The Debt Trap: How Student Loans Became a National Catastrophe, by Josh Mitchell, Simon & Schuster, 2021, 260 pages, $27.00 hardback. ISBN: 978-1-5011-9944-8.
Wall Street Journal reporter Josh Mitchell provides a journalistic exposé of the political, financial, and institutional forces that have created $1.6 trillion in student debt over the last 65 years. His central claim is that the student loan industry is broken and near crisis. The statistics are staggering: 43 million have outstanding student loan debt; 8 million are in default putting at risk government-funded student loan balances that rival the debt level of the 2008 housing crisis.
How we created this debt trap is a complex blend of good political intentions, the quintessential error of indemnifying private lenders against losses, and the opportunistic expansion of higher education costs without mitigation. After World War II, the American Dream was redefined as primarily achievable through education, but the federal government fell short of paying for that education. Concerns about the national debt produced, in 1972, the Student Loan Marketing Association (Sallie Mae), a public-private partnership of political appointees, higher education institutions, and the banking industry.
The original charter for Sallie Mae was committed to seeking private investments to support student loans, but this failed. The first mistake that followed was allowing Sallie Mae to borrow from the Treasury at rates nearly as low as the government itself. Sallie Mae loaned to banks who loaned to students, and in four short years, Congress agreed that the government would guarantee all banking institutions against student defaults. In two more years, means testing was virtually eliminated for the Guaranteed Student Loan Program. The next year, Sallie Mae was guaranteed a profit of 3.5% above costs, and in 1980 it went fully public by selling shares on Wall Street.
When Democratic administrations attempted to capture these profits in the Direct Student Loan Program, Sallie Mae simply offered students higher private loan amounts than the public caps would allow. Securitization, the same financial trick that fueled the 2008 mortgage crisis, virtually eliminated financing limitations on Sallie Mae and by extension any limitations on the costs of higher education. Tuitions soared. As student loan defaults increased and jeopardized the Direct Student Loan profits, bankruptcy to discharge student loans became increasingly difficult until, in 1998, it became nearly impossible.
“The student loan crisis is about perverse incentives” (p. 211). To create opportunity through education, our government unleashed a lending behemoth that aggressively pursued student borrowers regardless of any capacity to repay the loan. There was no risk of loss to the lenders. Traditional higher education institutions have been unintentionally protected from the consequences of escalating costs and insulated from making educational reforms to improve cost efficiencies. Millions of student borrowers are weighted down by loans that cannot be repaid or legally discharged. Unlike the 2008 mortgage collapse, there are no private institutions as risk; the defaults will be born by the taxpayer. What we have lost may be more than mere money. We have lost confidence in the value of an education and thereby weakened one of the best pathways to opportunity in America. We have institutionalized inequality and a corrosive and long-lasting wealth gap.
Mitchell makes several suggestions for improving the situation, but they really all come down to one idea – our society must accept that education for all is a social benefit and a social cost. Until we do, student debt will keep too many of us entrapped.
Reviewed by Peter A. Kindle, PhD, LMSW, Professor of Social Work at The University of South Dakota. He can be contacted by email at Peter.Kindle@usd.edu.