The hidden truth about student loans

The president's proposal to combat the student loan debt crisis is a good start. But let's get real about its cause

By Tim Donovan

Published August 23, 2013 4:46PM (EDT)

                              (AP/Pablo Martinez Monsivais)
(AP/Pablo Martinez Monsivais)

This article originally appeared on The Suffolk Reserves.

News outlets across the country were abuzz yesterday after the New York Times revealed a plan by the Obama White House to give a series of highly publicized speeches addressing the student loan debt crisis “aimed at making colleges more accountable and affordable by rating them and ultimately linking those ratings to financial aid.” Obama is crisscrossing New York and Pennsylvania in an effort to highlight the student loan crisis and suggest a number of solutions he hopes to implement – some via executive action, others through legislative compromise (ha!) with the GOP:

A draft of the proposal, obtained by The New York Times and likely to cause some consternation among colleges, shows a plan to rate colleges before the 2015 school year based on measures like tuition, graduation rates, debt and earnings of graduates, and the percentage of lower-income students who attend. The ratings would compare colleges against their peer institutions. If the plan can win Congressional approval, the idea is to base federal financial aid to students attending the colleges partly on those rankings.

Unfortunately, the amount Obama is able to accomplish is tied to the willingness of Congressional Republicans to work with the president at crafting legislation, no easy task. But Alec McGillis of The New Republic offers some hope that bipartisan compromise might be possible, noting that, “when Republicans do rise against Obama’s cost-control plan as another example of heavy-handed big government, they should be aware that his plan has firm roots in George W. Bush’s White House.”  Meanwhile, at New York Magazine, Jonathan Chait suggests that the GOP’s hatred of the Affordable Care Act – another traditionally conservative policy proposal – could serve as a blueprint for how Congressional Republicans might oppose Obama’s new education agenda:

Finding ways to get the government to spend less on education sounds pretty conservative. On the other hand, so did finding ways to get the government to spend less money on health care, a goal Republicans now deem a socialistic nightmare so terrifying they are mulling which catastrophic hostage threat they should use to destroy it.

The president’s initiative is a valuable – albeit limited – step in the right direction. Obama should be applauded for using his “bully pulpit” to draw attention to this enormous problem rather than just contentedly back-patting House Republicans for their exemplary and bipartisan work jacking up student loan interest rates on tweens. As an aside, it’s not unlikely that many of the friends of Obama’s daughters Sasha and Malia will be the victims of a student loan interest rate that quickly soars to 7 percent or 8 percent at the precise moment the economy finally starts to recover.

Despite the awful student loan interest rate “compromise” that Obama brokered, he deserves credit for his newest initiatives: if successful (and that’s a big “if,” considering the practical challenges of implementing his program) his reforms could help millions of teenage Americans avoid catastrophic, uninformed choices made far, far too young. And while the president’s plans don’t go nearly far enough, this may be evidence of the considerable constraints on his political capital, and not some cynical unwillingness to help tens of millions of desperate students, graduates and dropouts.

Still, Obama seems intent on selling the notion that colleges are unscrupulously raising costs in a vacuum, without any external incentives that might motivate their behavior. The president is effectively using his enormous mouthpiece to conceal his own role in the debt crisis. As Matt Taibbi recently highlighted in his damning appraisal of the “student loan scandal,” Obama enacted a new loan bill in 2010 that has only served to exacerbate the problem of rising tuition costs:

While it’s not commonly discussed on the Hill, the government actually stands to make an enormous profit on the president’s new federal student-loan system, an estimated $184 billion over 10 years, a boondoggle paid for by hyperinflated tuition costs and fueled by a government-sponsored predatory-lending program that makes even the most ruthless private credit-card company seem like a “Save the Panda” charity. Why is this happening? The answer lies in a sociopathic marriage of private-sector greed and government force that will make you shake your head in wonder at the way modern America sucks blood out of its young.

Much like the changes to bankruptcy law in the late ’90s and early 2000s that largely created the current crisis, Obama’s student loan bill brought to the federal government the same broken misincentives that corrupt the interests of loan originators and universities. As Taibbi explains, the Department of Education learned to love student loans exactly at the point when they started to earn a sizable profit:

[...] the government can essentially lend without fear, because its strong-arm collection powers dictate that one way or another, the money will come back. Even a very high default rate may not dissuade the government from continuing to make mountains of credit available to naive young people.

“If the DOE had any skin in the game,” says [ Founder Alan] Collinge, “if they actually saw significant loss from defaulted loans, they would years ago have said, ‘Whoa, we need to freeze lending,’ or, ‘We need to kick 100 schools out of the lending program.’”

Turning down the credit spigot would force schools to compete by bringing prices down. It would help to weed out crappy schools that hawked worthless “degrees in bullshit.” It would also force prospective students to meet higher standards – not just anyone would get student loans, which is maybe the way it should be.

Much like the Affordable Care Act and the attempt at “fixing healthcare,” Obama’s new proposals are barely even a stopgap compared with the enormous tidal wave of unsustainable debt young Americans are accumulating. Even if fully enacted, this would only be the tiniest first step down a very long road – but if we want to fix the student loan crisis before it imperils the entire American economy, we need to introduce greater transparency and accountability to our unconscionably expensive (and secretive) university system. Obama’s newest proposals aren't a bad place to start.

Tim Donovan

Tim Donovan is a freelance writer who's work has appeared in various publications including VICE, Al-Jazeera America, AlterNet, and Mic. He lives in Queens, New York. Follow him on Twitter at @tadonovan.

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Related Topics ------------------------------------------

Barack Obama College Congress Financial Aid Student Loan Debt Student Loans