REALITY CHECK: STUDENT DEBT

HOW THE STUDENT LOAN PROGRAM TRAPPED MILLIONS IN DEBT

AND BECAME A NATIONAL CATASTROPHE

Today more than 43 million Americans owe $1.6 trillion in student debt, a number that’s tripled in the past 15 years. The student debt in the U.S. is the size of Canada’s economy. While university endowments swell to billions, thousands default every day

Today, more than 7 million Americans owe $60,000; one million owe more than $200,000; one hundred owe over $1 million! 8 million borrowers are in default on their student loans, close to the number of people who lost their homes in the 2008 subprime predatory mortgage housing collapse, which caused the Great Recession. In recent years, despite a strong pre-pandemic economy, 3,000 people a day defaulted on their student loans.

Lyndon B. Johnson, himself a beneficiary of student loans, first argued in the 50s for the federal government to create a student loan program. These loans were small, affordable, and easy to repay. The program later evolved into a disaster. Here’s why:

By the 70’s, Congress created Sallie Mae, a government-sponsored enterprise that facilitated the loan process. Pressured by lobbyists, Congress agreed to cover 100 percent of defaults on student loans made by Sallie Mae, guaranteeing profits for Sallie Mae and its banking partners. Facing no risk, Sallie Mae made loans to almost anyone with a pulse: no credit checks, no determination of ability to pay, and no ceiling on loan amounts.

These loosened loan eligibility requirements increased student borrowing from $1.8 billion in 1977 to $12 billion in 1989. To make matters worse, in 2005 Congress amended the bankruptcy laws to block student loan borrowers from seeking discharge of their debts unless they can show undue hardship, which in practice has been almost impossible.

With the proceeds of these loans, now $1.6 trillion worth, flowing to colleges and universities, admissions levels exploded. Tuition costs are up 100 percent over and above inflation since 2000 with some schools jacking prices up three to four times the rate of inflation, dating back to the seventies. Universities have become cash cows seemingly desperate to find places to spend their rivers of government-backed tuition money. One study in 2013 counted $1.7 billion in capital projects at 92 schools, an orgy of building that leads even mid-level schools to look like mini-Taj Mahals! The creation of this student loan/industrial complex monster has harmed so many students and so damaged the economy that there is clear justification for cancellation of, not just $10K or $50K per student, but all federal student loan debt, and the reform of the entire student loan program going forward.               

Source: Josh Mitchell, “The Debt Trap.”

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