Earlier this year the total student loan debt in the United States surpassed the $1 trillion mark, leapfrogging over credit card debt and auto debt to become the second largest debt burden in the country. Only mortgage debt levels are higher.
You know a debt bubble is getting ready to burst when even the Federal Reserve starts raising the alarm about it. Judging by the Federal Reserve Bank of St. Louis' “On The Economy” blog in recent months and accompanying data from the St. Louis Fed-run Federal Reserve Economic Data (FRED) database, student loan debt is one of the top issues facing the American economy at the moment. And they're right.
The case is made in a series of increasingly hand-wringy posts pretending to fret about the reasons that student loan debt is spiraling out of control. “What’s Behind the Default Rate on Student Loans?” ponders one. “Is Student Debt Jeopardizing the Short-Term Financial Health of U.S. Households?” wonders another. “The Share of Borrowers with High Student Loan Balances Is Rising,” warns a third. Some of the insightful analysis to be found in these pieces include the observation that success in school and success in the labor market determine whether someone is likely to default on their student loans (well, duh), and, even more incredibly inane, the observation that “outstanding student debt may jeopardize the short-run financial health of households,” which, unbelievably, is quickly qualified by the warning that “this topic is complex and more research is needed before suggesting policy prescriptions.” Such is the level of analysis one can expect from the Fed about why and how America arrived in the current student loan debt crisis.
And a crisis it is. No one can (or even tries to) dispute that anymore. Earlier this year the total student loan debt in the United States surpassed the $1 trillion mark, leapfrogging over credit card debt and auto debt to become the second largest debt burden in the country (only mortgage debt levels are higher). About two in every three students in America graduate with a student loan debt now, and the average debt level at graduation is $25,000. In the seven year period between 2005 and 2012 alone, the share of student borrowers who owed more than $100,000 more than doubled, from 3% to 6.2%. College tuition in the 25 year period from 1986 to 2011 rose at an average rate of a whopping 498%, compared to a general inflation rate rise of 115% over the same period. Tuitions are skyrocketing, and so is overall student loan debt as well as its attendant defaults and delinquencies.
If we listen to the Fed, it's as if these developments are surprising and somewhat inexplicable. Sadly, it is neither of these. Tuition rates have been rising in line with overall federal intervention in the student debt market as predictably as it did with government intervention in the housing market in the previous decade. As the Student Loan Marketing Association (a government-sponsored enterprise begun in 1972 and spun off into its current private corporate incarnation as “Sallie Mae” in 1997) began managing the Federal Family Education Loan program (first launched in 1965), tuitions started their ascent. In 1980, the average cost of a 4-year college degree at a public school was $2,550 per year; at a private school it was $5,594 per year. By 2011, that had risen to $15,918 and $32,617 respectively.
To combat the rising tuitions, more government grants, loans and aid were thrown at the problem. Federal Student Aid, an office of the US Department of Education, now guarantees over $150 billion in new funding to higher education applicants each year, managing a portfolio of over $800 billion. Tax credits and rebates have also been used to blunt the cost of tuition for the average student, and state governments and local communities have chipped in with their own grant and aid programs and private fundraisers to help offset costs for students who can't afford the full cost. And yet, those costs keep rising. It's almost as if all of the loans, grants, tax rebates and federally guaranteed financial aid are in fact contributing to the problem rather than helping it.
And of course they are. Just as any Economics 101 graduate could tell you that it was Federal Reserve incentivized lending (as well as unscrupulous lenders and even less scrupulous ratings agencies) that caused the housing bubble of the last decade, so, too, is government intervention in the student loan market exacerbating the problem and blowing up the bubble. Now an entire industry has grown up around the lucrative student loan market, and it is just as dirty and gruesome as anything we saw in the subprime era.
Just as one example, Sallie Mae itself was sued in 2005 by a former employee alleging that the company intentionally encouraged borrowers to fall into forbearance so that they could run up higher total debt levels. In 2006 the issue came to national attention thanks to 60 Minutes, which featured then-Harvard Law professor and soon-to-be US Senator Elizabeth Warren calling out Sallie Mae for wearing the hat of lender and debt collector simultaneously, a practice that would be shunned in any other area of lending. In 2007, then-New York Attorney General Andrew Cuomo launched an investigation into the corrupt lending practices of Sallie Mae and its cohorts (EduCap, Citibank, Nelnet and The College Board among them). The investigation was dropped when the accused agreed to voluntarily adopt a new code of conduct drawn up by Cuomo himself. In February of this year, the Illinois Attorney General's office opened their own investigation into Sallie Mae. And this is just one lender in an increasingly crowded (and expanding) market.
Of course, like so many other economic matters this story threatens to become one of numbers and figures, nameless statistics and faceless percentages. The real story is not merely that average tuition has increased by so much percent or that student loans account for such-and-such percentage of total consumer debt. The point is not even that lenders are increasingly using underhanded tactics to ring up higher debt totals and extract that money from their duped applicants through increasingly intimidating means. The real story is that this debt represents what debt always represents: the chains of forced servitude.
If there is any common point that critics of my new feature-length documentary, “Century of Enslavement: The History of the Federal Reserve,” have focused on, it is the title itself. “Enslavement? Surely that's too strong a word.” But I defend the use of the term. When one is a debtor, one is in a position of enforced servitude to the lender who granted the original credit. Of course, when this arrangement is entered into voluntarily, with both parties fully understanding the ramifications of that decision, that is not “slavery” by any stretch. When that debt is levied through deception, however, as in the Federal Reserve backed system of fractional reserve banking, where the majority of the money itself is created as debt owed to private bankers, that is another thing altogether. People end up working the vast majority of their lives to pay back loans (car loans, credit card loans, mortgages, business loans) that are created out of thin air by the bankers. If this is not enforced servitude, I don't know what is, and it is all the more insidious because there is no one holding a whip or holding the title of “master.”
It is one thing if these debt chains are placed on oneself in the full knowledge of the deal that one is entering into. Its another when a man or woman is duped into placing these chains around him or herself without realizing what they are getting into. It is yet another when the dupes in question are twentysomethings who are at the very beginning of their lives. In such a case, the damage done by placing these students in debt bondage is almost incalculable. There are tens of thousands of stories that would undoubtedly shine a light on this suffering (just ask one of the estimated 6,100 American Ph.D. graduates who are working in janitorial services at the current moment), but this story will suffice:
“It's a weird feeling that because I wanted to go to school and I wanted to get my Master's degree, that the rest of my life is dramatically altered. Can I get married? Real questions. Can I honestly have children because of the loan? And I don't feel I can do that.”
For the hundreds of thousands of young people suffering through this crisis at the moment, rays of hope seem few and far between. There are grassroots groups like StudentLoanJustice.org advocating for basic consumer protections for federal student loans (bankruptcy protection, for instance). Certain loan forgiveness programs can help those in specific circumstances (10 years of employment in the public sector, for instance, or full-time employment as a teacher in a low income school for five consecutive years). Hopes are occasionally raised by Congressional bills, like the one that was voted down in the Senate last month that would have allowed students to refinance their loans for lower interest rates.
But as with so many other issues, the fundamental solution cannot come from the government that exacerbated the problem in the first place. If the problem is to be addressed at its root, American society has to reevaluate the dogma that it has adopted in recent decades that a college degree is essential to economic success and personal self-fulfillment. It is the inculcation of the idea that everyone needs (at the very least) a B.A. in order to succeed in life that has allowed the post-secondary sector to expand to its current levels of insanity. Why, after all, does every youngster today need a four-year degree in order to embark on a career that, more often than not, has nothing to do with what was learned about during that time? Why does every businessman need a piece of paper to help him launch a successful venture? Or every retail manager need an education in medieval history or statistics or English literature to help them manage their store? Why does every office worker, taxi driver, sales rep and janitorial specialist need some letters behind their name to make them “better persons?” Has this idea been fostered (or at least actively promoted by) the lenders and others who stand to directly benefit from it?
This is not to say that colleges are useless, or that they should be completely eschewed. There is a legitimate need for higher education in certain specialized areas and fields of study. But this is precisely the function that academia filled for centuries before our modern mania took over; that of a specialized place of study for specific fields of inquiry. The modern idea of the university as a mandatory rite of passage for all youth benefits no one but the hangers-on of the post-secondary industry itself.
It is never easy to be the first to buck a trend, of course. There will always be social disapproval of those who go against the norms of society, and the first students (and parents) who make the decision not to go to college when the opportunity is there will be treated with disdain. But the choice is one that increasingly needs to be made by a generation that is now facing the real question of whether to go to college or to get married. Whether to get a degree or have a baby. Whether to get some letters behind their name or get a life.
My advice, as someone who went through the post-secondary grinder myself and is now doing something I was never trained for and never could have imagined at the time: get a life. It'll serve you better.