Charting The Student Loan Crisis

Millions of Americans Are In College Debt. Will It Ever Get Solved?

Forty-five million Americans owe more than $1.7 trillion dollars, which are debts that cannot be discharged in bankruptcy. This is according to Elizabeth Tandy Shermer, author of a new book entitled Indentured Students: How Government-Guaranteed Loans Left Generations Drowning In College Debt. 

In it she unpacks the little known history of how America’s student-loan program has become for many loan holders the pathway to poverty. She weaves the narrative around how soaring student debt is a story of hope and good intentions gone awry. In fact, she makes the argument that the federal student loan program was never created with the intent of making college affordable. 

My own personal story with student debt is an interesting one as I graduated with an undergraduate degree owing nothing. But in 2004, I decided to pursue a Masters of Public Administration in Health Services Administration graduate degree (20 years after completing my B.A. in Sociology from The Ohio State University). 

What I discovered then is how easy it is to secure educational monies with a flick of a pen. These funds were not only directed to the university for my tuition, but up to $2,000 each semester was deposited into my checking account for books and incidental expenses. With my graduate degree in hand two years later from the University of San Francisco, I re-entered the world of healthcare through a leadership role with a Northern California-based community health center. 

Since then, I’ve often reflected back, given the student debt I’m now saddled with, on whether I would pursue this same course all over again. Certainly, a big part of me believes that paying all of that money back is the right thing to do. Yet there is this nagging issue I have with the corporate fat cats who got what essentially was a monetary bailout during the financial crisis of 2008 to the tune of billions of dollars. 

So with all of the Biden talk of erasing a portion of student loan debt, I’m a bit conflicted. Because to me, the student loan issue appears to be as bad if not worse than the corporate bailout in terms of its broader impact on the U.S. economy. 

Recently, I attended an online Twitter Spaces forum with debt and wealth expert Cori Arnold who I had the honor of featuring in a “Great Books, Great Minds” feature article in 2021. In the discussion, Cori, who went from being $260,000.00 in the hole to a millionaire in ten years admitted that a pretty sizable portion ($140,000.00) of her original debt was tied up in student loans. She adds: 

“Student loans are one of those areas where you can easily get in massive debt in a very short period of time yet it can take forever to pay off. So you have to view it as a consistent, long term journey to freeing yourself.” 

With student loan payments frozen at present as well as uncertainty as to whether Biden was going to indeed fulfill his promise of forgiving a portion of student loans for current borrowers, I asked Cori about whether students should continue paying on their loan given the possibility that all or some of what they have remaining could be forgiven. Here’s the thoughtful response she offered: 

“If this is your only loan debt, set aside what you would otherwise be paying in a savings account until a decision is made. In other words, approach this as though you are making a payment on the remainder of the debt. Your aim should be to set aside as much as possible in a savings account until Biden’s decision is made. Depending on the outcome, you will then be able to make a lump sum payment if needed on whatever is remaining.” 

The History Behind The U.S. Student Loan Mess

Shermer who is an Associate Professor of History at Loyola University of Chicago says it hasn’t always taken upwards of thirty years to pay off the cost of a bachelor’s degree, noting that the earliest federal proposals for college affordability were set with the intention of replacing tuition with taxpayer funding of institutions. But she says that over time Southern whites during the Jim Crow Era feared that lower costs would undermine segregation

There were also two other contributing factors to this narrative according to Shermer. For starters, Catholic colleges voiced strong objections to state support of secular institutions. Moreover, college professors worried that federal dollars would come with rules hindering academic freedom. Then there were the presidents from elite universities that expressed issues with the idea of mass higher education. 

She notes that Cold War congressional fights eventually led to access becoming more important than affordability. So rather than colleges being extricated from their dependence on tuition, the government created loan instruments which led to college more accessible in the short term but even costlier in the long run by delivering an interest penalty to needy students. It was in the mid-1960s, as bankers began squawking over the prospect of uncollected student debt, that Congress weighed in to backstop the loans. This in turn fueled runaway college tuition inflation as well as immense lender profits. 

In an interview with Great Books, Great Minds, I asked Shermer what fueled her decision to write this book as well as whether there were any surprise discoveries she encountered over the course of researching the book. She had this to say: 

“I tell the full story of this book in my acknowledgments. But here’s the short version — I had finished my first book on the movement of industry from the Steelbelt to the Sunbelt, which led me to discover how important universities were to attracting industry. In fact, business groups and executives spent millions on public campuses (like ASU, UNC Chapel, and UCSD) in order to make sure their new factories would have nearby universities to supply the research, development, and workforce training that corporations needed.”

This, she says, led her to begin writing a book challenging the assumption that private money in public campuses was not as recent as many have assumed and still argue. But that project, says Shermer, filled with research trips to campuses across the country, seemed impossible after her father’s health began to rapidly decline. And then a surprise discovery: 

“I ended up having to empty and sell his house, which was when I found the student loan documents that I first signed when I was 17 and am still paying off. It occurred to me that historians didn’t know much about the federal loan programs or the student loan industry. And the research for that project seemed far more manageable, especially since I’m from the DC area.” 

She says that this major surprise was central to how the book evolved as she researched and wrote. 

According to Shermer, student loans are usually described as the unintended consequence of a program started with the best of intentions. Most books, in fact, blame greedy bankers and for-profit colleges. But lawmakers, she says, actually pushed for a loan program that bankers fought and for-profits were not eligible for initially. She elaborates: 

“The Guaranteed Student Loan Program only seemed on paper to be a small part of the 1965 Higher Education Act, usually celebrated for substantial, direct federal spending on campuses. But, in fact, the Johnson Administration prioritized the loan industry as did many lawmakers (in both parties). They modeled that student loan program on the federal mortgage program even though there’s a big difference between a loan for a house (which can be repossessed and sold to someone else) and college credits/degrees (which cannot).” 

As the story goes, Sixties lawmakers made the decision to avoid a substantial investment in colleges, similar to 1930s lawmakers choosing mortgages over public housing projects. Moreover, both programs worked in similar ways to worsen system racial, gender, and economic inequalities. She also learned (which was less surprising) that the delay between the earliest federal tuition assistance programs came from talks derailing over fights over segregation, states’ rights, federal power, taxing, and spending.

In terms of the student loan issue in the U.S. where an estimated forty-five million Americans owe more than $1.7 trillion dollars, 

In debts that cannot be discharged in bankruptcy, Shermer adds:

“It really wasn’t until the turn of the millennium that the federal government published accounts of individual household debt and then separated out student loan debt. But it also wasn’t until 2008 that Congress mandated real data be collected from states, lenders, and campuses to give a much broader picture of the debts incurred and still owed.”

With this new data, Shermer asserts that researchers have been able to show that citizens of color disproportionately have to borrow more and then have struggled more to pay it back because families of color lack the inherited wealth to pay college expenses out of pocket. Moreover, college credits/degrees have done nothing to erase persistent pay gaps, which is also why women struggle to repay their debts. Women are also more likely to leave the labor force to provide unpaid care for children and/or older relatives with interest still accruing if they pause their repayments.

When asked about what sorts of funding approaches new prospective college students should explore in order to avoid ending up in a similar predicament, Shermer offered this: 

“First and foremost is to learn about these financial products. Second is to consider starting off with a community college for their general education requirements. Many states have low or even no-tuition options for some solid options for students to discover what they might study. But, most important, is to only borrow through the federal programs, which have far better (though certainly not perfect) options for repayment. Indeed, it is only the federal direct loans whose payments and interest accruals have been paused during the pandemic.”

She adds that many people are surprised that she still suggests that students borrow through the federal program. 

“I do because of the protections for borrowers but also because college has become so unaffordable that few can really work enough to pay for college fees, books, and living expenses. The more students work the less likely they are to finish. But college dropouts still have to pay back any money they borrowed for college with interest. It is better to borrow so a student avoids working so much that they can’t finish and have the degree to compete for well-paying work.” 

With all of the current discussions in Congress about the debt crisis, I asked Shermer about the likelihood of student loan forgiveness occurring during the Biden administration time in office? She adds: 

“I prefer the term cancellation because no one did anything wrong by trying to go to college. As I show in the book, the Roosevelt Administration rolled out the first federal work-study program and championed the still venerated first GI Bill of Rights because New Dealers recognized that the nation benefitted (not just the individual student) from more people being able to go to college.”

But the story of ordinary people taking those opportunities to go to college during the middle of the Depression and at the end of World War II reveal what it will take now to get the Biden Administration to cancel student debt. 

“Young people in the 1930s and 1940s proved lawmakers wrong with respect to the ability of ordinary people to go to college and excel. Similarly, it’ll take even more public pressure and organizing to get President Biden to cancel student debt. He was very clear during the campaign that he would only sign limited cancellation if Congress placed a bill before him.”

Shermer says that the prospect of this seems highly unlikely right now, especially before the midterms. Plus, his February 2021 town hall revealed that the president didn’t understand the dimensions of a crisis that progressive lawmakers (like Ayanna Pressley), researchers, and activists have shown to disproportionately affect citizens of color, especially women. 

“They reacted swiftly to his mistaken comments about what Harvard students might borrow (that institution, like many wealthy campuses, have no-loan policies for students). Public pressure and organizing has also done a lot to push the Administration to keep extending the moratorium. So both need to continue to push for cancellation (not forgiveness).”

In the meantime, the Biden administration did recently announce that student loan payments will be deferred until Aug. 31, 2022. At present it has been reported that only about 500,000 federal student loan borrowers, out of more than 43 million, have been repaying their loans during the pause. Shermer responds: 

“Inflation helped a lot of activists, researchers, and progressive activists keep the moratorium going, which is especially impressive because so many of the pandemic aid programs are now gone (such as the eviction moratorium and even the extra child tax credit, which many Democrats had hoped to make permanent). There’s been excellent reporting on how this pause has helped many borrowers pay down (or even off) credit card debt as well pay for rent and food as prices have soared.”

Despite this reprieve, Shermer says that concerns remain that a restart in payments would be harmful to individuals as well as the economy as a whole as the country tries to recover economically from the pandemic. She adds that the most recent moratorium has also included help for borrowers in default, which hopefully indicates continued work on another issue important to activists and policymakers: enabling student debt to be discharged in bankruptcy (the most recent bipartisan legislation on that issue went nowhere). 

“Also interesting is what is happening with making the Public Sector Loan Forgiveness program (PSLF) functional. Few had actually had their debts cancelled through a program riddled with mismanagement. But there are more and more reports of people having their debts cancelled and even receiving a refund for overpayments. But it has been a slow process for many (myself included) and this fix is only temporary.”

Some, according to Shermer, are considering the most recent extension a signal that cancellation might be coming soon, especially since August 31 is an odd date with millions starting college classes and the midterms looming. But she’s not convinced it is coming without continued public pressure and activism.

As for those with outstanding loans continuing to pay,  she says that she was one of them. 

“I did it as a way to pay down the principal, which is a suggestion that has been made to borrowers able to afford payments during the pandemic. I only stopped once I began the process of filing for the temporary changes to the PSLF because I’ve made many more payments than the required 120 payments.” 

Here’s another fact that borrowers may be unaware of. Loans that are in default for 7 1/2 years are automatically removed from their credit report. In terms of the ramifications of this, I asked Shermer to respond: 

“This might seem small but it matters a lot. Defaults on credit reports can make it hard for people to borrow for basic needs, including housing. Having someone borrow for the same education and pay more over time does a lot to sustain and even worsen long standing equalities (especially since families of color remain more likely to have to borrow because they don’t have as much inherited wealth). Borrowers already struggle to save but, if the defaults continue to reappear (especially for debt that can’t be discharged in bankruptcy) would just continue to make it harder for borrowers to genuinely move past the debts that they incur. All this for just trying to compete for well-paying jobs with health insurance and that can enable one to save for a home.”

Shermer says she dedicated her new book to the 45 million of us who currently owe more than $1.7 trillion. And at the end of the book she writes that it is for past, present, and also future borrowers, including the ones whom she considers herself lucky to have in my classrooms now.

“All of this is such a tragedy. From my perspective as a historian, the American people didn’t want a loan program. There were calls for affordable, accessible higher education since young people in the 1930s and 1940s showed the power and potential of ordinary people to go to college and excel – as well as why that was good for the entire country. But democratically-elected leaders ignored their demands then as well as the many pleas for help decades before Congress mandated real data be collected.”

She concludes:  

“Those numbers helped reveal who really paid the price for the federal government guaranteeing bankers repayment, not that Americans would have affordable, accessible educational opportunities or that campuses would have the revenue to remain open, let alone expand to meet demand for seats or faculty research. That’s why the book ends with a demand that people elect and hold their representatives accountable for political compromises that have disproportionately harmed families of color.”