Today’s college debt crisis is 2008’s housing bubble.
Student debt is destroying lives—and it could destroy our economy.
Student debt has emerged as a full-blown crisis in America. Holding a collective $1.5 Trillion in student debt, the average student debt is $32,731—up from $5,400 in 1989.
An anchor in the lives of young people, student debt often accounts for many of the abiding stereotypes that have emerged about Millennials. “Why aren’t Millennials getting married?,” and “Why aren’t they buying houses?” can often be explained by “they have tens of thousands of dollars in debt.”
If President Biden is serious about “building back better,” that has to include doing something about paralyzing student debt. He campaigned on student debt relief. And though initially, he said he’d be open to cancelling up to $10,000 per borrower, according to Chief of Staff Ron Klain, he requested a memo from Education Secretary Miguel Cardona regarding the legality of cancelling up to $50,000 in student debt—92% of which is held by the federal government.
Though eliminating student debt may be as easy as simply cancelling it—it remains a thorny political challenge. So it’s worth stepping back to understand how we got here, and why fixing the debt crisis and the broader higher education system underneath it remains so challenging. Perhaps the best lens through which to understand student debt—both the policy and politics—is through the frame of the last major debt crisis, the 2008 housing crisis.
Why is student debt so high?
The 2008 subprime mortgage crisis was the consequence of two major factors: less government support for everyday people and the deregulation of predatory industries.
Throughout the 80s and 90s, government support for affordable housing declined while deregulation of the financial industry allowed predatory banks to coax lower- and middle-income families into risky subprime loans. These loans were then packaged and traded as mortgage-backed securities and collateralized debt obligations—the instruments that ultimately led to the Great Recession.
These two major factors—lower government support and deregulation—are back again, driving today’s college debt crisis. Over the past decade tuition is up 25%. During this same time, funding for state colleges and universities—critical to offering affordable college in this country—was down an average of 13% across states, according to a 2019 report from the Center on Budget and Policy Priorities.
Colleges have made up this lost funding by, of course, raising tuition. But it’s not just that. Declining state funding has changed their very business model. State colleges and universities have sought to make up the deficits by attracting wealthy out-of-state students whose tuitions are often two to three times as high as in-state students. And to attract these students, they’ve invested more in non-essential amenities—fancy dorms, cafeterias, and state-of-the-art rec centers—that raise the overall operating costs across the board. A 2015 study found that these investments do, indeed, attract these customers—sorry, students—to universities, jacking up tuition and driving a vicious spiral.
The second reason for rising student debt: grant money is being replaced by loans. This government disinvestment in grants has its origins in Reagan-era tax and spending cuts. Between 1980 and 1985, higher education spending through both grants and direct support to institutions was cut 25%. Reagan’s OMB Director David Stockman told Congress that students were “tax eaters” and he called them a “drain and drag on the American economy.”
Rather than provide grants, the federal government began to focus on providing loans. Low-interest loans, once widely available to most students, were limited to the neediest families—those earning less than $32,000 per year. Since federal support for higher education has lagged, loans have made up the difference. In 2003, according to an analysis by New America, students borrowed 50.7% of their costs, racking up a median debt of $15,246. By 2015-2016, the proportion borrowed jumped almost 10% to 60.4% overall—and median debt increased nearly $6,000.
The third causes for the debt crisis is government deregulation, which opened the door to a predatory industry. Like the predatory home loan industry that led to the housing bubble, the rise of the for-profit college industry has been almost entirely subsidized by federal student loans (check out AJ Angulo’s book about this to learn more). The rise of for-profit colleges is directly linked to the Higher Education Act of 1965 that allowed government funds, including Pell Grants and federal student loans, to be used at for-profit colleges. Between 1974 and 1986, for-profit colleges gobbled up a fifth of all Pell grants, though they only accounted for 5% of students.
Today, for-profit colleges account for only 10% of all students—but half of all student loan defaults. More for-profit students take loans, and borrow more in loans when they do. That’s because for-profit college tuition is, on average, $10,000 higher than comparable public community colleges. It’s also because for-profit degrees are simply less powerful—those who graduate with associate’s degrees from for-profit colleges earn about the same as those with no higher education degree at all.
The Obama administration instituted a new “gainful employment” rule in 2014 that forced for-profits to prove their graduates could find gainful employment to retain access to federal financial aid. But Trump’s for-profit loving Education Secretary, Betsy DeVos, repealed it. The Biden administration has signaled a renewed focus on predatory for-profits, it recently cancelled $1 Billion in student debt for over 72,000 graduates of the now defunct Corinthian Colleges and ITT Technical Institute who had been scammed. That’s a good thing, because for-profit enrollment is up given pandemic-associated job loss.
Not everyone has debt. That makes it a massive wedge issue.
During the Obama administration, stabilizing the housing crisis was a toxic political football. Though the implications of toxic debt for the economy as a whole were obvious, the majority didn’t hold toxic mortgages and saw themselves as being forced to pay for someone else’s irresponsible decisions. Lost here was the culpability of the predatory industries scamming unwitting people out of their money and their homes.
In some ways, student debt is even harder politically. The common conception of the "average college student" offers a misleading picture of student debt. Our mind’s eye probably conjures a wealthy, white 20-something with $50,000 in debt from time at Princeton or UCLA. But that’s not really the picture of student debt in America—and that's because so many poor people and people of color have been priced out of traditional ideas of college due to the astronomical cost increase. This makes debt forgiveness appear as a handout to rich kids.
The biggest victims of the college debt crisis didn’t even graduate from college. Collectively, 40% of those who hold student debt don’t have a college degree. Indeed, between 2014-2016, nearly 4 million undergraduate students with debt dropped out. Without the degree the loans are supposed to help secure, their default rate is up to three times higher than graduates.
Women hold nearly two-thirds of all student debt. Because of pervasive structural racism limiting wealth among Black families, Black bachelor’s degree graduates carry 17% more debt than their white counterparts. Nearly a third of Black families hold college debt, compared to just a fifth of white families.
There’s also a massive generational difference in the nature of debt itself. College graduates from a bygone era, when tuition was low and grant support was high, assume that the playing field looks the same way it did when they were young. They don’t realize that their “hard work” to pay for their education was largely subsidized by the government. So they assume that college debt is a matter of laziness, weakness, or sloth—the “kids these days”—rather than structural unaffordability.
A 72-year-old gentleman I met at a town hall in a wealthy suburb of Detroit captured that generational divide better than I can. I wrote about it in Healing Politics:
“I went to the U of M in 1968. I had to pay seven hundred fifty bucks for my tuition—and another fifteen hundred for my room and board. I could make about three thousand bucks working odd jobs over the summers, so I’d have a little extra for beer money.”
I could see the more silvered heads nodding in agreement. “Now my grandkid’s a freshman at the U of M. Her tuition is fifteen thousand bucks, and her room and board are another fifteen thousand bucks. Now, I don’t know many folks who can make thirty thousand bucks in a summer, especially not as a freshman in college.”
But there’s also a saving grace in cancelling student debt as compared to addressing the housing bubble. Saving the economy from the consequences of the housing bubble meant bailing out Wall Street—the predatory industry behind all of those disastrous loans. Cancelling student debt would mean bailing out the victims of a broken higher education system rather than the predatory industry that caused it.
As we debate the merits of cancelling at least $50,000 in debt, it's going to be critical to highlight the society-wide implications of addressing the student debt crisis—particularly as we think about what a post-pandemic America should look like.
Student debt devalues our most important asset.
What made the subprime mortgage crisis so toxic is that it struck at the heart of wealth accumulation. Houses are unique because unlike consumer goods—like your car—they tend to appreciate in value with time. So investing in a house yields a roof over your head, of course, but also a steadily appreciating source of wealth. Indeed, for working and middle-income families, homeownership is one of the most important sources of wealth accumulation. A housing crisis that leads to massive foreclosure represents a huge loss in wealth for a family over time.
If housing is one of the most important sources of capital that most people possess, an education represents a massive investment in the most valuable resource: human capital.
The way we spend those first few years out of high school—whether in college or learning a trade or starting a family—will dictate our life trajectory in profound ways. Our society-wide failure to empower young people to pursue a higher education without being yoked to student loan debt represents a full-on disinvestment in society’s most valuable asset. For some, the potential burden of student debt prices them out of an education entirely. For others, the cost of it displaces other resources they might have pursued.
The knock-on effects of that disinvestment are staggering. Debt fundamentally changes the calculations that young people make throughout their lives. Buying a home, having children—even getting married: all of these decisions are shaped by debt.
But the impact spills over across generations. For the coming generation, lost family wealth due to educational opportunities forgone, or debt obligations fundamentally change childhood circumstances. If your parents are too squeezed by their own student debt to start saving for your education, it will change your decisions, too.
But college should probably just be free.
Ultimately, we shouldn’t have to cancel debt. College should just be free. After all, the debt conversation ignores all of the people who considered college out of reach in the first place—and never went. We have to make college affordable for them, too.
On that basis, some have argued that universal free college is too broad—it would be a “giveaway” to the rich. After all, children of high income families are the ones most likely to go to college regardless of the cost. Rather, we should mean-test plans to target those for whom costs are the only barrier.
But that ignores the dynamics of higher education I discussed above. So long as we maintain a tiered system, colleges and universities will retain the incentive to attract rich students who pay full tuition—thus investing in amenities that don’t improve the quality of the educational experience while raising the costs for everyone. It’s a recipe for inflating higher education costs and playing into the hands of the next Republican ideologue who wants to cut the program for being too expensive. By contrast, a universal program would attract universal buy-in and political support across the board. The most abiding public programs in our country have always been the most universal.
We need universal free college.
But for now, let’s at least cancel as much student debt as possible. In 2008, then Vice-President Biden had to contend with the aftermath of the subprime mortgage crisis only after it had exploded in our faces. This time, he has the opportunity to act ahead of time. Let’s hope he takes it.
We saved using the 529 UFund, perfect if you have one child, two good salaries and aren’t living paycheck to paycheck. Which means we aren’t rich, but still atypical. My daughter recognizes her privilege. She has friends graduating with five-figure debt, which will oppress them for decades. So I don’t begrudge cancelling student debt, or making college free. We need to stop being so selfish and shortsighted. I don’t believe that just because I paid, others who didn’t have my opportunities should suffer. A rising tide lifts all boats. If we started thinking as part of a community, we won’t be so hateful and uncharitable.
Great newsletter. We need your silver haired guy to talk to Joe - Better yet, a senior at an HBCU trying to afford graduate school .
Also, how about services to help kids graduate???