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The Origins of the Student Loan Crisis

[ 103 ] August 22, 2012 |

As a companion piece to some of Paul’s recent work, Maureen Tkacik has a terrific piece about a few random anecdotes being parlayed into student loan debts being made uniquely non-dischargeable:

But then, in 1978, the bill went to conference committee with the Senate, and the clause came back. Like the loans themselves, it could not be gotten rid of.

At first this provision applied only during the first five years of the life of the loan; then it was seven, then eternity. Until 2005 it only applied to federally guaranteed loans; now, thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act, it applies to all.

And as the loans became more steadily impervious to the usual laws of credit and debt, they became bigger and more profitable. In the years since the Bankruptcy Reform Act passed in 1978, the nominal price of college tuition has risen more than 900 percent. Over the same period the median male income – again, nominally – has risen 165 percent. And since the percentage of the workforce boasting a bachelor’s degree has expanded from less than 20 percent to nearly a third, I don’t have to convince you that the median de facto return on investment on those diplomas has diminished greatly over the same years. Which brings us to the second way in which the student debt bubble differs from all the others you’ve seen: It is legally impossible to pop. By law it can only grow very fast. The profits in this racket are downright hallucinogenic: A military veteran sharing his story with Occupy Student Debt has paid $18,000 on a $2,500 loan, and Sallie Mae claims he still owes $5,000; the husband of a social worker bankrupt and bedridden after a botched surgery tells Student Loan Justice of a $13,000 college loan balance from the 1980s that ballooned to $70,000. A grandmother subsisting on Social Security has her payments garnished to pay off a $20,000 loan balance resulting from a $3,500 loan she took out 10 years ago, before she underwent brain surgery.

As a side point, note the date of when this policy started. It’s very common to read that the Democratic Party has been “drifting right” for 30 years, and that the Democrats we had back then were so much better than Obama, Reid, and Pelosi. My reaction is always to wonder what the hell people are talking about. During this alleged Golden Age of the Democratic Party, it controlled the White House and both houses of Congress for four years. Can someone point out the legislative achievement that rivals the repeal of DADT, let alone the ACA?

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  1. Ugh says:

    “the repeal of DADT”

    Or who was in the WH when it was enacted?

    • Sherm says:

      While DADT is viewed negatively now, it did represent progress at the time of its enactment. Clinton campaigned on a full repeal of the ban, but compromised with DADT. And the public was much less supportive of a ban at that time than now.

    • rea says:

      Ugh, DADT was a marked improvement over the preceeding policy, which was, “We’ll ask and force you to tell.” Clinton tried to get an end to discrimination agasint gays in the military, but couldn’t get the votes–obviously not enough steely-eyeed resolve and use of the bully pulpit.

      • Anonymous says:

        DADT was a marked improvement over the preceeding policy, which was, “We’ll ask and force you to tell.”

        And, recall that DADT was originally don’t ask, don’t tell, don’t pursue. The military ditched the last one almost immediately and carried on with their purges.

        • Uncle Kvetch says:

          And, recall that DADT was originally don’t ask, don’t tell, don’t pursue. The military ditched the last one almost immediately and carried on with their purges.

          Exactly so. So I’m a bit confused as to how this constituted a “marked improvement.”

          • The policy that Clinton agreed to was a marked improvement.

            What ended up happening was not the policy Clinton agreed to.

            St. Colin really stabbed him in the back on that one.

          • Captain Haddock says:

            One huge difference was in the disposition of cases in which servicemembers were found to be homosexual. Prior to DADT, homosexual servicemembers could expect a dishonorable or bad conduct discharge, which is punitive, or an other-than-honorable discharge, which while not punitive does remove a considerable number of benefits that otherwise honorable service accrues such as the GI Bill. Under DADT, the vast majority of discharged servicemembers received honorable discharges, some received general discharges, and only a very small percentage received other-than-honorable discharges. The difference in quality of life for discharged servicemembers after the enactment of DADT was significant.

      • Sherm says:

        “We’ll ask and force you to tell.”

        I always assumed that the people complaining about DADT the past few years were too young to recall its enactment and have never seen Stripes.

        Recruiter: Now, are either of you homosexuals?

        John Winger: [John and Russell look at each other] You mean, like, flaming, or…

        Recruiter: Well, it’s a standard question we have to ask.

        Russell Ziskey: No, we’re not homosexual, but we are *willing to learn*.

        John Winger: Yeah, would they send us someplace special?

        Recruiter: I guess that’s “no” on both. Now if you could just give Uncle Sam your autograph…

        • Malaclypse says:

          I always assumed that the people complaining about DADT the past few years were too young to recall its enactment

          That really shouldn’t happen until 2028 or so.

        • mark f says:

          Also, when called to the draft board,

          there’s only one thing you can do and that’s walk into
          the shrink wherever you are, just walk in and say, ‘Shrink, You can get
          anything you want at Alice’s restaurant.’ And walk out. You know, if
          one person, just one person, does it, they may think he’s really sick and
          they won’t take him. And if two people, two people do it, in harmony . . .
          they’ll think they’re both faggots and they won’t take either of them.

          • Halloween Jack says:

            In a book I read in my late teens (around the time that Selective Service registration was reinstated, and proof of same was made a requirement for federal student aid, much to my dismay), which described the various ways that people dodged the draft in the sixties, there was a fascinating description of how to give the draft board the impression that you were gay without coming right out and saying it, which would end up on your draft record forever, at a time when LGBT discrimination was much worse than it is now. The general idea was to dress as nattily as you could, complete with a tightly-rolled umbrella (even on a perfectly-clear day), bring up the topic of homosexuality if they didn’t, and make a point of denying that you were gay, more than once–and give a casual flick of the wrist every once in a while.

            I have to wonder if that ever worked, if anyone even tried it. There’s been a pattern of the military not really caring if someone was gay during times of war, only to embark on an anti-gay witch hunt after the war was over and there wasn’t the need for a large standing army. I have a theory that DADT was revoked in large part because the armed forces weren’t meeting their recruiting targets (or having to revise them downward to make it look as if they were, which of course didn’t help with the real problem), and gauging that support for the wars would drop to zero if the draft were reinstated, decided to ditch a policy that they already knew most of the rank and file really didn’t care about.

    • Or who was in the WH when it was enacted?

      A less-liberal Democrat than the one we have now.

    • Ugh says:

      Fair points everyone.

  2. Paul Campos says:

    But what about all the rich heart surgeons who defaulted on their medical school loans prior to 1978?

    Oh wait, that didn’t actually happen.

    But there are still thousands of them running around in Wingnut Anecdote Land.

    • Davis X. Machina says:

      The crime of it is, they’re all employed treating the epidemic of atherosclerosis among young bucks from over-consumption of T-bone steaks, and malt liquor, and menthols, purchased with food stamps, so they could have paid back those loans.

  3. Malaclypse says:

    I seem to recall that it was possible, back in the 1990s, to pay off student loans using credit cards, then discharge the credit cards through bankruptcy. Does that still work?

    • Paul Campos says:

      Acquiring debt with the intent of discharging it through bankruptcy is considered fraud. So this isn’t legal, and the only way to get away with it would be to carry the credit card debt for long enough to convince a bankruptcy court that this wasn’t your intent.

      What Sallie Mae does, by contrast, is perfectly legal.

    • catclub says:

      I was thinking of those debt consolidation plans also. Pay off the student loan with that, then deal with what else happens, later.

      I think they require a home to put the second mortgage on.

    • Sherm says:

      Nearly impossible for the reasons Paul said. The only way I could see it working is if you paid your loans off with credit cards to stop a wage garnishment after a default, and then made a good faith effort to pay the credit cards off over a decent period of time before filing.

    • AR says:

      Fraud aside, many student loan servicing companies stopped accepting credit card payments.

  4. Tom says:

    It’s very common to read that the Democratic Party has been “drifting right” for 30 years, and that the Democrats we had back then were so much better than Obama, Reid, and Pelosi. My reaction is always to wonder what the hell people are talking about.

    My feeling is that it’s more like 40 years, and that the Carter administration’s existence was basically a fluke, a consequence of Watergate, with few lasting results. My impression is that the political dynamics of the U.S. for the better part of the last half-century have all been a response, to varying degrees, to the Johnson administration.

    This impression is obviously ahistorical and probably riddled with errors, but there you go.

  5. Bill Murray says:

    Why would anyone think that the late 70s was the golden age of the democratic party? or even the end of the golden age? the late 70s was the second stage (the first being the decision of many of the power brokers to not support McGovern) of the transition to cringing corporatism.

    Not that there probably aren’t some people that think that

    • Scott Lemieux says:

      Beats me, but the trite point that Obama is the second most progressive president of the last 70 years always generates plenty of fury in our comments section.

      • Erik Loomis says:

        Is Obama more progressive than Truman? It may be true–both were facing increasingly conservative Congresses and so might be compared through that prism. Just not sure.

        • Scott Lemieux says:

          Obama certainly has a more impressive record of progressive achievement. Whether what Truman would have liked to accomplish was more progressive in context is debatable.

          • timb says:

            He tried to accomplish Civil Rights legislation and National Health Insurance. Both failed

          • John says:

            I think it’s reasonable to argue that the Fair Deal, as conceived, was a more liberal program than what Obama has passed. But, of course, none of the Fair Deal actually got enacted.

            Also worth noting that the FDR New Deal guys were mostly not big Truman fans – they thought he was an incompetent machine hack devoted to cronyism. Certainly his supreme court picks were uniformly not particularly liberal mediocrities.

        • rea says:

          Also, like LBJ, Truman was maybe more progressive in domestic policy than Obama, but foriegn policy brings the average down.

      • mark f says:

        A lot of people seem to think Carter was some sort of raging Commie. I’d bet he’d be in the top 3 on a Family Feud-style survey of 100 random NRO readers to determine the most liberal US presidents of the last hundred years.

        • Scott Lemieux says:

          And it’s not just conservatives. A lot of liberals seem to view Carter this way although he’s the only Democratic president of the last century who was arguably to the right of the median votes in Congress.

          • mark f says:

            Yeah, I realized I stepped on my own foot with the NRO thing; I think it probably applies to a general audience as well. Thanks to 30+ years of Republicans reinforcing the perception combined with Carter’s unusual post-office career, plus Carter’s environmentalism that Sherm mentioned and the public’s distaste for DC baseball, older folks have faulty memories and younger people (I was born 47 days after Reagan took office) get the wrong impression.

        • Sherm says:

          Carter was a moderate. The right paints him as a “raging commie” simply for his green initiatives. His environmental record was excellent.

      • wengler says:

        Most progressive President in my lifetime, there is no doubt. Second most progressive President in the last 70 years?

        You gotta be kidding me.

        • Tom says:

          We’ve been around the block about this before, but who the hell else would be “more progressive”?

          - Clinton: to Obama’s right
          - Carter: to Obama’s right
          - JFK: um, no
          - Truman: see above

          That leaves LBJ. So, yes, Obama is the second most progressive president since FDR. It’s a low bar, admittedly, but not really surprising.

          • wengler says:

            If you really want to have this discussion there probably needs to be an agreement to what ‘Progressive’ actually means.

            Maintaining a tax cut for the richest Americans and then turning around and passing a compromise austerity budget built very much on top of hysteria over the lack of revenue does not strike me as progressive.

            Staffing your DoJ with people either unwilling or incapable of prosecuting the financial crimes that shook the global economy to its very core does not strike me as progressive.

            Unleashing a campaign using draconian law against the very whistleblowers that we need in order to reform our government does not strike me as progressive.

            I could argue that one, two or all three of these things weren’t present in more than one administration since FDR, but like I said we will be lost if we don’t define what ‘Progressive’ means.

            • Tom says:

              The argument is not “Obama is a great progressive president who champions all the right causes and we should all admire his greatness.” His administration has, as you’ve indicated, pursued some pretty poor policy, especially in regard to foreign policy and civil liberties, and he’s also been constrained by a hard-right House since 2011 and the World’s Worst Deliberative Body since 2009 (hence the budget). All that being said, he’s still more progressive than anyone since LBJ. ACA is a compromised bill but one which can be improved. He’s been good on gay rights. He’s been good on immigration, despite congress’s best attempts. He should’ve had a larger stimulus, but again: congress. We live in an age when “Keynesian” is a synonym for “communism,” after all.

              There are historical, political, social, and institutional reasons why we don’t have more progressive presidents. It’s unfortunate for those of us on the left, but Obama is probably as good as we are going to get in the current environment. Should we try to change that environment? Absolutely. But despite all these problems, he’s still the most progressive president since LBJ, and the second most progressive since FDR.

            • Halloween Jack says:

              You’re arguing for a binary value of “progressive” in which a negative value is assigned if the subject fails any of a number of your pet litmus tests. It’s a popular approach among absolutists, but not particularly defensible.

              • Lee says:

                Right. Obama’s policies aren’t the most liberal ones but they are the most liberal ones that are politically feasible to implement.

                • Scott Lemieux says:

                  Obama’s policies aren’t the most liberal ones but they are the most liberal ones that are politically feasible to implement.

                  This isn’t actually true, but no president (including LBJ or FDR) meets this standard.

              • Biden, Clinton, Dodd & Edwards says:

                Only childish absolutists used support of the Iraq War as a litmus test during the 2008 primary.

            • I note that you still haven’t cited the Democratic president in that period who is more progressive, for the obvious reason that there isn’t one. And, also, if Truman gets credit for supporting civil rights then Obama gets credit for supporting the rollback of Bush’s upper-class tax cuts. You can’t play this game where Obama’s accomplishments are compared to other presidents’ aspirations.

            • a compromise austerity budget built very much on top of hysteria over the lack of revenue

              …which was larger than the previous year’s budget, by an amount greater than the rate of inflation. Despite having to pass through a Republican-controlled house of Congress.

              Wow, that sure is some austerity there.

              • As opposed to The Greatest Progressive President of All Time, who actually did pass an austerity budget after the 1936 elections.

                • scott says:

                  Obama = Better president than FDR? Is this the new line we have to toe as good “progressives?”

              • scott says:

                I guess you missed the points made by Krugman and Ezra Klein that, if you took out the job losses presided over by federal, state and local governments, you’d knock a full point or more off the unemployment rate. But, hey, it wasn’t grim austerity it was days of wine and roses!

                • Malaclypse says:

                  if you took out the job losses presided over by federal, state and local governments

                  All the data I’ve seen shows that, aside from the temporary Census jobs, the job losses were at the state and local level, not federal. Perhaps you have other sources you can link to?

                • Sherm says:

                  the job losses were at the state and local level, not federal.

                  But that could have been prevented with more federal aid to the state and local governments.

                • Malaclypse says:

                  Like this, you mean?

                • Sherm says:

                  Exactly

                • Malaclypse says:

                  I definitely blame Obama for not doing that thing that he did, then.

                • Sherm says:

                  Not looking for an argument regarding Obama’s responsibility. I fully understand what he was up against with Congress.

                  But the point remains that those job losses could have been prevented with more stimulus. Once the original funding dried up, the government job losses started. And more government spending also helps the private job market as well.

                • This analysis suffers from the fact that the Collins/Snowe/Nelson group specifically targeted state budget aid money when they insisted on pairing down the stimulus bill.

          • Malaclypse says:

            If we want to be nit-picky and pedantic (and Cthulhu knows, I can be counted on for that!), then the claim can only be safely made for the last 68 years, not 70.

      • Hogan says:

        You keep forgetting about Imaginary JFK! That makes Baby Oliver Stone cry.

  6. ajay says:

    Fee income is not just a sweet spot for Sallie. The fee collections subsidiary of its fiercest rival, Nelnet, is so flush it keeps a 3,800-gallon saltwater shark tank in its main lobby.

    A loan shark with actual sharks. Wow. Takes me back to the halcyon days of the 2000s and the discovery that some of the media whores who were paid to be nice to President Bush were also actually real whores.

  7. Scott,

    Are you suggesting that a party that elects Nancy Pelosi to a Congressional leadership position isn’t more conservative than a party that elects Robert Byrd?

    The hell you say!

  8. wengler says:

    The answer to the student loan crisis is to destroy Medicare. There is nothing more the 20-somethings of today need more is the burden of lifelong student loan debt coupled with their parents being the first ones to be voucherized in old age.

  9. timb says:

    I worked for Nelnet for over two years and it baffled me how these people were only rich, instead of super-rich. They had guaranteed profit; they scammed the government for 9.5% of the interest during a deferment period (whereas the borrower’s interest rate was whatever the note said, often as low at 3%); and they had non-dischargeable obligations.

    Yet, the financial crisis almost destroyed them, because they had leveraged everything many times over to play in the stock market and to acquire new portfolios. These two asshole Randian supermen who ran the place took guaranteed profit and almost lost everything.

    True story, during an annual corporate meeting where the CEO would “meet” the little people/drones, he told us how proud he was of building this company so large from “nothing, except the small Nebraska bank my father left me.”

    I think “nothing” = “inherited bank” is wingnut for “I built that.”

  10. Halloween Jack says:

    I’m quite surprised that this is coming from Mo Tkacik, whose work I became acquainted with when she was drunkblogging at Jezebel.

  11. Cody says:

    Do we give credit for Obama creating direct student loans instead of guaranteed ones to company that get to just scam free money?

    Of course, this system is still far from perfect. And the Direct Loan Servicers (DLS) website kind of blows and has been riddles with bugs.

  12. Corey says:

    I always thought student loans were non-dischargeable because otherwise lenders wouldn’t provide them (18 year olds typically having no assets and all).

    • RedSquareBear says:

      In addition to their non-dischargeability, they are backed by FF&C.

      That they bear interest even one one-hundredth over the rate on t-bills is absurd, much less the 6.8% Staffords are at now.

      • RedSquareBear says:

        Also, for undergrad (at least), parents will often have to cosign.

        Also, the usual thing about how the increase in federal loans spurred the growth in tuition and the decline in state aid.

    • PhoenixRising says:

      Pretty sure that’s why they are federally guaranteed.

      Not that I’m suggesting a better world, in which the first two years of college cost an amount that a hustling 18 year old can earn in her senior year of HS plus 2 summers plus work study, isn’t possible.

  13. scott says:

    How did we get from an article about student loan debt to a defense of Obama? Oh, because Scott’s raison d’etre is to defend Obama and explain how this is the Bestest of All Possible Administrations. A pretty indirect route in this case, even for him, which reveals how deep the obsession goes.

    • rea says:

      This argument would be a bit more telling, if you had a sensible, or even articulable, theory as to why Obama’s presidency is not the Bestest of All Possible Administrations.

  14. mch says:

    I’m confused. Carter as a benchmark of liberalism? After all, compare Nixon to Carter, and Nixon looks progressive.
    But the larger picture. The dems have always, including in FDR’s day, been hapless from a leftist perspective. The robber-baron capitalists always figure out ways to gain the upper hand. The dems are needed to do a little liberal holding action. Obama has disappointed even here. Of course I’ll vote for him — we gotta keep holding, in hope.

  15. [...] to Maureen Tkacik’s excellent recent piece about the history of the student debt crisis (H/T: Scott Lemieux). Tkacik is a fine journalist who has does some outstanding work on business and finance topics. [...]

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