The Student Debt Crisis
The United States is experiencing an unprecedented, nationwide student debt crisis that rivals the subprime mortgage crisis in size, and is clearly larger in scope. Ten years ago, the nation owed less than $400 billion in student loan debt and average undergraduate borrowers left school owing roughly $14,000. Today, the nation holds well over $1 trillion in student loan debt, average undergraduate borrowers leave school owing $33,000, and a whopping 42 percent of those holding this debt are unable to make payments on their loans—their loans are in deferment, forbearance, or default.
Ten years ago, the proposition of full-on forgiveness of student loan debt would have been dismissed out of hand. Today, however, the concept is increasingly relevant. This debt burden has become a national threat. Debt is leading some to increasingly desperate measures such as expatriation while Congress—beholden to the lending system and its lobbyists—avoids addressing the problem.
Is it time for a student debt Jubilee?
In order to understand and solve the student loan crisis, it is critical to understand the unique fiscal dynamics that govern the student lending system, and the institutional and political behaviors that result.
The Predatory Nature of Student Loans
The lending system supporting our higher education system is structurally predatory. In the absence of fundamental, free-market consumer protections like bankruptcy, statutes of limitations, and refinancing rights, and in the presence of unprecedented collection powers that, as Elizabeth Warren says, would make “mobsters envious,” we have a student loan system where the big lenders (including the federal government) can and do make significantly more money on defaulted loans than healthy loans.
Imagine if it turned out that JP Morgan Chase, Fannie Mae, and even the Housing Department were making more money on defaulted subprime home mortgages than those which remained in good stead. This is the reality for student loans—a reality that demands careful consideration. We must ask ourselves a few common-sense questions: Would you want to take a loan from someone who wanted you to fail in your endeavor? Doesn’t this put the lending system in a position of bad faith? Is this not a defining characteristic of a predatory lending system? Adam Smith, Milton Friedman, and every other western economist would answer yes on all counts.
Lenders’ financial motivations explain a wide and deep array of systemic defects, conflicts, and corruptions in the student loan system. For example, Sallie Mae and other lenders defaulted student loans en masse without even attempting to contact the borrowers. And colleges routinely mislead students about the true default rates of the loans they are about to take out—they instead doggedly promote their reasonable-sounding “cohort default rates” (the percentage of a school’s borrowers who enter repayment on certain loans during a federal fiscal year and then default prior to the end of the next one or two fiscal years), and the Department of Education never does anything to correct this false impression. The true default rate across all schools is roughly one in three, and has been for years, whereas the cohort default rate typically lies between 4 percent and 8 percent.
Similarly, students usually aren’t made aware that consumer protections such as bankruptcy, statutes of limitations, and refinancing rights don’t exist for student loans. These are only a few examples of the deceptive behaviors that have resulted from the anti-borrower financial motivations that have taken hold of this lending system, and more than likely they will find these to be happening, in fact, on the ground.
Those who claim that the new “Direct Loan Program” cures the student loan system of these predatory underpinnings are wrong. Defaulted loans still carry all the same penalties and fees as before, and Sallie Mae is still servicing healthy loans and collecting on defaulted loans in the same conflicted manner as before. The collection frenzy around massively inflated, defaulted loans may even be exacerbated under the new system, where interest income is no longer a possibility for these contractors. In any event, the new system clearly doesn’t curb the predatory nature of the debt instrument.
The most troubling outcome resulting from this lending environment, however, is the massive tuition inflation that the schools are imposing at will upon the students. Congress enables this, year after year, by repeatedly increasing the lending limits. The Department of Education allows this to happen without protest, despite having known about the astonishingly high default rates for years. And of course this affects all students, not just those who borrow. Wealthy and moderately wealthy families who must pay out of pocket for kids to go to college feel this, and feel it more sharply, arguably, than those who borrow.
Why is the Education Department not treating the exponentially increasing student loan debt and astonishingly high default rates as a national crisis? When we were looking at a trillion dollars in national student loan indebtedness, and the default rate was north of one in four, why wasn’t the Department of Education sounding the alarm? It’s time for Congress to pose these questions to top officials at the Department of Education. Department staff, who should have warned Congress and the public but didn’t.
So the question now is how to “fix what is broken,” to borrow a phrase from President Obama, Secretary Geithner, and others following the 2012 State of the Union Address. Gainful employment rules, dickering around with the Pell Grant, and similar activities do nothing here. Neither do the various repayment programs that are being marketed by the higher education crowd as viable substitutes for the consumer protections that were stripped from the system. Some policy analysts in fact, are pointing to these untested, unproven programs as a basis for dramatically increasing the federal loan limits! This is not the direction we want to go. We cannot afford it, and to claim otherwise is hugely irresponsible.
Restoring Bankruptcy Protections
Congress created this problem by removing fundamental, free-market consumer protections from student loans. Congress can and must fix it by essentially undoing what it did. Quite simply, it begins by returning, at a minimum, the bankruptcy protections that were removed without rational basis (when bankruptcy was the same for student loans as all other loans, far less than 1 percent of federal loans were discharged this way). With this fundamental, free-market mechanism returned, the Department of Education will have a vested interest in compelling the schools to provide a high quality product at a low cost, and at reasonable debt levels. This is an obvious solution.
Ten years ago, when activists began making this argument, we were met with fierce resistance from the banks, the schools, the Department of Education, and even many student advocacy groups. Year after year, we keep hearing that “now is not the time” to fix this obvious problem by restoring the protections that should never have been taken away. Many of the stakeholders in this broken system continue to extract huge sums of unearned wealth due to the absence of bankruptcy protections, so of course they are not eager to restore them. And Congress does not have the courage to disagree with them.
As a distressed borrower myself, I know that if I call strongly for a student debt Jubilee some may accuse me of speaking out of self-interest. But as a fair-minded analyst, and given the current state of affairs vís-a-vís Congress, I am certain that public confidence in the lending system is going to evaporate in the foreseeable future, and the real consequences of this could be dire. As such, Jubilee becomes not only a viable solution, but a necessary one.
(This web-only article is part of a special series associated with Tikkun’s Winter 2015 print issue: Jubilee and Debt Abolition. Subscribe now to read these subscriber-only articles online, and sign up for our free email newsletter to receive links to future web-only articles on this topic, as well! Visit tikkun.org/jubilee to read the other web-only articles associated with this issue.)