“The Debt Trap” by Josh Mitchell

Note: This was a fascinating read about the history of student loans and a prime example of how misaligned incentive can drive us so far astray.

• Student debt hits black household hardest
• Universities have the third largest lobbyist group
• The cold war led to needing more education
• Hard work used to be the ticket to the American Dream
• The GI Bill was meant to slow the return to work of veterans
• Johnson leaned on banks so the debt would stay off the Federal books
• Walker wanted a system backed by the Fed but with no oversight
• Inflation ran out of control, causing a raise in interest and loans
• Sallie Mae (SLM) was created to take federal money to forward to banks and was authorized to cover at nearly the same level as the Federal Reserve
  • This created “moral hazard” in which banks too bigger risks because they were fully insured
• Mid-1980’s students started defaulting more frequently
• Fox, CEO of SLM, convinced congress to guarantee profit, exploding the student loan market even more
• Then SLM severed ties with the government… going public
• Everyone made a lot of money… Private banks, SLM, and states
• Then came Student Loan Consolidation which let students combine loans then pay over 30 years
• US News college rankings started the arms race for prestige
• Higher tuition started raising prices to indicate quality
• 1989 WSJ reported 23 universities meeting to compare notes on students to maximize profits
• Accreditors were self-regulated and poorly funded so tons of random, bad schools popped up everywhere
• 1990 saw large reforms including better accounting and fewer student discharge rights
  • Tuition went up 120%-150% in a decade
• 1991 introduced Direct Loans for the first time (Fed paying schools directly, cutting SLM out of the picture) but also solidified debt vs grants by raising the cap but broadening availability
• Clinton launched direct loans that included income based repayment and eventual forgiveness
• Congress never required review of student’s ability to repay
• 1996 Al Lord got congress to disavow ownership of SLM so they could change their charter to lend directly to student, letting them profit from origination fees
• SLM started offering discounts to shut out the Clinton’s direct funding program
• For-profit schools could not earn more than 90% of their profit from federal loans
  • Schools accomplished this by keeping tuition low enough that 90% could be covered by federal loans
  • Growth came from the for-profit sector putting pressure to make more loans
• 1996 American Bar Association was sued, and lost, for cartel-like behavior; professors on the accreditation boards would require universities to pay higher wages to stay accredited, they would comply then raise tuition to cover the costs
• 1998 Federal government uncapped Grad loans
• 2006 SLM tried to go private but congress scraped the interest subsidies, cratering the value of SLM
• 2008 SLM was the first bail-out of the housing crash
• Obama pushed for the American Dream to be college instead of home ownership
• We encouraged people on the dole to get educated
• 2010 Federal government ended student loan guarantees and made them all Fed issued
  • Part of the savings paid for Obamacare
  • Debt raised fastest among black families
• 2011 Fed realized banks failed to correctly enforce loan criteria, the sudden enforcement meant a lot of students and parents could not get loans
  • Student aid became a form of welfare
• 2012 loosened the qualifications criteria
• 2014 lowered the income based repayment
• The housing bust enabled for-profit school to soar, capitalizing heavy-hit areas
• 2010 we start seeing “Disney-brand State U”
  • University of Alabama started aggressively marketing to out of state students who paid more
  • SLM pioneered “enrollment management”; how much to charge each student
• Student loans passed debt to future generations
• Many students were worse off from having gone to school, they made more but owed more
• Preventing discharge through bankruptcy meant Congress could show more profit from the Student Loan programs
• DeVoss engaged JP Morgan CEO to help investigate the Student Loan program and found the continuous interest charging was not sustainable