Penury By Degrees

"The Debt Trap

By Josh Mitchell

(Simon & Schuster, 260 pages, $27)

Indentured Students

By Elizabeth Tandy Shermer

(Belknap/Harvard, 382 pages, $29.95)

Who says American ingenuity is dead? No other nation could have invented and sustained anything like our Byzantine student loan system, with its immense cost, dizzying complexity and perverse incentives.

Launched with the best of intentions, the system has produced a human and financial catastrophe. Many former students have reasonable debts, but millions have no realistic hope of paying what they owe, proving once again the iron law of credit -- that truly massive debts end up in the lap of taxpayers. The whole mess is the subject of two valuable new books.

In "The Debt Trap," Josh Mitchell offers a devastating account of the ways in which government, business, academia and naive citizens joined forces to produce the nation's $1.6 trillion student loan crisis. The story he tells is so infuriating that it could induce apoplexy in a Zen monk. Yet it is also a characteristically American story, in which democratic ideals, political expedience, concerns over national security, naked greed and tender optimism have blighted the lives of millions.

Government-supported student loans go back to the 1950s, when they began in a climate of concern (not to say paranoia) about communism, against which advanced schooling, particularly of a technical nature, was considered a potent weapon. The GI Bill had demonstrated the potential for democratizing higher education, but almost everyone was wary of direct subventions to campuses for fear of federal control. Many legislators, moreover, were children of the Depression who believed that students wouldn't take college seriously if they didn't pay their way. From the start, the idea was to fund students (rather than schools) via loans and work-study jobs.

At first limited to the needy, federally backed student loans were eventually made available to all. Loan limits climbed ever upward, and Uncle Sam fatefully stopped paying the interest for much of this lending while borrowers were in school. Callow youths, sold on the value of a sheepskin, borrowed small fortunes to attend third-rate campuses or, worse, for-profit chains designed to exploit the easy money. Family members sometimes co-signed. Graduate students acquired mortgage-size debts too. "At the University of Southern California's dental school," Mr. Mitchell reports, "tuition and room and board cost $152,000 -- for the first year."

For years student loans were made by private lenders with government guarantees against losses. Congress liked this arrangement because it kept the loans off the books (and out of the federal deficit) even if it meant privatizing profits while sticking the rest of us with the losses. "The student loan program," says Mr. Mitchell, "is the quintessential form of crony capitalism." The author, a reporter in the Journal's Washington bureau, shows how a government-sponsored enterprise called Sallie Mae, by mastering the student loan business, became a gusher of wealth for shareholders and executives.

By giving a blank check to every 18-year-old to attend any school at any cost, the system turbocharged the cost of higher ed. America's colleges and universities, while cloaking themselves in the mantle of virtue, shamelessly exploited students and taxpayers by jacking up prices. "Average tuition and room and board at four-year private colleges," Mr. Mitchell reports, "has risen nearly 800 percent since 1980, more than five times the rate of inflation." State schools raised prices even when public funding was stable or growing.

Since 2007, student debt has roughly tripled. Many people owe so much, Mr. Mitchell says, that "hundreds of thousands of senior citizens have had their Social Security checks reduced as the government collects on unpaid student debt." Nor was the money well spent. Among Americans born in the 1980s, "college graduates are only modestly wealthier than those who never went to college. While they earn far more than nongraduates, they have failed to build the savings that prior generations of graduates did, in no small part because their debt has consumed so much of their earnings."

Mr. Mitchell's unsparing account is nicely complemented by Elizabeth Tandy Shermer's "Indentured Students," a work of history that patiently reconstructs the evolution of our student lending system. Ms. Shermer's chronicle presents a valuable case study showing how the American legislative process -- with its many hurdles and decentralized power centers -- produces such complex and costly social programs. Also well illustrated are the risks of unintended consequences in policy making. For-profit trade schools, for example, offered a ladder to success for blacks, Jews, women and others back when they were unwelcome on traditional campuses, as Ms. Shermer notes. But the student lending boom (she puts the total at $1.7 trillion) encouraged some of these schools to become for-profit colleges designed mainly to fleece students.

The author, a historian at Loyola University in Chicago, believes that Congress should have funded schools instead of students. This alternative might have been better, though it would have spared students a lot of debt by shifting even more of the burden to taxpayers. Don't count on campuses controlling costs. Already, Mr. Mitchell observes, "universities employ more lobbyists than any other industry except pharmaceuticals and technology." Unfortunately we ended up with the worst of all worlds: extensive federal sway over higher education and a generation over its head in debt.

Mr. Mitchell says that perhaps $500 billion of the debt will never be repaid. He offers some sensible suggestions, including forgiving interest. But neither author tackles the larger questions here. Is college really for everyone? How much should students pay? How do comparable countries fund higher education? And if we forgive students their debts, as some are demanding, what about those who saved up for school and frugally lived at home, or parents who raided retirement accounts for tuition? Their reward, it seems, will be to pay for the good times and bad judgment of others." [1]

1. Penury By Degrees
Akst, Daniel. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]02 Aug 2021: A.15.