middle-class families also need assistance.

Akers and Chingos also want the private sector to be involved in offering support. They float an idea—circulating amongst Congressional Republicans—for “income share agreements,” in which “investors provide funding for students’ educations in return for a share of their future income.” This kind of investment would “transfer risk” that college won’t pay off to those supplying the capital, but also rewards them with the successful graduate’s stream of interest-bearing payments. Akers and Chingos admit that critics have likened the idea to indentured servitude, a form of unfree labor banned under the 13th Amendment. They still feel confident that “adequate consumer protections” and regulations would enable Congress to “balance the promise and the pitfalls.”

Like Baum, they largely blame the minority of borrowers in default for their plight. Enrollees should have asked more questions in order to make better choices, selected more appropriate repayment options, and borrowed less to avoid the temptation of unneeded “conspicuous consumption.” Their prescriptions are subsequently directed towards fixing what they consider the real “national tragedy”: the 10 percent default rate on student loans. That number includes “475,000 students in a single cohort who defaulted within only two years of entering repayment.” Akers and Chingos do admit that the system is somewhat stacked against borrowers, many of whom only recently became legal adults. The existing system doesn’t take that into account, since practically every admitted student, regardless of age, is eligible for a government loan. Plus, only recently have federal officials taken steps to make data about schools, programs, and job prospects more available. But that database remains hard for students and parents to navigate.

Nevertheless, these economists, like Baum, think the first thing that needs to happen is stopping the sense that there’s a crisis, which might lead to “regressive and wasteful” “broad-based ‘relief.’” Like Baum, Akers and Chingos are convinced that the media created unfounded fears. The total amount of outstanding debt may seem large, but isn’t enough to “make a small dent in the federal budget,” even if everyone defaulted. Both the average and median monthly repayment amounts, $276 and $193 (respectively), represent roughly 7 percent or 4 percent of income (respectively) because a bachelor’s degree generally guarantees a higher income. Either amount is far less than the average 20–40 year-old household spends on healthcare, housing, transportation, and even entertainment. They also don’t see much merit in fears that debt has deterred borrowers from public-sector work, marriage, and home ownership. Such concerns are “implicitly focused on the emotional burden … affecting decision making,” and really show “that people prefer to have more money rather than less.” They likewise discount a national 2015 study raising concerns about borrowers’ mental health, since “this research does not tell us whether student loan debt has psychological effects that are any greater than those imposed by other debts or financial obligations.”

The different arguments of Baum, Akers, and Chingos all presume that the arc of history bends towards better economic opportunities for individual borrowers and more prosperity for the nation as a whole. Such whiggish presumptions are out of step with recent widely publicized studies showing that millennials are unlikely to do as well as their parents and grandparents. The apparent failure of the American Dream reflects the scarcity of well-paying work for poor, working-class, and middle-class Americans.

Downward mobility is also a function of soaring housing costs, health care premiums, and consumer debt, never discussed in Student Debt or Game of Loans. For years, the federal government offered tax cuts to the rich, rescinded business regulations, and starved social welfare programs. Banks were even given more relief than borrowers during the Great Recession, a crisis from which Baum, Akers, and Chingos consider the country to have recovered, without any concern that another calamity might be on the horizon.

Sara Goldrick-Rab doesn’t think a disaster is coming; instead, she believes it is already here. The few years of data that Baum, Akers, and Chingos parsed may have indicated that the status quo is fine, but the emergence of a new higher education economy is painfully clear from Goldrick-Rab’s parsing three decades of both policy changes and economic trends. The financial assistance underpinning the entire higher education system doesn’t lessen inequality—but actually exacerbates it. Tuition costs, as Goldrick-Rab points out, were once low enough that students could easily choose to either borrow or work their way through school. Her book, Paying the Price: College Costs, Financial Aid, and the Betrayal of the American Dream, documents that fees and expenses now force most students to do both, even those from low-income families who qualify for federal grants and work-study opportunities on campus. Of course, offsite part-time jobs are more readily available, but rarely pay enough or have schedules suitable for students studying full time (a prerequisite for maximum state, federal, and often private support).

Affording school has become increasingly difficult for poor, working-class, and middle-class enrollees. Between 2003 and 2013, family income dropped for almost 80 percent of Americans. Those years also coincided with massive cuts to state expenditures for higher education. As a result, fees soared in years when college degrees conversely became more important than before. So Baum may be right that a little more than 40 percent of Americans never enrolled in advanced coursework, but almost 60 percent of Americans have felt the need to at least attempt to get some postsecondary instruction.

Goldrick-Rab (unlike Baum, Akers, and Chingos) isn’t convinced that completing a degree program all but guarantees a return on investment. Getting ahead is actually at the whim of “the ever-shifting labor market … rife with uncertainty and ongoing change and, too often, discrimination to boot. People who grow up in economically fragile circumstances often continue to live in economically fragile communities, even after they attend college.” They also are more likely to enroll in for-profit institutions. They don’t need more data to make a better choice; their K–12 schooling, family obligations, and work schedules really don’t give them any other options.

Goldrick-Rab didn’t reach those conclusions from crunching numbers or reading news stories. She ran an innovative, interdisciplinary, six-year study (2008–14) of 3,000 broadly representative students, six of whom she profiles in depth. All came from families with an adjusted gross-income under $25,000, all were accordingly on financial aid, and all were from Wisconsin, the “‘mythical microcosm’…[that] comes closer than any other to national averages on key measures such as income, education, and neighborhood characteristics.” However, a privately endowed, extremely generous scholarship fund did make the state somewhat unique. Benefactors started the program during Goldrick-Rab’s investigation, which enabled her team to investigate the impact of the $5 million distributed amongst federal Pell Grant recipients enrolled full time in a state school. University students were eligible for an additional $3,500 per year, twice the amount available for those in two-year programs. Results indicated that additional assistance did help students afford college in some cases. But money didn’t guarantee graduation or significantly change the odds of completing a degree. Only 20 percent finished their bachelors in four years and only about a third in six years. Half of all participants left without finishing their program of study, putting them amongst the debtors that Baum, Akers, and Chingos tended to single out as being the most at risk for default.

The reason? Financial aid simply falls short. State and federal support can only cover what colleges report the cost of attendance to be, which includes tuition, fees, books, and living expenses. Goldrick-Rab’s numerical data, surveys, and ongoing one-on-one interviews dramatized that such support rarely makes up for the expense (even for students living at home) of foregoing a full-time job—a startling revelation given progressives’ faith that free tuition can solve the entire higher education crisis. Schools rarely offer an accurate picture of the total expense of pursuing a degree. Institutions’ publicized calculations of living expenses vary widely, even in the same area, but a fifth routinely estimate less than what even economists consider adequate. After schools deduct tuition costs and fees from individual financial-aid packages, undergraduates often don’t have much money left for books, rent, or food.

Participants in the Wisconsin study also defied Baum, Akers, and Chingos’s assumptions that the undergraduates who were most at risk for default were wasteful, unthinking, and lazy. Students had, in fact, carefully considered what jobs they wanted, what programs would help them, and how much that might cost. That calculation was difficult for first-time college students to make given how colleges determine the publicized costs of going to school full time. Many had hoped to work their way through school only to find themselves unexpectedly needing a loan. Goldrick-Rab discovered that students didn’t really like to take out any money. Borrowing triggered intense anxiety, especially as they endeavored to stretch their limited resources. Many needy students still contributed to their families’ incomes, often at the expense of basic needs (like sleep, food, and housing). In the process, undergraduates sacrificed the hours needed to keep up their grades, a prerequisite for qualifying for federal support and finishing their degrees.

Economists may want to equivocate, but the student loan crisis is real. The actual fiction? Too many Americans believe that “college is affordable.”

Addressing the new realities of affording a higher education requires more than the fine-tuning that Baum, Akers, and Chingos advocate. Goldrick-Rab demands an entirely new approach to financing postsecondary schooling, which recognizes that college “is now essential” even if it is “broadly considered a privilege and not a right.” Like the economists, sociologist Goldrick-Rab does think more information would be useful. She doesn’t just want a better database. She wants clearer explanations of the sources and requirements for federal grants and loans made available much earlier. Accepted applicants must receive these explanations in easily understandable, multi-year expense estimates. Such projections should also clearly differentiate between the listed price of admission as opposed to the actual cost of attendance. That breakdown would yield better estimates of an individual’s and family’s financial contributions.

Borrowers also need to know up front how financial aid might fall short and receive a list of other sources which might help cover costs. Those resources should include the emergency food and shelter programs that already help students. Few know about that assistance, particularly the undergraduates who find themselves unable to use their family’s welfare benefits because they are enrolled in school full time. Revising those social programs’ rules would certainly help students, but so would amending the tax code to exempt undergraduates’ meager wages.

Even better would be a substantial Congressional overhaul of the Higher Education Act. The federal work-study program should be made more widely available and easier to use, since part-time work rarely makes it easy for students to hold down a job and go to school. Rules could also be put in place to ensure national expenditures would be used to supplement, not supplant, state earmarks, perhaps even to ensure allocations are distributed more equitably between schools (as opposed to just being funneled to the flagships that disproportionately serve more-affluent students).

Such a comprehensive overhaul also requires rejecting a myth. Economists may want to equivocate, but the student loan crisis is real. The actual fiction? Too many Americans believe that “college is affordable.” That fairy tale, Goldrick-Rab argues, just perpetuates inequality because the current system “allows liberals to feel good and the poor to feel indebted, while at the same time providing a scapegoat for conservatives.”

Goldrick-Rab’s changes would be hard, but now even the kind of tepid federal reforms that Baum, Akers, and Chingos seek seem impossible. Trump might actually reverse the changes to the financial-aid system that the Obama administration had managed to make, principally through the passage of the now-imperiled Affordable Care Act. Obamacare was clearly important to the 20 million Americans who got health insurance. That law also mattered to the millions of students enrolling since its 2010 passage. These students, under the new rules of the ACA, could now stay on their parents’ insurance until 26, a tacit recognition of the difficult labor market for well-paid work.

The ACA also contained a rider that killed the indirect loan program. That addendum was significant even if it did little for the students who have already borrowed, either directly from the federal government or from the kinds of financial institutions in which the DeVos family is heavily invested. As the GOP steps up to gut Obamacare, the very drama around “repeal and replace” should convince anyone that abolishing and reinstituting national programs, as Akers and Chingos advocate be done for student assistance, will imperil the very existence of these programs.

Despite Baum, Akers, and Chingos’s shared faith in increased regulation, Trump’s appointment of Betsy DeVos raises serious questions about the White House’s support for new rules—and its enforcement of existing rules—around student lending. Like Trump’s other nominees, DeVos evinces little knowledge of existing policies, interest in enforcing them, or eagerness to pass more. Abolishing the indirect loan program was just one of the many now-imperiled steps that the Obama administration took to dismantle the sprawling loan industry. Reports around inauguration day of how Navient, the largest student-loan collector, continually violated consumer protection rules illustrates just how difficult that beast will be to subdue, much less slay. icon

Featured image: Sign from a protest at New York City's Cooper Union, 2012. Photograph by Michael Fleshman / Flickr