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In August of 2018, Lisa, a 54-year-old single mother of two, met with a lawyer to discuss her student loans.
As a working psychologist, she’d not just been to undergraduate college — Fairleigh Dickinson University in New Jersey — but also to Widener University in Pennsylvania, to earn her Ph.D. in psychology. In total, Lisa took out 16 different federal loans to pay for her education, for a grand total of $95,000.
But by the time she graduated in 2001, the interest charges had already bumped that number up to $120,604. By 2018, Lisa, who runs her own psychology practice in Chester, Pa., had written hundreds of checks, eventually paying off just over $135,000 — but she still owed $96,820, and was growing desperate.
“Most of it, $100,000, went toward interest,” writes Josh Mitchell in his new book, “The Debt Trap: How Student Loans Became a National Catastrophe” (Simon & Schuster), out now.
Lisa discussed declaring bankruptcy with her attorney, Bob Lohr — who, like her, lives and works in Chester, Pa. (Lisa goes by a pseudonym in the book.) But Lohr just had more discouraging news. The government, which had subsidized her loans, wanted the rest, regardless of how long it took her to pay it off.
Lisa “reflected on the years of payments,” Mitchell writes. “The times when the student loan bill came before putting away savings for her children’s college education, how it had prevented her from having a house with a yard.”
That’s when she sent a screenshot of her retirement savings, a total of $12,086.43, to her lawyer.
“It was all she had,” Mitchell writes. “And it was all the government was going to get out of her.”
Lisa is far from alone. Today, more than 43 million Americans owe $1.6 trillion in student debt, a number that’s tripled in the past 15 years. College grads owe more in student debt than they owe in credit card debt and car loans combined. Or, as Mitchell writes, “student debt in the US is the size of Canada’s economy.”
A generation ago, it was almost unheard of for somebody to owe $60,000 in student debt. But today, more than 7 million Americans owe that much. “A million borrowers owe more than $200,000,” Mitchell writes. “At least a hundred owe over $1 million.”
Those struggling to repay those loans fall into every demographic category, from single millennials to older parents and grandparents. They’re men and women; white, black, Latino and Asian.
And the cruel irony is, higher education has stopped being the ladder to career and financial success that it once was. If anything, “it has become a slide down,” writes Mitchell.
Many borrowers are actually worse off for having gone to college.
“The well-paying jobs promised by universities never materialized,” Mitchell writes, “leading to a wave of defaults on par with those of the 2000s housing crisis.”
In 2016, a study from George Washington University and the Treasury Department found that most graduates from for-profit colleges earned $600 to $700 a year less than what they’d made before enrolling in college, mostly because of student loans.
As of this writing, 8 million borrowers are in default on a student loan, which Mitchell points out isn’t that far from the number of people who lost their homes after the housing crash. “In recent years, despite a strong pre-pandemic economy, 3,000 people a day defaulted on a student loan,” he writes.
How did it happen? A big culprit was definitely the universities, which have been raising tuition at an alarming rate.
The average tuition and room and board at most four-year private colleges in the United States has risen by nearly 800 percent since 1980, or more than five times the rate of inflation. Today, a four-year degree at a private college costs nearly $200,000 on average. Meanwhile, a public college costs half that for in-state students but almost as much for those from out of state.
At the University of Alabama, for instance, out-of-state students pay $180,000 for a four-year education, and even after grants and scholarships are factored in, “many Alabama students and their parents take on tens of thousands of dollars in debt, and in some cases more than $100,000,” Mitchell writes.
And that’s the cheap option. At the University of Southern California’s dental school, tuition and room and board cost $152,000 — for the first year.
If you’re looking at the broader overview, it was a big f–kup.
Ed Fox, the first CEO of Sallie Mae, the quasi-public agency created by Congress to act as a middleman for the student-loan industry
But those ridiculous tuition fees didn’t come out of nowhere. The problem started when the federal government gave families a blank check to allow students to attend the school of their choice, regardless of its cost. The more Americans borrowed, the more colleges raised tuition. “Colleges have abused their tremendous pricing power,” Mitchell writes.
Lyndon B. Johnson, as the Senate majority leader, first argued for the federal government to create a student loan program in the 1950s. His idea had the best of intentions — Johnson himself had benefited from student loans — but it soon evolved into what Mitchell describes as “the quintessential form of crony capitalism.”
By the 70s, Congress had created a quasi-public agency called Sallie Mae, a sort of middleman for the student-loan industry. The agency funneled billions to schools and banks, “and itself made enormous profits off the whole operation,” writes Mitchell.
But to millions of families, the loans offered by Sallie Mae were seen as a gift. They believed these institutions “had their best interests at heart,” Mitchell writes.
When Lisa applied for her student loans, she was shocked at how easy it was. She found it even less complicated than when she applied for a loan to buy a stereo. “Here, the school didn’t even check her credit,” Mitchell writes.
The financial counselors at each of her schools reassured her that student debt, which was rapidly rising, was “good debt,” because it was an investment in her future. “You’ll be able to pay it off with the money you earn once you graduate,” they explained.
But by the time Lisa graduated, “she owed more than twice as much as the average annual salary of $55,000 for college graduates that year,” Mitchell writes.
This type of debt has reshaped modern American lives in many ways. It has caused many couples to delay marriage, to rent rather than buy homes and to hold off on starting businesses.
“They are choosing jobs solely for higher salaries, rather than jobs that best suit their talents and interests, so they can pay off their debt,” Mitchell writes.
In one way, it could be argued that the federal student loan program achieved its mission. “It opened up higher education to the masses,” Mitchell writes. “Anyone who has wanted to go to college has been able to, rich or poor. Today, half of the US adult population has an associate’s or bachelor’s degree, because student loans gave people the money to pay for it. Without loans, many would have never gone to college.”
But also, because of student debt, millions of Americans haven’t been able to save for retirement. And it’s not just the people paying off student debts who suffer.
“When borrowers fail to repay, taxpayers cover the tab,” Mitchell writes. Only two-thirds of the $1.6 trillion in student debt is expected to be paid back by the borrowers, which leaves more than $500 billion to be paid by taxpayers.
“That’s almost the amount of subprime mortgage debt that private lenders wrote off after the housing crash,” Mitchell writes. “It’s seven times what the government spends on food stamps each year.”
Even those involved in the creation of the student loan system are starting to have regrets. Al Lord, who joined Sallie Mae in 1981 and served as the company’s CEO between 1997 and 2005, calls the system “criminal.”
He told Mitchell that when he attended Penn State, he paid just $175 a semester. The tuition he paid for his grandson to attend the University of Miami was $75,230 per year. This inflation has given him hindsight about the damage caused by Sallie Mae.
“Our customer was almost every bit as much the college as it was the student,” Lord told the author.
Ed Fox, Sallie Mae’s first employee and CEO for almost two decades, before retiring in 1990, begrudgingly accepted some blame for the student loan mess.
“If you’re looking at the broader overview, it was a big f–kup,” he told Mitchell. “Eventually you wind up with $75,000 tuitions at institutions that have $40 billion in reserves.”
Mitchell believes the solution may lie in the universities themselves, not just the government that set up the system. Some colleges like Stanford and the University of Minnesota make loans to students directly and keep the default rates low, he writes. In the early 20th century, before the government got into the loan business, universities would make loans to students in this manner.
“Default rates were low,” Mitchell writes.
“When schools — or banks — put their own money at risk, they are more careful with it, and less likely to extend loans at amounts that will be impossible for borrowers to pay off.”
But until then, the cycle of debt continues. Even as Lisa learned that she would still owe thousands for the foreseeable future, she was driving her oldest daughter, Stephanie, to college.
“Instead of the American tradition of parents passing wealth to their offspring,” Mitchell writes, “her daughter was about to join mother in debt.”
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