Profiting off Debt

Federal student loans facilitate a pernicious profit motive in higher education.

York College, New York. CUNY Academic Commons

Student loan debt has achieved gargantuan proportions. Over the past two decades it has grown to $1.44 trillion, surpassing other forms of debt like credit cards and auto loans. This debt mountain didn’t form overnight and it wasn’t an accident. It has been fueled by intentional government policy. Instead of public investment and true accessibility, college on credit and for profit has become the norm.

Since its inception, the Federal Student Loan Program has been a patchwork solution — created under a guise of access and affordability — to demands for higher education as a public good. But instead of creating more opportunity, the federal loan program has set the stage for a looming student debt crisis by profiteering off students who are already economically vulnerable and obfuscating the urgency of abolishing debt altogether.

Just over a decade ago, outstanding student debt was $250 billion, meaning aggregate debt has grown more than fivefold since then. According to a recent report, the rapid increase in aggregate student debt between 2004 to 2012 is attributable both to an increase in the number of borrowers and an increase in the average debt per person: The proportion of students relying on debt to finance their education increased 70 percent during this period, while the average debt load per student went from $15,000 to $25,000. More and more students are becoming victims of onerous debt.

Who are the students taking out these loans? Economic pundits blame persistent un- and underemployment on a skills mismatch, advising Americans to adapt by getting more education, more skills, and more certifications throughout their adult lives. As a result, today’s student borrowers are no longer just those fresh out of high school.

They increasingly include working-age adults, those with dependents, and, disproportionately, people of color. A report from the Brookings Institution shows a marked increase in “non-traditional” borrowing by parents, students beginning college many years after high school, and those attending for-profit institutions. And it is these borrowers most at risk for being overloaded with debt.

The Profits

The Federal Student Loan Program started in 1958 and then expanded in 1965 to increase access to higher education for students without the means to afford college. The program initially lent primarily from the United States Treasury, but later the government began guaranteeing loans made by banks and nonprofit lenders under Title IV of the 1965 Higher Education Act. Over the years, the program has gone through a number of ad hoc policy tweaks, resulting in today’s mix of programs including: subsidized loans, unsubsidized loans, parent PLUS loans, and private, yet guaranteed, loans.

The growth of the student loan program and the acceptance of debt financing as the status quo has bequeathed a pervasive model of college on credit. And as tuition and fees have risen far more rapidly than income, students’ increasing reliance on loans has made debt financing the norm.

These relative costs can have big consequences. Whereas taking on small amounts of debt for a public education in the 1970s meant getting a summer job to repay the loan, today’s bachelor degree holders have debt balances averaging $35,000 — a tremendous burden for borrowers as well as the economy as a whole. The burdensome nature of the debt is not helped by weak labor markets, lower returns on a degree, and high interest rates on federal loans.

As of 2013, the interest rates on federal undergraduate direct student loans is determined by the ten-year treasury note yield plus a markup, capping loan rates at 8.25 percent — rates that are orders of magnitude higher than the cost to borrow for big banks.

These rates are justified as necessary to cover the costs of the program and the cohort-wide risks of default. However, these costs have been overestimated, and the federal government now rakes in a considerable profit on student lending.

One of the upshots of the current higher-education financing model is an asymmetric credit market — one which places nearly all the costs of default risk on student borrowers through high interest rates and the elimination of bankruptcy protection. That’s right: If you go bankrupt, the debt stays with you. In some cases, even death may not expunge the debt.

With its high interest rates, harsh terms, and ever-growing loan levels — all levers to offset the lack of public funding —  the Federal Student Loan Program is responsible for a looming student debt crisis.

Millions of students are overleveraged, but the burden of student loans is by no means shared equally. The student loan program, like our corrupt banking system, disproportionately profits from poor students, and students of color in particular. In the popular media accounts, we typically hear stories about this student having $100,000 in debt, and that student having $120,000 in debt.

While these astronomical debt levels are outrageous and make great headlines, it’s the students with lower loan balances that often have the hardest time repaying their loans. Lower degree completion rates for black and Latino students mean that while many poorer students may have relatively “low” loan balances, they are denied the higher income that comes with completing a degree.

Meanwhile, the average college debt for black bachelor degree holders is about $4,000 higher than that for the average white student. This higher debt burden is linked to a number of factors: black students are more likely to borrow, take on average higher debt loads due to lower family wealth, are more likely to take out unsubsidized loans that carry higher interest rates and accrue while enrolled, and attend for-profit universities at higher rates.

Not to mention that discrimination in the labor market contributes to black graduates earning a substantially lower return on investment on their degree and being subject to an unemployment rate that is twice that of white graduates.

Exorbitant profits are being made on the backs of student borrowers, especially those already most marginalized in our economy. But not everyone agrees that the government makes a sizable profit on student loans.

There are two opposing schools of thought: Following proponents of the Federal Credit Reform Act (FCRA), which government budget analysts are required to use, the government will rake in well over $100 billion over the next decade from student loans, according to the Congressional Budget Office (CBO). On the other hand, those who ascribe to a fair-value accounting (FVA) method estimate the government will lose billions on student loans due to potential risks.

These kind of “budget games” have an ideological thrust. While the FCRA method is the CBO’s best guess of the actual impact of the loan on the budget, the FVA acts as if the federal government is run like a for-profit institution. But the government is not run like a private bank, nor does it take on additional costs or risks that are factored into the FVA score. FCRA advocates are correct when they contend that the government is making windfall profits off students trying to get ahead — and no accounting methods can change this fact.

The Burden

The problem with student lending — both federal and private — is twofold. First, by subsidizing guarantees for private lenders of student loans and by directly profiting from its own student lending program, the government facilitates a pernicious profit motive in education finance. This structure turns the costs of higher education into an individual burden and undermines the government’s responsibility to finance colleges and universities as a public good.

Second, the widespread option of college on credit distracts from the urgency of creating affordable, accessible, and debt-free public options for higher education. While student lending may be a profitable program for the government, and appears to be an easily financed means of expanding access, this effect is only apparent by displacing costs into the future, onto students who are struggling to keep up with an ever-more competitive labor market. At the same time, states and the federal government continue disinvesting from higher education, compounding the severity of the student debt crisis.

These dynamics create the conditions for a student loan crisis, and one that will, like the mortgage crisis, have a disproportionate impact on the most marginalized groups — the same groups the program was purportedly created to help in the first place.

These loans aren’t going to disappear anytime soon. They’re a burden on individuals, their families, and the economy writ large. With many borrowers paying into their forties, and some even into their fifties, student debt will remain a drag on economic growth for decades to come. In fact, a report by the think tank Demos found that if current borrowing patterns continue, student debt levels will reach $2 trillion by 2025. This isn’t sustainable.

The Response

Some legislators have advanced ideas to revamp the student loan program, but the broader reform landscape is bogged down in relatively narrow debates surrounding the profit involved in student loans. In March, Senator Tammy Baldwin introduced the In The Red Act, which claims to put America on a path to “debt-free college.” Baldwin’s bill incorporates a version of an amendment Senator Elizabeth Warren tried to attach to the Republican budget resolution last March.

Warren lambasted the US government for using students as “profit centers to bring in more revenue for the federal government.” Warren’s original amendment would have slashed the interest rate on student loans, bringing substantial savings through refinancing for millions of students. To offset the cost she proposed closing tax loopholes for the wealthiest Americans.

Unsurprisingly, Republicans blocked Warren’s amendment. But the issue of student debt isn’t going away. Indeed, if this year’s election shows anything, it’s that student debt is increasingly becoming impossible to ignore. Most candidates put forth proposals to reform the student loan program during the primaries. Hillary Clinton claims her proposal — the New College Compact — will ensure the federal government will “never again profit off student loans for college.”

Meanwhile, Sanders claimed his College-for-All Act, introduced to Congress last May, would eliminate government profit from student loans through a significant reduction in the interest rate charged — cutting it nearly in half for undergraduates. His policy does not ensure “gains” or “losses” are made or avoided, but it would substantially lower potential government profits on student loans.

While Sanders is no longer in the race, his stance on college as a public good and a fundamental right has changed the conversation. Clinton has embraced portions of his platform, and now boasts a plan for debt-free college at in-state universities for families making up to $125,000 in income. This is a far cry from universal higher education — a model in which everyone, regardless of income, gets a free college education system — but it shows that the demand is making headway.

The Republican nominee has no plan for higher education. In an interview conducted by Inside Higher Ed Donald Trump’s campaign co-chair declared that “[student loans] should be [a] marketplace, and market driven.” Perhaps his model is Trump University. As one employee of Trump University said during testimony in a class-action suit against the university, “while Trump University claimed it wanted to help consumers make money in real estate, in fact Trump University was only interested in selling the most expensive seminars they possibly could.”

Regardless of what’s happening in the corridors of power, students are taking matters into their own hands. Last fall saw a wave of student activism across campuses, focusing on the Fight for $15, the movement for black lives, and the forgiveness of all student debt as a matter of both economic and racial justice. The Million Student March last November brought together campus activists to form a cross-issue movement for social and economic justice. Students are demanding education as a right, not a privilege for those who can afford it.

We need to eliminate government profit on student debt, and move on to real conversations about providing an education accessible to all.