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$1,000,000,000,000: How Did We Get Here?

Posted: 05/16/2012 3:28 pm

Part II of an ongoing series on student debt.

Anthony Hatfield can't afford to pay his student loans. And he has about $130,000 worth. A graduate of Ball State University, the Indianapolis entrepreneur started his own business two years ago and is working to grow it.

"I would love to pay these off," he says. "Sallie Mae is not willing to work with me." Unable to make monthly payments, Anthony can only pay a $150 fee to keep from defaulting, and fend off lender calls. He accrues $600 in interest every month.

This year, the most oft-cited statistic in higher education will be the big one: $1 trillion, the amount of student debt now held by Americans. And while most borrowers graduate with far fewer loans than Anthony -- the average borrower left school last year held about $25,000 -- the burdens are still high and protections low. The buzz around the interest rate debate makes it feel like change must be on the horizon. But in order to have a meaningful conversation about the future, it's important to review: how did we get here in the first place?

From Sputnik to Slow Jam

Student loans have been around for over 50 years. In 1958, the National Defense Education Act created federally-backed low-interest loans for students to increase participation in fields crucial for national security, in response to the launch of the Soviet Sputnik satellite.

As President Eisenhower declared, "high-quality professional personnel in ... critical fields are necessary to our national security...many able high school graduates do not go on to college. This represents a waste of needed talent."

Economic opportunity was another early goal; the Higher Education Act (HEA) of 1965 sought to expand access for students from low-income families. These two priorities -- global competitiveness and access -- have remained guiding principles of federal higher education policy ever since.

Changing Politics, Evolving Policy

The HEA created need-based grants and low interest loans, including the Federal Family Education Loan (FFEL) Program, which gave federal guarantees for private loans, put in as a compromise position between Republican-favored tax credits and a Democratic-favored emphasis on grants. Sallie Mae was established in 1972 to act as a quasi-governmental entity, buying already-made loans to keep capital flowing.

In the 1970s and 1980s, college enrollment grew significantly; by 41% in the 70s, and 14% in the 80s.

Unfortunately, also starting in the 1980s, college costs rose much faster than normal inflation. Prices on consumer items generally go up, but not normally this fast. In the 1980s, tuition and fees for in-state students at public four-year schools increased an average of 4.5% per year above inflation. In the 1990s, it was 3.2%. In other words, if prices for consumer items overall increased by 3% in 1995, college costs increased by around 6.2%. Unsurprisingly, we typically see the greatest tuition increases at the same time as states made the biggest cuts in state funding per student.

In 1992, in response to the rise in tuition, access to borrowing for the middle-class was expanded through higher interest, unsubsidized loans. In addition, a pilot program for Direct Loans, made directly to students from the federal government, was put into place to avoid the need to subsidize outside banks. President Clinton campaigned on the need for reform and ushered in an expanded Direct Loan program.

Threatened by direct lending, Sallie Mae began to privatize, delving into the new market for the securitization of student loans.

State Disinvestment Continues, The Great Recession Hits

The vast majority of students attend public colleges, and the past decade has seen even sharper decreases in state funding per student at public institutions. From 2001 to 2012, state investment in higher education has decreased at an average of 5.6% per year. Decreases in funding from states have gouged budget holes that increases in tuition have only partly filled. There has also been a very large rise in private school tuition, and an explosion of for-profit schools, where almost every single student borrows money to attend school.

As a result, student debt has increased 511% since 1999.

And of course there was the Great Recession. One major effect of the Recession on the loan industry was that the credit crunch reduced the private student loan market significantly, a market that had expanded greatly in the decade leading up to the Recession (although signs show it may be back on the rise). Another effect was that college became even more expensive: from 2008 to 2009, state and local appropriations to public schools dropped by $751 per student, and tuition increased by $369. Overall, funding per student dropped by 23% in the 2000s.

In the past couple of years, there have also been major changes to student loans. In 2010, Congress and the Obama Administration passed legislation to remove the private banks from the federal student loan process, arguing that the banks served only as unnecessary middle-men. This ended the FFEL program, saving $61 billion by eliminating subsidies to these outside banks to provide loans. Now, all new loans with federal backing are Direct Loans. In 2007, Congress passed legislation setting a five-year plan to cut the interest rate on Stafford loans for low-income students from 6.8% to 3.4%, and created an income-based repayment program, allowing payments based on their monthly salary.

Throughout this Recession, as debt continued to rise, getting a job after school to pay it off became that much harder. Now, amidst this tough economy, student loan interest rates on new subsidized Stafford loans are set to double on July 1, as the 2007 legislation expires. This doubling of the interest rate would raise the cost of college for over 7 million students, adding up to $1,000 more in debt per year of school.

President Obama has taken on the issue, proposing a fix to the problem in his 2012 budget and hosting several campus events on the topic, even a slow jam with Jimmy Fallon. The Ryan Budget supported by the House GOP did not address the issue, allowing interest rates to double. However, Republican leadership, prompted by support from Governor Mitt Romney, have recently stated that they support efforts to prevent interest rates from doubling, although they differ on how to pay the $6 billion cost. But at a time when there is $1,000,000,000,000 in outstanding student debt, Congress has yet to prove that it can work together to stop accelerating the expansion of student loan debt.

No Escape

The twists and turns of this federal and private lending market have been marked by practices unique to student loans.

In 1970s, Congress made it effectively impossible to discharge federal student loan debt. There was an unfounded perception of abuse of the bankruptcy process by student borrowers, even though less than 1% of all federal loans had actually been discharged. In 2005, private loans would face a similar fate. Private lenders argued that changes were necessary to increase the availability of loans, and to keep interest rates from rising to cover the loans discharges. Yet the amount of new private student loans issued annually rose 767% from 1997 to 2005; clearly, issuing loans was not a problem when these protections were still in place. However, Congress removed bankruptcy protections for private loans as well.

These unique terms are particularly problematic due to the enormous powers of collection, particularly on the federal side: wages can be garnished without court orders, tax refunds taken, Social Security checks can be garnished, and there is no statute of limitations on student debt.

Recently, Sallie Mae stated that adding bankruptcy protections for graduates a few years out would cause no disruption to price or availability, and the Senate has held hearings around bringing back bankruptcy protections to these private loans. But for now, the future remains dismal for those truly struggling.

Debt vs. Degree: A Necessary Struggle?

Estimates vary, but some studies show that getting a bachelor's degree is worth as much as $2.8 million, and project that the American economy will be at least 3 million degrees short by 2018. The 2011 unemployment rate for high school graduates were twice that of college graduates.

Certainly, however, the debt held by today's borrowers will put a drag on that economic ladder.

Consuelo Flores of Los Angeles has a huge debt load. "I was told by my supervisor that I would never get beyond the entry-level position without a degree," she says. She fit a return to school into a crowded life -- working and tending to sick family members.

"I was able to parlay the degree into a better paid job ... to make a better life for me and my family." But 15% of her wages are being garnished as a result of going into default on one loan.

Despite the trajectory of debt, this generation of college graduates holds better economic prospects than their non-college peers, but with the drag of debt, interest, and the unforgiving lenders holding them back for decades to come. Hopefully, the $1,000,000,000,000 cloud of debt will spur bold action as we debate our public investments in higher education, the terms of student loans, and the relief we provide.

 

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