For most of the history of our species we were helpless to understand how nature works. We took every storm, drought, illness and comet personally. We created myths and spirits in an attempt to explain the patterns of nature. -Ann Druyan
As we attempt to understand how, exactly, we got to the place where 44 million Americans owe $1.4 trillion in student loan debt, we need to be careful. We must avoid telling easy just-so stories about the situation. Instead, we need to be like good journalists. We need to take a look at the data with fresh eyes. We need to let go of prejudices and assumptions.
$1.4 trillion—a debt that has ballooned 400% since 2007. Since that time, we’ve accrued about $1.1 trillion in debt. Now it’s the second largest debt in the country, second only to what we owe in mortgages. That's a subtle way of saying that, next to their mortgage payment, the average American’s next highest monthly payment is their student loan. Believe it or not, nobody really paid attention to all this, because we were looking at other things.
Here’s how we got here from 2007. It traces back to the economic crash of 2008, otherwise known as the bursting of the mortgage bubble. Our current student loan “bubble” or “balloon” of debt is a ripple effect from that crash. Let me break it all down.
Before the crash happened, states subsidized college tuition, and the colleges were able to keep tuitions (relatively) low by relying on property taxes.
The mortgage industry would gather income from property tax, from people buying, flipping, refinancing mortgages, or just living in over priced homes. And through this symbiotic system, money would flow into the colleges, and colleges would help their states.
When enrollments went up, states benefited. For instance, big schools could sell tickets for football games, driving up local business and revenue and so forth. So it was a mutually beneficial ecosystem—the colleges, the states and the mortgage industry were interdependent.
But when the bubble burst, guess what almost all the states did—one of the first things? Across the board, they were forced to cut costs just like most people during that time. They cut funding to colleges. But the colleges didn’t want to cut their budgets. So they just shifted their ever growing costs of running their schools over to students. They raised tuitions, sometimes by as much as 300%.
Even 10-15 years ago, a semester’s tuition at a 4 year college might have only cost $4,000 or $5,000. Today, it’s $15,000—easy. So we’ve clearly seen a drastic raise in tuitions.
Here’s the next thing that added to this balloon. Since the early 1900s, every time Americans have run into a recession, a large number of people go back to school. They do so for retraining purposes. Maybe their industry died. Maybe they just wanted a change, and the recession snapped them out of a rut. Or maybe they were flat broke, and going to school seemed like an escape. A student loan in that case could help pay for housing and board and so forth, while they retrained to try to put their life back together after this tragedy.
During our modern recession, we saw a lot of people go back to school at the same time—right as tuitions spiked. Since these people were mostly destitute from the hard times, they took out student loans to cover their just raised tuitions.
Meanwhile, there’s demographic insanity. The Millennial generation—depending on the numbers you look at—are as big as the Baby Boomer generation. Maybe even bigger. And they’re coming to college right at that same time the tuition jumped. So you have a huge number of young people coming to college at the same times their parents just saw their money evaporate and wages stagnate. So more young people took out student loans.
Here’s yet another piece of the puzzle. Before the crisis, parents would frequently refinance their houses to pay for their kids to go to college. But suddenly, they couldn’t do that, because they found themselves upside down on their mortgages and financially squeezed and twisted out of shape.
Ahe banks were so distraught from the financial crash that many of them had to back out of the FFEL program. They couldn’t afford to lend to students. That alone almost ground the entire system to a halt. At that moment, the Direct Loans (the ones given directly by the Department of Education) really took off. Then President Obama in 2010 eliminated the FFEL program altogether. From then on, all Federal Student Loans were Direct Loans. This has made the Department of Education (DOE) one of the biggest banks in the world—with assets owed to it that dwarf many countries’ GDP’s! The banks that still wanted to be in the student loan lending industry then created Private Student Loans—a mess all its own.
So we got blown into a perfect storm. Many provocative factors all came into play at the same time. I call these factors the kerosene on the fire. And there are a few more I want to talk about. One is the biggest hidden secret in the industry—something that has caused more damage than any of these other factors combined. And no one talks about it. That one is going to be long, but here is a sneak peek…Student Debt Compounding Interest! Much more on that later.
Another subtler factor—a shift in how we perceive colleges—also contributed to this storm and helped collectively endanger our nation. More on that in our next piece!