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Schooled on Debt

Congress’ latest student loan fix is no long-term answer

By Deanna Isaacs and German Lopez · July 11th, 2012 · News
news_moneymonstarIllustration: Julie Hill

University of Cincinnati student Dan Traicoff is not happy about the limitations that costs have placed on his education. At one point, Traicoff was looking forward to attending a prominent college for graduate school. Now, due to rising education costs and student loans that have become more difficult to afford in recent years, Traicoff has had to make a tough decision: Instead of going to his dream school, he will have to settle for more affordable options.

Traicoff, a 21-year-old expecting to graduate in 2013, is one of many student voices that have joined in a chorus asking Congress to look at the increasing burden of student debt and education costs in the United States.

On June 29, Congress listened. The 3.4 percent interest rate on new student loans has been extended for another year. Now the problem has been kicked down the road. But the one-year fix won’t help Traicoff; it only applies to undergraduate students.

Traicoff is not yet sure where he’ll end up for graduate school, but he does know he’s had to cross out some options because the costs, even with loans, were too high to justify.

“It’s really limited my options as for where I can apply to school and what I can go to school for,” Traicoff says. 

Student debt in this country has surpassed the trillion-dollar mark — exceeding even total credit card debt — and is still climbing. And a lot of it is owed by English and philosophy majors now working as baristas or not at all.

In Ohio, the situation is as bad as anywhere. Ohioans currently face the seventh most student loan debt in the United States, according to a report from the Institute for College Access and Success. On average, Ohioans graduating from a four-year program in the 2009-2010 school year ended up with $27,713 in debt. New Hampshire had the No. 1 highest average at $31,048.

Ohioans can also expect to get even less aid from the state government. Recently, Ohio public colleges were found to be among the most expensive in a U.S. Department of Education survey. Schools around the Cincinnati area blamed the high costs on a historic decline in taxpayer subsidies offered by the state to public colleges.

This “education bubble” was the subject of a paper cultural critic Brian Holmes (continentaldrift.com) gave at a lecture sponsored by Chicago’s Open University of the Left in late May. Though the original intention was benign, Holmes says, “the use of federally guaranteed loans to make college more accessible has ended up creating a monster.” 

Holmes’s starting point is a cold war initiative, the National Defense Education Act of 1958, which provided for direct loans to students from the federal government.

Tuition was modest, and the number of borrowers was relatively small. In 1965 the program got a Great Society expansion that added middlemen and private lenders (and layers of expense) to the mix. The motivation for that was a little bit of accounting magic: “Direct loans to students appeared as a loss on the federal budget. Loans made by private lenders, but guaranteed by the government, would not show up at all.” 

Then, in 1972, the government created the Student Loan Marketing Association, which grew into the financial services giant known as Sallie Mae. 

Initially a government entity whose job was to keep the market liquid by buying up loans from smaller lenders, Sallie Mae underwent a significant transformation in the ’90s. It became a private company, the SLM Corporation, and it got into the extremely profitable business of bundling and reselling government-backed student loan debt as SLABS (student loan asset-backed securities), investment packages similar to mortgage-backed securities. 

When the credit markets seized up in 2008, the federal government stepped in to save Sallie Mae and other private lenders “too big to fail” with multibillion-dollar bailouts. 

Meanwhile, tuition soared, inflating faster than anything else in the economy, including health care. As universities and colleges became increasingly competitive, “corporate” and global, they invested in buildings, marketing and multiple layers of administration, while handing off an ever-greater portion of instruction to adjuncts. 

Like rising home prices in the housing bubble, tuition increases were enabled by easy credit. Students everywhere borrowed, but none more than those at for-profit schools. Holmes notes that at four-year for-profits in 2008, 97 percent of graduating students took out loans. At least they graduated. In the worst cases, students leave with debt but no degree. 

And here’s the important distinction about student loans: they’re uniquely hard to shed. While some subsidized student debt can be “forgiven” — if you make all your payments for 20 years and still have a remainder, for example, or if you spend your career in public service — they’re the only kind of consumer debt that can’t be discharged through bankruptcy. Unlike credit card debt and mortgages, if you take out a student loan — even a bank loan without a government subsidy — you’ll be on the hook until it’s paid. In theory, you could still be ponying up for that film class from your social security check. 

In 2010, in spite of a multimillion-dollar lobbying effort by Sallie Mae, the Obama administration closed private lenders out of the government’s undergraduate student loan business. Now those loans are being made — as they were at first — directly from the government to the student. But the debts outstanding at this point will still be handled by the same players under the old rules. 

Students like Traicoff are concerned that Obama’s legislative changes and the congressional action won’t be enough. 

“I think we need to find a way to get more money back into the colleges,” Traicoff says. “If we could get money back into the colleges, that would decrease the amount of tuition we have to pay. That alone would save students a lot of money on their debt.”  ©

A version of this story first appeared in the Chicago Reader. 

 
 
 
 

 

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