- In “The Debt Trap: How Student Loans Became a National Catastrophe,” journalist Josh Mitchell explains very well how student debt became the US $ 1.6 trillion problem.
- But while Mitchell does a good job of shedding light on the causes of the student loan crisis, his policy solutions are not enough.
- Jonathan A. Knee is Professor of Professional Practice at Columbia Business School and Senior Advisor at Evercore.
- This is an opinion column. The thoughts expressed are those of the author.
If your gut feeling is that there must be a good story behind how Americans collectively racked up $ 1.6 trillion in college debt – much of it will never be paid off and with taxpayers holding the sack – the reporter from the Wall Street Journal Josh Mitchell “The Debt Trap: How Student Loans Became a National Disaster” will strongly confirm your suspicions.
It’s not just the sheer volume of bonds that takes your breath away – more than an outstanding credit card or auto debt – but the extent of who is involved in the debt. Over 20% of adults still owe something, and that’s not just limited to current and former students. Over the years, various programs have grown to allow parents, other family members, and even friends of aspiring college students to get stuck with the bill.
The road from the first modest loan program adopted in the 1950s to the uncontrollable beast of today is paved with a combination of good intentions and sinister motives. Mitchell is an entertaining guide along this route, introducing us to the colorful personalities who have proven to be influential in the expansion of student debt and the real borrowers who have been crushed by the very programs that were meant to lift them up.
Although “The Debt Trap” tends to overestimate to a dramatic effect – claiming for example that with a 27% market share, Sallie Mae “controlled the student loan industry like few companies dominated an industry” – Mitchell typically delivers the goods by getting some of the most blatant baddies in the business to officially talk to him.
A failure of solutions
While journalism is stellar, where “The Debt Trap” ultimately collapses is in its political analysis. The three pages the book devotes to half a dozen policy proposals aimed at “fixing” the systemic problems behind the student debt bubble in some cases seem designed to repeat the same mistakes of the current system, and in others, ignore Mitchell’s excellent report on what worked and what didn’t.
Take Mitchell’s proposal to go ahead and make the community college completely free. The major problem with the loan program that the book identifies is that by simply guaranteeing repayment, the government tricked schools and lenders into pushing students into programs they weren’t suitable for and out of business. expanding programs without considering outcomes for students – while constantly raising tuition prices. Mitchell notes that most community college students are currently dropping out and suggests a number of reasons for this other than the most obvious – many colleges are doing a terrible job, both in providing essential support to students and in ensuring that this is so. that their programs are of adequate quality and closely linked to employment opportunities.
Indeed, the unchecked growth of for-profit schools that Mitchell rightly criticizes elsewhere has been aided in part by these obvious and well-known failures of community colleges to prioritize the interests of students over faculty and administrators. Making these schools free for students will obviously reduce their debt load, but transfer that obligation to the government’s ledger. More importantly, making community colleges the beneficiaries of a vast new eligibility program without addressing their current shortcomings will create a whole new set of perverse incentives that could make matters worse.
In contrast, Mitchell proposes to eliminate entirely all grants, through loans or otherwise, for graduate studies. It repeatedly brings together all master’s, doctorate, medicine and law and MBA degrees, which makes little sense from a political point of view.
More importantly, one of the few real success stories highlighted in reports where the loan program clearly made a positive difference is the case of the for-profit Florida Coastal School of Law. The loan program was essential for the innovative school to break the traditional law school cartel and effectively serve a predominantly black and Hispanic cohort of students with below average LSAT scores – in 2004, with 900 students, 80% of its graduates have passed the bar. exam, more than any other Florida law school except one. The story took a dark turn once the business was bought by a private equity firm and ‘evolved’ faster than necessary, but its initial success demonstrated the potential of entrepreneurial approaches in targeted areas with the government support as long as there is oversight.
A careful eye is necessary
The broader conclusion of the decades of attempts to “fix” public funding for higher education so clearly detailed in “The Debt Trap” is that none will succeed without addressing a particularly American conceit about regulation.
Businesses and individuals are happy to receive government largesse or protection, but are outraged if it comes with conditions. For my money, there are few phenomena less attractive than the exploitation of regulatory arbitrage for corporate or personal financial gain by those who complain about the oppressive yoke of regulatory oversight. But time and time again in the history of the loan program, such lamentations, disguised as lofty political arguments, have allowed banks and schools to profit from government loans with little control over how that money is spent and for who.
So Sallie Mae, an independent private company originally created as an accounting trick to ensure that student loans were not counted against the government deficit, was allowed to aggressively market the government guarantee that all debt students would be reimbursed. For a while, wealthy families were able to take soft loans that they didn’t need just to reinvest the money and profit from the spread at taxpayer expense. If the government tells schools and banks that they will guarantee any benefit regardless of performance and tells students they can use it anywhere, regardless of the suitability of their skills or job opportunities , the results seem predictable.
Lyndon Johnson, as a senator, was a driving force behind the original student loan program. He had only been able to attend Southwest Texas State Teachers College because a local bank had concluded that he had demonstrated the “honesty, character, industry and ability” necessary to obtain a loan – that he was in fact able to repay. This is an extremely high threshold to reach and Johnson saw an important additional role for the federal government to play in meeting society’s needs for specific skills and the ability of individual citizens to realize their full potential.
But if the next wave of “reforms” fails to put in place real standards and control over the schools, students and any other institutions that participate in the program, we shouldn’t be surprised if we are once again educated. on the seriousness of the unintended consequences of well-intentioned legislation.
Jonathan A. Knee is Professor of Professional Practice at Columbia Business School and Senior Advisor at Evercore. His next book, “The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans”, will be released in September on Portfolio.