The Education Department projects that a quarter or more of today’s college undergraduates will ultimately default on their loans.
As I have written about in past articles, the timing of how all these moving pieces lay out is fascinating, and it’s imperative to understand the big picture. Okay! So prior to October 1st 2007, the banks were in charge of lending student loans, which were insured by the Federal Government. That’s what a Federal Student Loan was—just a bank loan that was insured by the Federal Government. They worked much like mortgages do today. Banks lent the money, and the government insured the loans. Simple enough, right?
But starting in 2007, and finishing fully transitioning the system in 2010, the government took all the loans “in house.” So Department of Education became the lender, and that’s the way it’s been for the past 10 years or so. These loans were named “direct loans,” meaning they come directly from the Department of Education. The reason was simple: estimates from all of the government’s budgeting and auditing agencies showed that direct lending would deliver the same loans to students at significantly lower cost to taxpayers.
“Wait—what’s funding these loans?” you may ask. Our IRS tax dollars. It’s a funny thing. Our Federal government is so massive—moving trillions of dollars around, funding everything, taking part in the global political and economic game, and controlling or taking part in nearly every facet of our lives. We sometimes forget that tiny fact that We The People are the ones who fund it. We also sometimes forget that our elected officials work for Us, the taxpayers who pay for everything. I don’t want to get too far on a tangent. But just take a mental note that we, the American People, are funding the Department of Education. We are giving them the money to lend out in the form of Student Loans.
Anyway, with the direct loan program, it became easier to lend money for education. This is an important puzzle piece that contributed to the mess we are in today—with 44 million Americans owing 1.4 Trillion dollars.
As I’ve written in previous articles, more and more kids (the Millennials) started going to college in the late 2000s, at the same time that tuitions had (in some cases) tripled due to the mortgage meltdown. Now the personal federal student loan limits were low, because they had been set before the outrageous tuition increase.
So what people did—or I should say, what the in school financial aid officers who help students and parents get loans started to do—was to lean on Private Student Loans (money lent directly from a bank NOT insured by the federal government) and Parent Plus Loans (money lent in the parent’s name from either the federal government or a private institution) to cover the gap in tuition. They still do that to this day, by the way. I could write a whole other article about how private lending institutions routinely give kickbacks to financial aid officers who choose their institution to lend the gap of tuition.
But I digress. Here’s what happened. To counteract this, the federal government was like okay, we haven’t increased our lending limit—how much we lend per year or semester—for a while, so let’s do that. Guess what happened almost immediately after that? Tuitions jumped again to match the limits.
I, of course, am the expert. I see the big picture—which is what I want you to see as well. And if you do, invariably, questions arise. Like:
Why did the government step in to take the loans in house right when they did?
Did they see the situation as a business opportunity?
Did they really not know that these factors would lead to a 400% increase in debt (now in the hands of the federal government)?
Did anyone see that this one decision would make the Department of Education one of the biggest lending institutions in the world, with arguably 1.2 to 1.3 Trillion dollars of assets under management? Side note: 85-90% of the entire student loan debt—the lion’s share—is Federal. Our U.S. Government makes anywhere from 6-10 Billion dollars a month from this debt. Don’t forget: they are making this money from educated, hard working Americans; and they received the money to lend from hard working Americans. If that doesn’t make you scratch your head, then probably you should stop reading all together!
I do not consider myself a conspiracy theorist, but knowing what I know, some of these questions are natural. I believe that what happened was a case of good intentions gone awry. Similar to the government’s push to get more kids to go to school led to unintended consequences—in much the same way as the push to get everybody to own their own homes backfired when the mortgage bubble popped. I personally think everyone who makes these kinds of decisions are asleep at the wheel. But believe me, I am going to ask all of those questions and more when I get to Washington.
(Interesting for political buffs out there—President George W. Bush, aided by a Republican Controlled Congress—the supposed fiscal conservatives—started the move to the direct loan program and actually enacted a lot of the forgiveness and income driven plans to help students!)
In any event, once the government got into the game, the game changed completely. The schools were like great, let’s take advantage of this. They realized they could just charge more, because more was covered by the loans. A huge problem that persists to this very day. As of this writing, colleges are inflating tuitions around 9% a year—way faster than any cost of living increases. But that’s a whole different story.