With college costs climbing faster than the cost of living, how can access to higher education remain a central part of the American dream? In The Student Loan Mess (University of California Press, 2014), Joel and Eric Best explain how recent college graduates, who average $27,000 in debt at graduation, have found themselves in trouble for the future. This excerpt, which discusses some of the major factors that have led to the increased average debt, is from Chapter 3, “Outrage and Crushing Debt.”
Outrage and Crushing Student Loan Debt
Even as policymakers concentrated on reducing defaults by student deadbeats during the second student loan mess, a new concern—what we’ll call the third student loan mess—was taking form. It was already visible in 1994, when President Clinton argued that the direct loan program he’d advocated “will decrease the debt burden that crushes too many.” By the beginning of the new century, references to student loans as “crushing debt” would become commonplace.
As the twentieth century came to a close, self-help books aimed at those dealing with student loans began to appear, with titles such as The Guerrilla Guide to Mastering Student Loan Debt (1997) and Take Control of Your Student Loan Debt (first published in 1999). These manuals listed the types of loans and gave strategies for dealing with debt. Soon there would be more critical books about the situation of those paying for student loans, featuring angrier titles: Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead (2005); Generation Debt: How Our Future Was Sold Out for Student Loans, Credit Cards, Bad Jobs, No Benefits, and Tax Cuts for Rich Geezers—and How to Fight Back (2007); and The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back (2009). These analyses—all by young authors—began with personal accounts that described either their own or their friends’ struggles with heavy debt. More recently, there have been testimonials—such as Destroy Student Debt: A Combat Guide to Freedom (2012), which recounted how the author repaid $90,000 in student loans in only seven months, and Debt-Free U: How I Paid for an Outstanding College Education without Loans, Scholarships, or Mooching Off My Parents (2010)—and even a “timetravel murder mystery” (Death by Student Loan, 2010) in which the heroine faces $100,000 in loans.
Photos of the 2011 Occupy Wall Street demonstrations featured protesters with homemade signs, such as “Is ‘Following Your Dream’ supposed to be this terrifying? $60,000+ in debt from my student loans,” and “I have $80,000 in student loan debt. How can I ever pay that back now?” Editorial cartoons portrayed student loans as outsized bullies, giant backpacks, or other crushing burdens. The new student loan mess focused not on bright young people blocked from achieving their dreams or on irresponsible deadbeats but on former students who had pursued the American Dream of higher education, only to find themselves in hock to their eyeballs.
Why Student Loan Debt Became “Crushing”
All federal student loan programs have placed limits on the amounts that can be borrowed. Recall that under the initial loan program—the National Defense Education Act of 1958—a student could borrow up to $1,000 per year; thus four years of loans would total $33,815 in 2013 dollars. Over time, student loan regulations allowed students to borrow ever-larger sums. For example, in 1988–89, a dependent student (that is, one deemed financially dependent on parental support) could receive subsidized Stafford loans (that is, loans for which the federal government would cover the interest payments so long as the student continued to be enrolled in school) up to a total of $13,250 for four years of study (over $23,000 in 2013 dollars); ten years later, such students could borrow a total of $17,125 (about the same—$23,000 in 2013 dollars). In 1998–99, independent students (those deemed not reliant on parental support) could borrow an additional $18,000 in unsubsidized Stafford loans (meaning that the accrued interest would be added to the principal); that is, such students could borrow up to $35,125 for four years of study (about $48,000 in 2013 dollars), although with the interest from their unsubsidized loans added to the principal, they would graduate owing more than that. And the limits continued to rise: in 2012–13, a dependent undergraduate student could receive direct loans totaling $31,000 (with $23,000 of that subsidized) over four years; an independent undergraduate could borrow $49,000 (again with $23,000 subsidized). Much higher amounts were available for those going on to attend graduate or professional school.
In other words, the limits on what students could borrow increased. But why did this come to be viewed as a problem? Three factors were at work.
Limits on Student Loans Weren’t Keeping Up with Rising College Costs
Raising these borrowing limits was necessary if student loan programs were to remain relevant. For starters, inflation required that students be allowed to borrow more; a $1,000 loan could go a long way toward paying for a year of college in 1958, whereas by 2012, a $1,000 loan would make only a modest dent in a year’s tab, even at most public institutions. And, of course, college costs had been rising even faster than inflation; even if the borrowing limits on student loans had some cost-of-living adjustment, this would not have kept pace with college costs.
Loans Became Harder to Pay Off as Economic Growth Slowed for the Middle Class
The students who took out those early student loans left college to enter a rapidly expanding economy featuring not just relatively high inflation but also rising real incomes. In 1958, median family income was $5,100 (about $40,970 in 2013 dollars); in 1968, it was $8,630 ($57,575 in 2013 dollars). This meant that taking out a $1,000 NDEA loan in 1958 didn’t pose such a savage burden, both because the dollars paid back weren’t worth as much and because people were earning more dollars. That is, $1,000 borrowed in 1958 was equal to nearly 20 percent of the median household’s income. Imagine still owing that money ten years later: $1,000 was less than 12 percent of the now larger median household income. This made student loans seem like less of a burden. By the 1990s inflation rates were lower and real income growth was much reduced, so that the long-term burden of student loans now seemed much greater.
There Was Less Slack in the Student Loan System
The second student loan mess—the concern about student deadbeats—led to a variety of tougher rules intended to ensure that students would repay the sums they had borrowed. To be sure, there were provisions for canceling some loans. People who were engaged in public service, such as some teachers or law enforcement officers, could have some or all of their loans canceled. In general, cancellation provisions were more generous for those with Perkins loans (intended to assist lower-income students) than for those with Stafford or direct loans (also available to middle- income students). For instance, one guidebook noted: “If you are a full-time elementary or secondary school teacher serving low-income students, you can cancel up to 100 percent of your Perkins loans.” However, cancellation terms for borrowers with Stafford or federal direct loans were less favorable: “If . . . you are not in default on your loans and you have been employed as a full-time teacher for five consecutive years in a school that qualifies for loan cancellation under the Perkins program..., you can cancel up to $5,000 of the total amount still outstanding after you have completed the fifth year of teaching.”
There were also various arrangements that offered some flexibility by stretching repayment over longer periods, so that a borrower’s monthly payments would be lower (although slowing the rate at which the principal was reduced meant additional interest charges, thereby increasing the total that would have to be repaid). But by and large, a student who borrowed money was going to have to pay it back, and many students wound up owing large sums.
MILESTONES IN STUDENT LOANS 2011: $100,000,000,000 in new student loans.
As a result, as the twenty-first century began, complaints about the burden of student loan debt grew louder. The first student loan mess was typified by a bright young person who could not afford to pursue an education, and policymakers rushed to establish loan programs to bring college into reach of all. The key figures in the second student loan mess were those deadbeat students who needed to be compelled to meet their responsibilities and repay what they’d borrowed. Now the focus shifted yet again, this time to young people no longer in school but crushed by the burden of student loan debt.
This excerpt has been reprinted with permission from The Student Loan Mess, by Joel and Eric Best, published by The University of California Press, 2014.