How The Student Loan Program Became Obama's War On The Young

Student Loan Debt Protest

Photo: jjinsf94115/Flickr

The blue social model is eating its young with the active help of President Obama’s Department of Education.More specifically, two generations of student debtors are being hounded and harassed by President Obama’s hired debt collectors because a bad federal program and a dysfunctional higher ed machine (with an assist in many cases from poor choices by immature young people) have locked them into a lifetime of debt peonage.

The federal government that Democrats like to portray as the friend of the friendless, the hope of the poor, the light of the world and the most generous uncle that ever lived has turned into the most inexorable, hard hearted and relentless debt collector in the nation, hounding a generation of students literally into their graves over loans they will never be able to pay and which they cannot escape.

Using techniques that are banned by law when it comes to private debt collection agencies, the federal government is exempt from statutes of limitations and bankruptcy rulings and can garnish Social Security checks and disability payments.

Yes, handicapped, disabled people can have their meager checks cut to satisfy student loan debt on jobs their disabilities now make it impossible to do.

As a brilliant article by Andrew Martin in the New York Times (at its best, still the best when it comes to serious reportage) shows how federally contracted private debt collectors, more ruthless than the hounds that pursued Eliza across the ice floes in Uncle Tom’s Cabin, track broke and even disabled student loan defaulters down the decades of their lives.

The student loan program is a shining example of the blue social model in the midst of decay. It’s a program that used to work pretty well, but over time has morphed into a nightmare. Conceived at a time when college costs were low, a relatively limited number of mostly pretty qualified young people went to college and full employment made the transition from college to the workforce a straightforward process, the student loan program helped a generation of young people to a good start in life.

It was government at its best. It gave people a boost and opened the doors of opportunity, but it also imposed a burden on the beneficiaries. Loans had to be paid back. But since education created a greater earning capacity, those who got the loans could afford to pay them back. It worked, and helped to build the nation’s confidence in the architecture of the blue social model: an active federal government, a mass university system and a powerful national economy led by a handful of regulated monopoly/oligopoly firms providing lifetime employment based on educational credentials.

A sensible and helpful initiative gradually turned into a devouring beast. Many students, of course, still navigate the system with success. They make sensible course decisions at good schools and emerge with skills which raise their earning power. They repay their loans out of that higher earning power, and life goes on.

But it is clear that for large and increasing numbers of students, the system no longer works in this way. They borrow more money than they can repay, or their school experience goes bad and the credential doesn’t work or they fail to earn it and President Obama’s hired debt collectors are turned loose on them to hound them into the grave.

Those who get in trouble, by the way, are disproportionately from poor and minority families, are immigrants, and are the first in their families to attempt higher ed. The young people that President Obama’s debt collectors are hounding most relentlessly are exactly the kind of people he hoped most to help.

This isn’t a minor issue in American life. Helping young people to make the transition from dependency into responsible adulthood is a critical task. When young people are so crushed by debt that they are delaying decisions like starting a family or buying a house, then the system isn’t working at a basic level. When growing numbers of young people are crushed by debts they did not understand, cannot pay and cannot discharge, then society is sitting on a time bomb. A generation of embittered deadbeats and angry, impoverished cynics is not the best foundation for a free and open society. When these alienated people living marginalized lives come disproportionately from the ranks of minorities, the divisive and destructive consequences of a social program gone to the bad can be serious indeed.

So what should we do? First, stop digging. We need to fix the higher ed system in ways that preserve access, stop creating unsustainable debt mountains, and encourage responsible behaviour by both students and schools. Second, we need to come up with a fix for those already enmeshed in this mess. President Obama has got to call off the dogs. Third, we’ve got to draw the lessons from what went wrong. In the housing bubble and in the higher ed bubble we are getting some very expensive crash courses in how federal cash, good intentions poorly thought through and bad incentives for both public and private actors can lead to disaster. We have paid a lot of money already as a result of these mistakes and will likely have to pay a lot more; we should at least learn some lessons so we don’t do the same things in the future.

So what went wrong? Five things.

1. Lobbyists both for the poor and for educational institutions changed the nature of both the borrowing population and the “colleges” they attended.

Once the student loan program was up and running for a predominantly middle class clientele of students, pressure grew to extend the program to more students and more institutions. Some of this pressure came from advocates for the poor — following the same logic that led Fannie Mae to get into the business of getting poor people into subprime mortgages during the housing bubble. Give the poor access to the same tools and assists that benefit the middle class. It seems simple, effective and fair.

At the same time, lobbyists and advocates for the “education industry” came forward. Universities wanted more students to be able to borrow more money: this was the kind of revenue that would allow them to expand their programs, reach more students and upgrade their offerings. But other kinds of institutions wanted in on the gravy train, too. Was it fair that only traditional colleges should be able to train students? Didn’t many students need vocational education rather than conventional college? Shouldn’t students, and especially low-income students, be able to borrow money to learn how to become secretaries, para-legals, computer programmers and automobile repairers? If Betsy and Veronica could borrow money to go to college, shouldn’t Rosie the Riveter be able to get money for trade school?

Furthermore, now that we had discovered the power of this wonderful student loan program (popular with universities, popular with parents, popular with taxpayers and politicians since, as a loan program, the money could be seen as not increasing federal liabilities), shouldn’t we use to to the max? Instead of becoming the privilege of a special few, shouldn’t higher education become a universal or near-universal social right? Don’t all American kids deserve to go to college?

And so more and more students began to borrow more and more money to attend a larger and larger number of increasingly diverse institutions. Programs that originally were sending high achieving kids to accounting programs at stable state universities were now being used to help much more marginal students attend some sketchy institutions: hairdressing programs, for-profit bartending schools and many others of this kind.

By any reasonable measure, credit standards were being dramatically lowered to increase the reach of the program. It is one thing to lend the hardworking daughter of a stable lower middle class family with a record of stable finances money to attend her local state college. But increasing numbers of student loans went to students whose personal background made it more likely that debt would get them in trouble — and who were not making and in many cases weren’t able to make good judgments about the quality of the school that was “helping” them get the loan, or the value of the credential it offered.

2. Education costs, partly as a result of federal aid programs including student loans, partly driven by federal educational mandates and partly driven by other factors, exploded meaning that students had to assume more debt.

Like health care, another skilled service industry with a guild based professional structure that gets a lot of government money, education is an economic sector whose costs have been rising faster than inflation for decades. Like health care, the cost structure of education is hard to decipher with all kinds of cross subsidies and inefficiencies built into the model. Pricing in education is almost as irrational as it is in health care; no two students at the same school can be assumed to be paying the same price, and the prices charged for different services tend to reflect bureaucratic decisions rather than actual costs.

Nevertheless, it’s clear that the huge presence of the federal government in both health care and education helps to drive price increases. On the one hand, Uncle Sam is a kind of payer of last resort. If it weren’t for student loan programs and financial aid, for example, colleges would have to charge only what students and their parents could actually pay out of their own resources and any private loans they could get.

On the other hand, Uncle Sam is a very pushy customer: if government money is involved, even indirectly and in the form of loans, regulations come with it. Often pushed through by lobbies and administered by bureaucrats with little experience of practical management, those regulations impose high compliance costs. These get passed onto consumers, who in turn are at least partially sheltered from the direct impact by subsidies and loans. Diversity bureaucracies, handicapped mandates, paperwork requirements: government is very good at coming up with extras to tack onto the bill.

Both health care and education have something else in common: they have powerful unions, guilds and accrediting agencies. Much of what these organisations do is benign: they protect workers and (theoretically at least) consumers by controlling entry into professions, holding institutions to certain quality standards and so on. But they are generally price-insensitive. They are mandate-adders and cost-enhancers rather than budget-balancers and fat-trimmers. And the deeply resist any kind of serious labour saving or cost cutting reform and will fight tooth and nail to protect the status quo.

The steady flow of government money into both health care and higher ed enhances the ability of these organisations to control the development and shape of their industries to protect the income and perks of professors, doctors, administrators and nurses without thinking much about the rationality and sustainability of the system as a whole or about the impact of its rising cost structure on customers and on society more generally.

And so, over time, costs in higher ed have risen: faster than the general price level and faster than the amount of money their graduates can reasonably expect to earn. The path of least resistance for everybody concerned (except for immature, unorganized and inexperienced students, who are easy to ignore and roll over) is to increase student lending to paper things over.

Put the two trends together and we are making larger and larger loans to people who are increasingly unlikely to be able to pay them off. This is a bad idea.

3. The nature of the economy and American society changed, making income streams less predictable.

Meanwhile, the country was changing in ways that made student loans dicier for both young people and lenders. First, the transition between school and professional life grew more complicated. The old American economy was more hierarchical than the one we have today. People tended to be slotted and screened. White males with BAs went straight into junior executive programs. White women went into the secretarial pool and into other “pink collar ghetto” jobs. Minorities got slotted as well, and usually into places that were not very nice.

This a very unfair system, but from the standpoint of administering a student loan program, it made things simple. Most college graduates were white males, and most of them would get reasonably well paid and reasonably stable jobs very quickly after college. When it came time to repay the debts, the jobs would be there.

Now things are less predictable. Entry level jobs in many fields now pay much less than they once did; companies no longer think every newly minted BA hire represents a lifetime commitment. They no longer maintain large entering ‘junior executive’ classes with significant training investments being made. It’s expected that young people will bounce around for a while after college looking for the right job and the right fit and gaining experience as they work at a series of entry level slots.

This means that earnings are more variable and it means that college grads can expect bouts of unemployment between jobs — especially when, as now, the economy is not creating many new jobs. Student loan payments come due at a time when many young people are unable to take basic steps — like moving out of mum’s garage.

More, the amount of education required to compete for good jobs continues to increase. A BA is now just the first step. Students often come out of college, work for a while in the world of entry level jobs, then go back to grad school, accumulate more debt, and come out again for another period of dues paying and hurdle jumping on the way to a stable professional setting.

Moving away from the single breadwinner model also means by the way that young couples are now pooling their student loans. When the bride and the groom both have two degrees, and each of the four degrees carries some significant debt, it’s going to be hard for one of the pair to take some time off and have children — much less to splash out and buy stuff that can keep the rest of the country employed.

4. Perverse institutional incentives meshed with the ignorance and immaturity of youth to create a system in which colleges generally failed to provide trusting young students with good guidance about the risks and responsibilities they were taking on.

If there were ever the case of consumers who needed protection, undergraduate college students fit the bill. Most undergraduates — and I have taught my fair share over the years — don’t know much about the facts of life. They may know where babies come from, but they don’t know how much people earn who graduate from different programs in their school. They don’t know how much money gets taken out of a paycheck in taxes. They don’t know what a budget looks like, how much rent and utilities cost in the city to which they hope to move, how much it costs to own a car or take mass transit every day, or what it costs to buy and maintain a working wardrobe.

They most especially don’t know anything about debt. They don’t know how much it will ultimately cost you to repay $10,000 that you borrow when you are 18. They don’t know how much the monthly payments will be, they have never seen them subtracted from a paycheck or seen what that does to living standards and discretionary spending. Most of them don’t understand how powerful and relentless Barack Obama is and how he and his minions can and will hunt them down to the ends of the earth if they fall behind in their payments, taking their tax refunds, garnishing their wages, fouling their credit ratings and generally wrecking their lives until they cough up.

They agree to these contracts with no clue what they are doing and in many cases, developmental psychologists will tell us, before their brains have matured to the point at which they can genuinely understand the long term consequences of those papers that trusted authority figures tell them to sign.

Much of the press attention is on the abuses of for-profit institutions like bartending schools and video technician institutes, and it is certainly true that those who operate these programs are often much more interested in signing up patsies than in preparing kids for the job market. But the abuses of the for-profits shouldn’t blind us to the perhaps even greater irresponsibility of the non-profit college sector.

Does anybody explain to students that going $100,000 into debt for a gender studies or human rights degree might be a bad idea? Or at least an idea with some tough real world consequences? When students choose a major is there anybody from the college to help them think through the likely consequences of the decision they are making?

The problem is that both the colleges and the trade schools get their money up front, regardless of what happens to the students. College departments have incentives to attract students as majors even if the likely financial consequences for low income students are disastrous. Sure, kid, major in literature with a specialty in the criticism of modern poetry. It’s what you care about; you can worry about the student loans later on.

I’m not saying that it’s never the right decision to choose an “impractical” major; my own BA in literature has served me well over the years. But the decision to finance an “impractical” degree with a mortgage sized load of undischargeable debt is one of the most consequential and grave decisions a young person can make. Do all colleges and all departments do everything they should to help students understand just what they are doing at this crucial turning point in their lives?

Almost certainly not. The department wants students, the college administration doesn’t want to antagonize some programs by appearing to warn students away from them and in any case, it’s generally cheaper to process a passel of lit majors than a group of organic chemistry majors who need a lot of expensive lab equipment and supplies. The student loan program has set up perverse incentives that discourage colleges from providing the kind of career counseling that impressionable students badly need.

Good colleges and good professors will do their level best to give students the best possible advice. When I advise students I make a point of helping them think through the financial pluses and minuses of the options they are mulling over, and I encourage them to talk frankly with their parents about what kind of support if any they can expect in graduate school and about what kind of income they will need given the burdens they are taking on.

But I’ve talked to enough recent college grads to know that far too many never had conversations like that along the way. They are starting life in deep financial trouble, and nobody ever warned them about what this would be like.

5. Reforms aimed at fixing developing problems in the system had unexpected side effects that made things worse.

Once social programs start to go awry, politicians and bureaucrats jump in with fixes, but those fixes often work in unexpected ways. Expanding availability of student loans to open the program up to more marginal and low income students is one example; it raised the number of defaults. The fix for the rising default rate was to make student loans undischargeable: sticking many ex-students with loans that will dog them for decades. The fix for that was a complicated but still punitive program that, like similar government efforts to deal with the home mortgage mess, set up a bureaucratic process that doesn’t seem to do much to help those most in need.

I’ll return to this subject with some thoughts about what to do next; decades of poor policy choices have created a real mess, and the social and financial costs of the student loan disaster continue to grow. But in the meantime, read the whole piece in the Times. This needs to be fixed.

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