Drunk on Debt

 “The Debt Trap – How Student Loans Became a National Catastrophe” by Josh Mitchell, 2021

One way capitalism is able to survive is by making debt universal. This riveting story, written by a WSJ reporter with a working-class background, shows how a former 'private / public' entity like Sallie Mae increased college costs, made inequality worse and youth debt overwhelming. The story could have been written by Michael Lewis its so funky. It is the dialectic of a rentier economy drunk on loans and debt.

Mitchell tracks the convoluted history of college loan programs, starting in the 1960s with Lyndon Baines Johnson's Great Society. Johnson got a small loan to attend college in Texas in the '50s and because of this, he pushed for some kind of aid to middle and working class students. At that time only 1 out of 10 went to college. In the 1950s the Sputnik successes by the USSR made the U.S. realize it was falling behind in science and technology. This cold war added steam to Johnson's idea. The push was on to better educate more of the population.

AUNT SALLIE MAE

The student loan industry story is a Rube Goldberg patchwork that created the twisted atrocity that is 1972's Sallie Mae (the Student Loan Marketing Association - SLM). First they tried a limited, means-tested program run by private banks, calling it the Guaranteed Student Loan program.  It benefited the middle and upper classes but after awhile, the banks and investors weren't lending to students, as the profit was too low and the money ran out. They fiddled around with other patches, while of course turning down a public funding option.

Then they found a reliable money pot for the program. A so-called private/public entity would 'borrow' federal money via a discount loan program (The Federal Financing Bank) at the Treasury Department, and be technically 'off the budget books.' This is similar to the Fed's discount window for the big banks. It gave a guaranteed interest rate of 3.5% profit to the banks; a 100% federal backup for any defaults and the loans would be universal. This created a logic for every college to raise tuition above the inflation rate. For instance, for-profit 'trade' and technical schools, some mail-order, were 90% funded by federal loans. This became Sallie Mae - a private company owned by banks and colleges, who also had majority control. It eventually traded on Wall Street, so it enriched private shareholders too; and finally went fully private.

The people who gained? The banks, investors and colleges / universities. The ones who lost? The students and the taxpayer. It was a giant shuffle of Fed money 'for a good cause' into private hands, presided over by the Congressional House Sub-Committee on Education. Mitchell focuses on the key individuals at each twist and turn, but this hides the fact that they all danced to a profit tune. He peppers the book with tough personal debt stories to illustrate his points.

WHAT HAPPENED NEXT

Of course, we know the rest, as its still going on. Elite colleges and universities – the Ivy League and the Seven Sisters – led the way and became ridiculously expensive. Under Reagan, schools became profit centers and students 'consumers.' The educational institution's role was no longer to benefit the public, but really the private pocket. Colleges went on administration, building and amenities' sprees to justify their increases, and engaged in price fixing tuition for certain students – not the most in need. Blue collar workers, practical skills and unions were getting pummeled, underpaid, insulted and laid-off, so traditional college seemed the best bet to cross some kind of class divide.

Luxury Dorm at U of Alabama

Au contraire! The government paid the interest while students were in school, but in the 1990s that interest was now added after they graduated. Nor were Pell Grants covering as much tuition – and still don't. Then the program appeared in the federal budget, as government accounting rules had changed, and its inequities were no longer a secret. The key rub? It was impossible to claim that every student could pay back a loan with a quality job, never mind how long that might take. So it was not the sure-fire 'the investment' it was made out to be. The program was becoming so bad that, according to Mitchell, Bill Clinton – of all people - rode to the rescue, torpedoing Sallie Mae with a Direct Loan program (DLP) from the Treasury, cutting out the banks and Wall Street. It was the dreaded public option again.

Well that couldn't fucking stand. Clinton, the good privatizer that he really was, agreed to let Sallie Mae go fully private. A corporate shareholder coup in 1996 took over Sallie Mae, which ultimately allowed them to directly lend to students, competing with the Direct Loan program. Previously they had to buy the loans from the banks. By offering freebies, discounts and aid to colleges with their prior profits it took back market share from the DLP. At the same time, Clinton forced the ABA to accredit 'for profit' law schools, where advanced degrees were loan gold.

A LONG LIST of GOUGING

Sallie Mae (SM) then started to securitize student loans for sale on Wall Street … much like the housing loans that brought down the banking system in 2008. They made a deal with for-profit / on-line schools that charged more, had sub-standard quality and catered to 'adult' students who perhaps could not get into a regular school. SM created a private loan program to fund the 10% of tuition that these schools could not legally pitch. The University of Phoenix, an on-line school, had 70,000 students in 1999, and was the largest single sales outlet for SM dollars, far more than Trump University. By 2003, U of Phoenix had 225K students. In 2006, according to Mitchell, 27% of all federally insured loans were with Sallie Mae – $142B or a third of all student loans in the U.S.

While Mitchell focused on Sallie Mae, the book encompasses a whole sector and profit approach. For instance, in 2005 Congress removed restrictions on how much MA / Ph.D / JD / Med / MBA grad students could borrow from federal programs (Grad Plus), and increased their interest rate. They had a low default rate at the time because of the jobs they 'mostly' got. So even with 'public' involvement, there was no control over what colleges were doing. Nothing was planned within the whole education sector.

Sallie Mae was going to abandon the stock market and go private in 2007, which would make their operations secret. The government said no, cut the subsidies the feds paid to banks to originate, extend and service student loans and sunk the deal. Then 2008 hit and SM had large private loan defaults on all the 'no questions asked' loans they'd made, especially at for-profit internet schools – akin to the 'no paper' mortgage loan racket. In summer 2008 Republican Bush bailed out 'too big to fail' Sallie Mae partly for those securitized loans.  A formerly swashbuckling capitalist concern, it was now revealed as a failure.

Obama responded by cutting fed insurance for private bank student loans, an expensive form of corporate welfare. But then compounded the problem by pushing college on every unemployed person, as part of the alleged American 'meritocracy.' And how would that be done? Loans, interest and debt, LID. The purpose was to get working-class African-Americans, Latinos and European-Americans into school. The upshot was to create massive debt, a contradiction - instead becoming a 'ladder down.' Black and Latino students and HBCs were the hardest hit, as they needed the most loans, since the class and color caste system still existed. Even the higher-interest “Parent Plus” program, which stuck relatives with student loans, was getting high defaults...passing debt upwards to the old. In Obama's two terms, student debt hit $1.3 Trillion dollars. In response, he extended the debt repayment schedule to 20-25 years and reduced the rate to 10%, which actually increased debt due to the longer term.  He left in place the original problem.

Mitchell looks at a for-profit law school chain, Infilaw and the Disneyfied University of Alabama for more examples of how debt reverses the financial opportunities possible in education. The involvement of Wall Street equity groups in for-profit schools was usually a sure sign they were primarily money-making institutions. Alabama hired consultants to vet each prospect on whether they should be offered discounts (merit aid), primarily based on if they might be 'shopping' other schools. Mitchell calls its an airline pricing system. They spruced up the campus to look like a Disney theme park, as many parents decide in the first 20 minutes about a school. They solicited out-state and more lucrative students to bulk up their ratings.

The debt slave march

A BANKRUPT SYSTEM

And then there's bankruptcy. Studies showed that 4 in 10 students earned the same as those without college or debt. By 2016 8 million had defaulted on student loans, yet the loans were no longer dischargable in bankruptcy. If you include the status of 'forbearance' 4 in 10 weren't sending in checks. 17% of borrowers owed more than $50K in 2014. Borrowers from the Guaranteed Loan Program were not eligible for the income-based repayment of 15% of income. 'Forbearance' status still accrued interest.  A consolidated loan lengthened the payback and increased interest payments. Indebted borrowers were trapped, even to the point of having their Social Security checks garnished. In 1976 Congress decreed that government-backed student loans could rarely be discharged in bankruptcy, based on a vague 'undue hardship' claim. In 2005 private loans joined that category. Bankruptcy judges began to revolt against the legal constraints while taxpayers were covering the defaults. Under Trump, the student loan bubble burst according to Mitchell. Yet nothing changed.

An excellent book on the privatization of higher education. Mitchell's solutions? He suggests 1) colleges directly loan to students, putting skin in the game; 2) have accurate risk accounting for every recipient of a student loan; 3) Congress should write off loan interest; 4) make community college free; 5) promote apprenticeships; 6) stop subsidizing grad school; 7) get cities to pay for local schools. He does not endorse free college, any planning or control over higher education or college endowments, creating state banks, labor action or other forms of socializing education, such as going after privatization and capitalism itself.

P.S. - A good number of strikes against corporatization have occurred at universities in the U.S., with the recent Rutgers' strike winning good pay increases for adjuncts, lecturers and other debt-ridden, poverty-stricken faculty.

Prior blog reviews on this issue, use blog search box, upper left, to investigate our 16 year archive, using these terms: “Debt & Capital – A Confluence of Factors,” “Debt – the First 5,000 Years” (Graeber); “J Is For Junk Economics” (Hudson); “The Deficit Myth – Modern Monetary Theory,” “A Marxist Education – Learning to Change the World,” “Capitalism on Campus,” “The Nordic Theory of Everything,” “House of Cards,” “Who Gets Bailed Out?” “The Big Short,” “Flash Boys and “Liar's Poker” (all 3 by Lewis); “The Wolf of Wall Street” (Scorcese).

And I got it at the Library!

Red Frog

April 13, 2023