Politics created the student loan industry — and the debt crisis

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The end of summer doesn’t just mean college students will return to campus en masse — some for the first time since things went virtual in March 2020. It also poses major problems for many alumni who are saddled with student loans. The moratorium on most government-held student debt expires at the end of September. So far, the Biden administration has only wiped out the balances of a handful of defunct for-profit schools and promised a Report on the legality of using an executive order, as the left has called for cancellation of a sizeable chunk of the $1.7 trillion owed by more than 45 million Americans.

So many Americans should never have owed so much student debt. But a crisis that is having a disproportionate impact borrower of color and especially women who are struggling to repay loans is not a tale of the best of intentions gone horribly wrong.

Rather, legislators in the 1960s purposefully designed the guaranteed student loan program to boost a student loan industry — rather than actually investing in colleges and universities to keep costs down, or forcing them to offer young people truly equal opportunities to enroll.

Student lending seemed like a reasonable solution to the rising cost of college and increased demand for higher education in the 1960s.

For one thing, more Americans took on debt than previous generations and saw it as an investment in the future. The New Deal mortgage program, for example, had turned many renters into homeowners. This experiment was intended to revitalize the housing sector by guaranteeing the bankers that mortgages granted would be repaid, thereby encouraging lending. Even with this government push, the gains have not been shared equally. White men consciously benefited the most. Nevertheless, the program was considered a success.

The Franklin-Roosevelt administration had also set a precedent for directly supporting students rather than universities. An ambitious program in the 1930s paid students to work so they could afford college. Later, Title II of the still-popular GI Bill of Rights of 1944 covered veterans’ college expenses.

Legislatures used to maintain some sort of national scholarship program to make college education more affordable, especially after veterans flocked to college campuses in the late 1940s. Throughout the 1950s, bills kept dying in Congress over disputes over whether federal funds could be given or lent to separate public schools or private institutions, especially if they had a religious affiliation.

These struggles over segregation and the separation of church and state almost derailed the passage of the National Defense Education Act of 1958, which offered federal undergraduate loans and graduate scholarships. Only the very real possibility of getting nothing after almost a year of wrestling led to a compromise: Any recognized school, including segregated or religious institutions, would be eligible to apply for federal money to set up campus loan funds.

Despite this, the level of funding for this program was sparse. The campus financial aid officers were responsible for disbursing the relatively small number of $1,000 loans available annually, which did little to defray college costs at a time when most families net made less than $5,600 a year cover. Nor did this law help address deeper inequalities or segregations in these institutions. Even so, the loan program was more popular than lawmakers had predicted. It might not have done much, but there was something for cost-conscious students, parents, and universities.

The Lyndon-Johnson administration and its allies in Congress understandably took credit as they strategized how to ensure equal and affordable access to higher education as more baby boomers graduated from high school.

Still, policymakers have been reluctant to take a bold stance against discrimination at universities across the country. Thanks to the Civil Rights Act of 1964 to be eligible for funding under the Higher Education Act (HEA) of 1965, colleges, universities and libraries were not allowed to discriminate on the basis of race, sex, religion or country of origin. Liberals correctly suspected that campus desegregation would be slow, but they did not include a plan to force integration for fear of losing support for the law.

The HEA instead included direct federal aid to “developing institutions,” which White House insiders later admitted was a courtesy term for the historically black colleges and universities (HBCUs) that had always been reluctant to support Congress’s ardent segregationists.

Liberal Democrats and Republicans genuinely hoped that the HEA’s student assistance programs, seemingly buried in Title Four, would incentivize the expansion and equalization of college opportunities and Americans’ ability to pay for them. Johnson promised that the mix of scholarships, loans and student jobs would guarantee that “a high school grad anywhere in our great country can apply to any university in any of the 50 states and not be turned away because their family is poor.”

The guaranteed student loan program’s promise to pay back the bankers was a big part of that lofty goal. Like Roosevelt’s mortgage legislation, this provision gave lenders an incentive to make loans to students so they could enroll while the campus itself decided on eligibility. It was a convoluted arrangement that emerged amid expensive, expansionary government efforts like the war in Vietnam and the Great Society — along with growing pressure from conservatives to cut taxes and spending.

Offering the bankers another government-guaranteed finance program was a cheaper, more American way of funding the expansion of higher education than directly and solidly funding colleges and universities so they wouldn’t have to charge tuition. After all, many Democrats and Republicans at the time credited the mortgage industry with turning a renter’s country into a homeowner’s nation.

But while lawmakers saw this housing program as a broad, revolutionary success (unaware of the inherent racism and sexism that researchers have documented over the past 30 years), the higher education mortgage model didn’t really seem to work, given the fees and many descended campuses struggled financially in the 1970s. Lawmakers on both sides of the aisle spent decades bolstering the student loan industry rather than addressing tuition. In the mid-1980s, years before journalists and lawmakers realized how expensive even public universities had gotten, Francis Keppel, director of Johnson’s Office of Education, admitted that his staff and allies in Congress “didn’t anticipate that the Loan amounts disbursed would increase so rapidly, or take on such a large portion of each student’s financial aid package.”

Financial aid officials reportedly offered needy students “scholarships, loans and a reasonably balanced work-study program to leave students and their families with manageable debt at the end of college.” Instead, credit played an outsized – and growing – role as tuition fees soared and public investment in higher education collapsed.

Forty years later, Johnson’s liberal successors regularly recognize and publish cutting-edge research showing how unequally colleges and universities offer discounts, scholarships, and dual degree opportunities that reduce borrowing by students and their families. Families of color often have to take the most from it, lacking the kind of generational wealth that government-funded home ownership has created for white peers. This research helped Rep. Ayanna Pressley (D-Mass.) and others argue that the mass forgiveness of student loans is a matter of racial justice and not just economic justice.

There are signs that this message has reached the White House. That The Biden administration’s infrastructure law included a significant investment in community colleges as well as four-year institutions that serve many students of color, such as B. HBCUs. The White House even promised it study mass cancellation before making headlines July 2021 debt relief accrued at now-defunct for-profit colleges.

But it takes more, like the bold ideas in the College for All Actto end the complicated financing that should never leave millions of Americans drowning in debt. Having truly fee-free public facilities is really the only way to create a better new normal where students don’t rack up debt when students return to campus.

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