The American Spectator

“God, what a mess / on the ladder of success / When you take one step and miss the whole first rung. / Dreams unfulfilled / Graduate unskilled / Beats picking cotton and waiting to be forgotten.”
—The Replacements, “Bastards of Young”

RELAX, GENERATION Y. It’s much worse than you think. According to the shiny new Consumer Financial Protection Bureau, Americans’ total student debt has just surpassed $1 trillion and now exceeds total credit card debt. Millennials’ share of that has doubled since 2005, and sits at a cool $300 billion—or about 21 grand for each of you under 30. Meanwhile, tuition costs continue their alpine climb, increasing ever faster than the consumer- price index, even as a weak labor market drives new hordes into post-secondary education, inflating away the advantage of holding a degree. So, too, is the recession changing the way we pay for college, and not for the better. According to an annual report from Sallie Mae, the average share of tuition paid with parents’ savings has dropped, as has the percentage of students receiving scholarships. To bridge the gap, students are paying more out of pocket and taking more loans from the federal government— a 55 percent increase in borrowing over the last five years.

Is this a higher education bubble? If it isn’t, it will do until the bubble gets here. And if it is, it may be set to pop: In 2008, 81 percent of 3,000 adults surveyed by Country Financial thought college was a good investment.This year, that number is 57 percent.

So how did we get to this point? More than anything else, the current dysfunctional market for higher education has been shaped by the federal government, and by one bill in particular: the Higher Education Act, signed into law by Lyndon Baines Johnson in 1965.

Before the HEA went into effect, the federal government’s involvement in higher education funding was largely limited to the G.I. Bill and something called the National Defense Education Act of 1958.Both were tied, if indirectly, to national security (the latter was aimed at producing math and science grads for research jobs in the Cold War military-industrial complex), and both offered direct loans, fully capitalized by the United States Treasury.

The Higher Education Act created the Guaranteed Student Loan (GSL) program, which eventually became the Federal Family Education Loan (FFEL) program. Under it, a portfolio of financial products, including what would become the federally guaranteed (and thus heavily subsidized) Stafford loans, were administered by private firms and bundled through a GSE called the Student Loan Marketing Association (better known as Sallie Mae, Fannie and Freddie’s scholastic kid sister). The HEA would morph and expand over the years to include Pell grants and direct loans called Perkins loans, but the Stafford loans were the bread and butter. And no wonder: They were a bonanza for the private lending industry. The federal government ate all the risk on massive loans offered to teenagers; bought, through Sallie Mae, as many loans as lenders wanted to sell in order to maintain market liquidity; and even sent lenders checks called “Special Allowance Payments” when interest rates weren’t delivering high enough returns.

Oddly enough, the move away from direct and toward subsidized private loans wasn’t made as a matter of principle, but of political convenience. You see, budgetary rules in 1965 required that Congress take the full value of every direct loan as a current-year loss, while guaranteed loans issued by private lenders—even though they were backed up by the full faith and credit of the United States—created no such unattractive line items.

But of course, once the government invited the lending industry to the trough, it proved difficult to get them to leave. After Democrats flirted with increased direct lending in the 1990s—and were largely stymied by congressional Republicans—the federally guaranteed loan reached its zenith, coming to represent fully 97 percent of all student loans issued by the private sector. Then came the financial crisis and the attendant consumer credit crunch, which quickly squashed lender participation in the subsidized loan market. In 2008, the industry got its very own bailout, when the Bush administration started buying up existing guaranteed loans from private vendors to spur them into originating new ones. In this environment, direct loans began making a comeback.

IN 2010, PRESIDENT OBAMA made it official when he signed a bill (appended, oddly enough, to the last bits and pieces of the Affordable Care Act) that replaced the FFEL regime with a system of all direct loans, all the time. Obama touted his victory over the “army of lobbyists” seeking to protect “a sweetheart deal,” including, most prominently, the now privatized Sallie Mae, which spent millions fighting the bill. For their part, the Republicans, then a minority in both houses, warned that ending the Stafford program as it existed would cost thousands of jobs inside the industry and amount to a “government takeover” of student loans. Multiple private lenders means competition and thus efficiency, they argued. And private lenders are likelier to check against over-borrowing.

Here’s the thing, reader. Obama was right. Or, at least, he was less wrong than the Republicans. The suggestion that a quasi-private market, shielded from the consequences of default, is a good check against over-borrowing is hard to make with a straight face in light of the housing crisis. Besides, private lenders will continue to compete in the market for non–federally backed student loans, as they did under the old system, and without the sluice of federal dollars, they will do so at higher (read: more realistic) interest rates that will likely check against over-borrowing just fine, thank you very much.

No, sir. If the first option is statism and the second is statism mixed with corporatism masquerading as free enterprise, I’ll take my Big Government straight up, please. The truth is that direct lending eliminates public choice problems and is cheaper for the taxpayer.Government estimates suggest the move to direct lending will save $68.7 billion over 10 years. (Of course, that money won’t be used for, say, deficit reduction, but instead be siphoned into the Pell grant program.)

But just because the new system represents a modest beating-back of rampant corporatism doesn’t mean it isn’t also perpetuating everything that is dysfunctional about the student loan market and propping up the bubble. Artificially cheap money used to come from private lenders; now it’s coming from the Treasury. Student loan interest rates are still set not by individual or actuarial risk, but by statute—a formula based on T-bill yields. In the middle of a full-fledged higher education crisis, the taxpayer remains on the hook for 100 percent of borrower default risk. And the whole thing remains stunningly detached from what should, after all, be the central question of the student loan industry. Just what is college worth?

THE GEORGETOWN UNIVERSITY CENTER on Education and the Workforce found that the lifetime earnings premium associated with having a bachelor’s degree (as opposed to a high school diploma) is about $1 million.The College Board has long put that number at $800,000. But these figures are almost certainly too rosy, which isn’t surprising considering that the former comes from a university and the latter comes from a trade group representing universities.A soberer estimate, from Mark Schneider of the American Institutes for Research, has recently gained purchase. Schneider suggests the real premium of a college degree may be less than $300,000.His 2009 study on the subject incorporated loan debt, opportunity costs associated with attending classes instead of working, and a variety of other variables that others left out.

But let’s concede that an extra $300,000 in earning potential over the course of a lifetime is nothing to sneeze at, and worth going into hock for. After all, there continues to be a yawning gap between unemployment rates for college and high school grads, and it still doesn’t pay to be the latter in a job market flooded with the former. The question then becomes: Is going to this college for this degree worth it?