Last week DePaul graduate student Marty Gleason went public about his mounting load of debt in an appeal to Congress to keep the interest rate on student loans at 3.4 percent.
His voice was one among many, some projecting a tsunami of defaults if the rates did what they were slated to do and doubled.
On Friday, 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.
Gleason, who's 35 and works full-time as a Cook County juvenile probation officer, has more than $30,000 in debt from his undergraduate years at Beloit College. He expects to take on another $40,000 before he finishes the master's in information systems he's pursuing part-time at DePaul. He'll owe about $73,000 when he's done, and the one-year fix won't help him—it applies only to undergraduates.
His situation is hardly unusual. 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.
This "education bubble" was the subject of a paper cultural critic Brian Holmes (continentaldrift.com) gave at a sparsely attended Open University of the Left lecture 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.
"By 2003," Holmes writes, "[SLM] was earning $1.9 trillion a year, with a profit margin of 46.5 percent." [SLM's 2003 annual report actually shows net income of $1.53 billion.] (Its CEO, Albert Lord, tried to buy the Washington Nationals and, tired of waiting for tee times, built a private 18-hole golf course.) But 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.
Holmes, teaching in Europe this summer, e-mailed last week that what we have left is "one trillion dollars of outstanding loans and a system based on ever-higher tuition every year. . . . The substantial work to solve the long-term debt problem remains to be done."