Uncle Ben: Look, we throw a lot of fancy words in front of these kids in order to attract them to going to school in the belief that they’re gonna have a better life, and we know that all we were doing is breeding a whole new generation of buyers and sellers…and indoctrinating them into a lifelong hell of debt and indecision!
Jack: I…I, I just don’t understand.
Uncle Ben: DO I HAVE TO SPOON FEED IT TO YA? Look, there’s only one reason that kids want to go to school.
Jack: Which is?
Uncle Ben: …To get a good job…To get a good job, with a great starting salary.
—Accepted (2006)
You can’t talk about contemporary higher education without talking about money, which is fine, because only fools are even tempted to try. Between 1979 and 2014, the price of tuition and fees at four-year nonprofit US colleges, adjusted for inflation, has jumped 197 percent at private schools and 280 percent at public ones, accelerating faster than housing prices or the cost of medical care or really anything you could compare it to except maybe oil.1
But while college applicants’ faith in the value of higher education has only increased—at least in terms of what they’re willing to pay and how much debt they’re willing to take on—employers’ has declined. Wages for college-educated workers outside of the inflated finance industry have stagnated or diminished, with real wages for young graduates down 8.5 percent between 2000 and 2012.2 Un-and underemployment have hit recent graduates especially hard, nearly doubling post-2007.3 The result is that the most indebted generation in history is without the dependable jobs it needs to escape. And like the debt, these facts about the state of higher education are inescapable. Regardless of whether or not any particular parent or guidance counselor is doing the right thing by advising any individual child to prepare for, apply to, or take out loans to attend college, these are the aggregate effects of treating higher education the way America does.
In the video game that is American childhood, higher education isn’t the final boss, after all—it’s more like the beginning of a new level.
When you hear “college student,” what do you picture? Maybe it’s a frat party, with backward hats and kegs of cheap beer and lots of loud noise. Maybe it’s a seminar room full of students debating the finer points of Plato. Maybe it’s a rowdy tailgate at a football game or a protest about safe spaces or glasses of fancy wine in an Ivy League secret society. The college student implied by Millennial childhood norms is overprotected to the point of permanent adolescence, but not many people are actually like that. We have a lot of college student media stereotypes, and many Americans have firm ideas about those kids and their various affectations. But that’s not really what this chapter is about. What’s more important is actual college students and the structures that subsume them.
There are some important myths to dispel: The average college student does not live on campus—only around 15 percent of undergraduates do. Most do not attend selective institutions that accept fewer than half of their applicants.4 Only 19 percent of full-time undergraduates in four-year public degree programs graduate on time, and it’s 5 percent for two-year programs.5 Students from poor families who go to college will probably remain working-class—38 percent of people from low-income families will remain in the bottom two deciles regardless of their educational accomplishment. But the biggest myth is probably the one about students and wage labor.
In her book Paying the Price, Sara Goldrick-Rab (herself a scholar of education policy) writes about how she assumed that a drowsy student of hers had been partying too hard and failing to take her studies seriously. When Goldrick-Rab confronted the student, the professor learned a valuable lesson: The student had been working nights at the local grocery store because the graveyard shift paid a little better. She had been attending class after an 11-p.m.-to-6-a.m. shift, taking her education very seriously. This is a good example of the difference between college student stereotypes and the reality, and the experience prompted Goldrick-Rab to take a look at how hard students are working outside the classroom:
Times have changed. In 1960, 25 percent of full-time college students between the ages of sixteen and twenty-four worked while enrolled. Five decades later, national statistics show that over 70 percent of undergraduates are working….Twenty percent of all undergraduate students are employed full time, year-round. Among those working part time (52 percent of all students), half work more than twenty hours a week (26 percent of all students).6
In a study of scholarship students at public colleges in Wisconsin conducted by Goldrick-Rab, 23 percent of respondents in their second year of school worked between the hours of 10 p.m. and 8 a.m. For all the jokes about students living off ramen, undergraduates are significantly more likely to experience high levels of food insecurity (in technical terms: “hunger”) than to live in a dorm.7 Millennials have changed what it means to be a college student in practice, but the American “Town vs. Gown” imaginary hasn’t been updated.
When I write about college students in this section, I’m not talking about a rarefied slice of the upper class, the scions of the rich and the famous. College students are regular people—mostly regular workers—who spend part of their work-time on their own human capital, like they’ve been told to. They are doing the work we all need them to do if this country and its economy are to have the trained workers they require to function and grow. The policies that affect college students affect all Americans, and looking forward, employers and policymakers alike are betting on near-universal higher education. The big question then is how the average student pays for it.
The prevailing logic is that investments in one’s own working credentials are almost always good investments. Whatever you take out in student loans will come back to you in the form of higher wages down the line. And if they don’t, you probably just need more education. There’s no such thing as too much. The problem then becomes access to the cash in hand to invest in yourself or your child, rather than what higher education could cost, or how the market values degrees when more people have them. Debt is a bridge over the gap.
But what kinds of incentives motivate lenders to continue awarding loans for tens of thousands of dollars to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce? Why do universities need so much more money from students and their families? Where does the money come from, where does it go, and why does everyone keep insisting college is a good investment no matter what it costs?
Looking at the consistent patterns of higher education debt, it’s hard to imagine that the federal government nationalized the vast majority of student lending—around 85 percent—in 2010.8 Ever frightened of being labeled socialist, the Obama administration downplayed a cost offset in the 2010 Affordable Care Act that authorized the federal government to buy out most of the student loan industry. But since then, it’s the feds who run the lending system directly, and the trillion-plus in student debt that the state holds makes up a plurality of its financial assets—37 percent, far more than national reserves officially hold in gold or foreign currency. Nationalizing around $850 million in outstanding debt and $100 billion in annual loan disbursement and cutting out private competitors is theoretically controversial, but by posing it as a debt-reducing cost offset, the Obama administration successfully reframed the move as a concession to Congressional Republicans. (Basically, since taking the place of private lenders saved the government money, by tacking it onto the ACA the administration reduced Obamacare’s overall costs, which Republicans could hardly oppose.) Democrats, who don’t want people to think of the welfare state as the home of Obamacare and student loans, were happy not to hype the state’s new debt holdings.
Before the Obama administration’s reform, most student lending was done through the ill-advised Federal Family Education Loan (FFEL) Program, under which the federal government backed an intricate private system of dispersed lending agencies at a totally unnecessary cost to taxpayers. There was no sense in the government using its credit rating to support private lenders while the fat cats profited off students. From an accounting perspective it’s a no-brainer: All they did was cut out the middleman. Not even the banks themselves could claim they were necessary, and every major private bank except Wells Fargo quietly exited the student loan industry entirely. But the government didn’t know just how well their plan was going to work, how much money they were really going to save.
While economic recovery has been just around the corner for years—or so we’re told—Treasury rates (the interest rates the government pays to borrow money) are still low, which has produced some unforeseen consequences for the federal government’s takeover of the student loan industry. Because the government’s borrowing costs are so low, student lending is incredibly profitable. The Department of Education expects to reap $18.99 in profit on every $100 in loans originated in 2014. Multiply that by 140 billion and we’re talking over $25 billion in projected negative subsidy—that is, profit—off the 2014 cohort alone.9 That is the current financial foundation for the American higher education system, but we don’t like to talk about it that much.
When policymakers and commentators talk about the cost of higher education, they tend to frame it in terms of making it easier to attend college. In his 2014 State of the Union address, for example, President Obama mentioned college access four times, and he went so far as to suggest that every American needs postsecondary training of some sort to remain competitive on the labor market. Despite this rhetorical commitment to spreading the benefits of college, average student debt continued increasing under the Obama administration, from $23,200 in 2008 to $28,400 in 2013.10, 11 Nationalization of the debt system certainly hasn’t made higher education cheaper.
But as anyone who’s seen an infomercial knows, affordability isn’t just about cost, it’s about the repayment terms. Paying $1,800 for a Bowflex up front may cost about the same as eighteen payments of $99.95, but it’s a lot less affordable. When President Obama said in the State of the Union speech, “We worked with lenders to reform student loans, and today, more young people are earning college degrees than ever before,” it sounded like there was a certain causal connection, as if reform had led to a reduction in the higher education debt burden that had freed up more young people to go to college. The reality is closer to the opposite: The more debt there is available, the more “affordable” college is. Washington’s program for higher education accessibility isn’t based on the “No one turned away for lack of funds” logic of a punk show at a Unitarian church; it’s closer to “At no money down, anyone can get behind the wheel of a brand-new Mustang.” This is how the president can call an escalation in average student debt an achievement in accessibility.
What happened? Even if the ideals of public education always have been glossy propaganda for investment in the upper ranks of the national labor force—a training school for bosses—at least it was an investment. This looks like a goofy scheme to stimulate consumer demand by dragging value from the future and spending it in the present. Recent high school graduates are the least creditworthy adults you can imagine; it’s perfectly reasonable for Millennials to ask, “Why are they giving us all this money in the first place?” To answer that, we need to look at where the money is going.
The broad Washington policy consensus boils down to the idea that we need more college access, which means more debt. But the problem with student debt isn’t that there’s not enough of it, it’s that American higher education costs too much. No mystification can disguise what anyone who can read a price tag already knows. But we ignore the cost because we’re so dedicated to the axiomatic virtue of “College for all” that we consider a college education priceless. A hard look at young America means a hard look at what higher education has become, putting aside whatever sentimental attachments we might have to humanities seminars, poetry slams, or March Madness.
Higher education is, in addition to other things, an economic regime that extracts increasingly absurd amounts of money from millions of young people’s as-yet-unperformed labor. For anyone who takes out a student loan—and that’s two-thirds of students—succeeding at contemporary American childhood now means contracting out hours, days, years of their future work to the government, with no way to escape the consequences of what is barely a decision in the first place.
Why has the cost of education gone up so high so fast? In theory, the vast higher education public option should keep fees down across the board. Since the government holds a compelling interest in educating the population, it created a whole network of institutions, from two-year community colleges to the so-called Public Ivies like UC Berkeley and the University of Michigan at Ann Arbor. If these schools are reasonable substitutes for private schools, and they keep their costs in line with the actual expense of providing services, then the whole industry should hew to a cost curve that has less to do with demand than with necessary expenditures. Or so the theory goes.
Since almost all colleges are nonprofits, we assume people work in higher education for reasons other than financial gain, whether it be commitment to teaching the next generation, a passion for contributing to the sum of human knowledge and understanding, fear of social life outside the academy, or some combination of all three. The bottom line is that on some level we expect that institutions of higher education will act in the interest of students, at least more than private companies motivated by profit would. But even though we assume something akin to custodial behavior from colleges and universities, it’s still reasonable to ask what this consistent escalation in costs is for.
First, let’s look at where the money hasn’t gone: instruction. As Marc Bousquet, a leading researcher into the changing structures of higher education, wrote in How the University Works:
If you’re enrolled in four college classes right now, you have a pretty good chance that one of the four will be taught by someone who has earned a doctorate and whose teaching, scholarship, and service to the profession has undergone the intensive peer scrutiny associated with the tenure system. In your other three classes, however, you are likely to be taught by someone who has started a degree but not finished it; was hired by a manager, not professional peers; may never publish in the field she is teaching; got into the pool of persons being considered for the job because she was willing to work for wages around the official poverty line (often under the delusion that she could “work her way into” a tenurable position); and does not plan to be working at your institution three years from now.12
Fewer than forty years ago, when the explosive growth in tuition began, these proportions were reversed. Graduate students are highly represented among this new precarious class of teachers; with so much debt available to them, universities can force them to scrape by on sub-minimum-wage fellowships, which makes grad students a great source of cheap instructional labor. There are fewer tenure-track jobs available (as a proportion), which means that recent PhDs, themselves often overwhelmed with debt, have little choice but to accept insecure adjunct positions while their wages are depressed by the next crop of graduate student workers. It’s a dizzying cycle, but university administrators like the ride: They hired part-time faculty at 2.6 times the rate of full-time between 1990 and 2012.13 Rather than producing a better-trained, more professional teaching corps, increased tuition and debt have enabled the opposite. So who’s reaping the rewards?
If overfed teachers aren’t the causes or beneficiaries of higher tuition (as they’re so often depicted), then perhaps it’s worth looking up the food chain. As faculty jobs have become increasingly contingent and precarious, administration has become less so. Formerly, administrators were more or less teachers with added responsibilities; nowadays, they function more like standard corporate managers or nonprofit fundraisers—and they’re paid like them too. Once a few entrepreneurial schools made this switch, market pressures compelled the rest to follow the revenue-prioritizing model, which leads directly to high salaries for in-demand administrators. Even at nonprofit schools, top-level administrators and financial managers pull down high-six-and even seven-figure salaries, closer to their industry counterparts than their fellow faculty members. And while the proportion of tenure-track teaching faculty has dwindled, the number of managers has jumped in both relative and absolute terms.14 A bigger administration also consumes a larger portion of available funds, so it’s unsurprising that budget share for instruction has dipped.
When you hire corporate managers, you get managed like a corporation, and the race for tuition dollars and grants from government and private partnerships has become the driving objective of the contemporary university administration. The goal for large state universities and elite private colleges alike has ceased to be (if it ever was) building well-educated citizens; now they hardly even bother to prepare students to assume their places among the ruling class. Instead, we have, in Bousquet’s words, “the entrepreneurial urges, vanity, and hobbyhorses of administrators: Digitize the curriculum! Build the best pool/golf course/stadium in the state! Bring more souls to God! Win the all-conference championship!”15 These expensive projects are all part of another cycle: Corporate universities must be competitive in recruiting students who are already set up to become rich alumni, so they have to spend on attractive extras, which means they need more revenue, so they need more students paying higher tuition. For-profits aren’t the only ones consumed with selling product. And if a humanities program can’t demonstrate its economic utility to its institution (which can’t afford to haul “deadweight”) and its students (who understand the need for marketable degrees), then it faces cuts, the preferred neoliberal management technique. Students apparently have received the message loud and clear, as “business” has quickly become the nation’s most popular major by over 100 percent.16
The clearest description of why education costs are so high and where they’re going comes from a whistle-blower of sorts. During the 2009 fight over a 32 percent increase in the price of tuition across the University of California system—a struggle that was valiantly fought and sadly lost—professor Bob Meister of UC Santa Cruz released a public letter called “They Pledged Your Tuition” designed to clarify what exactly the UC schools were doing with the fees. A professor of social and political thought, Meister went against the prevailing faculty wisdom—namely that all money problems in public higher education are the result of state divestment in higher education—and blamed the out-of-control growth of bond-financed capital projects.
Meister wrote that because state money can’t be used to finance construction bonds (by law), UC management had pledged future tuition hikes to satisfy bond-rating agencies, allowing the schools to continue to borrow money at low rates to build a new stadium in Berkeley, a new coffeehouse in Davis, a new campus police station in Los Angeles, and more:
Construction funding is a reason why the Regents want to raise tuition, perhaps the most important reason, but, as students, you are unlikely to go along with big increases to fund UC’s list of construction projects. Cutting back on instructional budgets is how they get you to agree to higher tuition without telling you how much will go to fund construction. On my campus, the most visible instructional cuts typically become permanent, and we’re told that without higher tuition they would have been worse. Campus administrations can always say that no particular tuition increase is ever large enough to reverse whatever instructional cuts were imposed to persuade you that it was necessary. If you accept this claim, you’ll never question how much of your tuition is used to fund construction, and whether you would have found an increase justified had you known.17
The policy debate around higher education costs tends to distinguish between public and private institutions, but evidence suggests the two are marching upward to the beat of the same drum. Over the past thirty years, costs of attendance (tuition, fees, room and board) in real terms have risen around 220 percent at both public and private four-year institutions (219 and 223 percent, respectively).18 The ratio between the two has remained constant. It would be one hell of a coincidence if private and public universities responded to entirely different sets of cost pressures in the same way over the course of three decades. The most obvious explanation is that nonprofit higher education has become a single industry with premium and generic brands. If you don’t believe me, then at least believe the financial services agency Moody’s, whose 2013 report describes the distinction in the clear and unashamed language of unaccountable finance professionals: “Public universities are now as market driven as private universities, but remain a lower cost option with stronger pricing power.”19
In the standard liberal narrative, public higher education is getting worse and more expensive at the same time because subsidies from state governments and the federal government (in the form of Pell Grants) have decreased, pushing the cost burden onto students and their families. The solution, according to this diagnosis, is increased state support for public universities. The evidence, however, doesn’t back up this story. Though there has been some decrease in state support since the 2008 crisis, the past thirty years do not show a withdrawal of state funds commensurate with the rise in costs to students. But if we can cease to imagine that the higher education industry is an oasis of care and concern in our vast desert of market indifference—which, quite frankly, only a deluded few employed in the industry believe anyway—then we might be emotionally prepared to look at higher education using the financial system’s heartless analytics, which explain perfectly well why costs have risen.
Higher education managers have one set of answers for the public, but the bromides about the lifelong value of a college education don’t work on the bond market. In 2013, Moody’s issued a negative outlook rating for the US higher education sector, suggesting that schools were, in aggregate, not a good investment. The first reason these analysts give is that schools have more or less hit the ceiling when it comes to charging families for higher education.20 Let that sink in for a second: Investors who have no particular interest in the wellbeing of families, investors doing fully rationalized analysis—these investors thought schools were charging as much as they possibly could in tuition.
Here’s how Moody’s described the current state of public education pricing in November of 2013, in the wake of 2008:
For several years, lower sticker prices allowed public universities to increase tuition at extraordinary rates in order to compensate for declining state appropriations. While some universities retain pricing power, it can be constrained by either mission-based or political limitations on tuition increases.
As a result, public universities are increasingly competing for out-of-state students, including those from outside of the US, for which the universities can often raise tuition at a greater rate.21
The competition for high-value customers and research grant money has pressured schools to invest in “capital, information systems, faculty compensation and program renewal” at a time when they have seemingly few options for increasing cash flow.22 During good years schools built and innovated and paid expensive consultants to do dozens of different things; now they’re stuck in a totally unsustainable model, and the only way out—at least judging from the way college administrators are behaving—is to try to climb over all the other crabs to the top of the U.S. News & World Report–ranked bucket.
A 2014 report from the Delta Cost Project at the American Institutes for Research (the party people at the AIR had some fun and named it “Labor Intensive or Labor Expensive?”) found that between 2000 and 2012, the nonprofit private and public higher education workforce rose 28 percent. “The higher education workforce—from tenured professors to part-time adjuncts, and from executives and professionals to support staff—is changing rapidly,” the report says, and the numbers agree.23 Careful readers might wonder if the jump in the higher education workforce mirrors the increase in enrollment over the same period, and it does. But the question isn’t how many employees colleges have added, but which kind.
Changes in the composition of the higher education workforce are a good way to track the ways colleges have shifted their focus, since labor costs amount to 75 percent of university expenditures on average.24 If schools were responding to higher enrollment by hiring lots of new tenure-track faculty, that would indicate one thing about their management vision, whereas a declining share of spending for instruction would indicate another. It’s the latter we’ve seen, as the report reveals that a small number of pricey professors—for whom universities compete aggressively—have received large salary bumps, while the overall cost per instructor and share of budget for instruction have declined. This is another instance of the winner-take-all tendency, where a small cohort of scholars garner all the right credentials and enough celebrity to leave the rest in the dust.
Between 1990 and 2012, the head count of nonprofessional campus workers—technical, clerical, skilled craft, and service/maintenance—declined sharply as schools invested in automation. The number of part-time faculty overtook the number of full-time faculty between 1990 and 2000 in private and public sectors.25 Universities have benefitted from automating solid jobs that don’t require college degrees, and at the same time they’ve lowered the quality of the instructor jobs that do require degrees. The university, as we will come to see in the next chapter, is at the forefront of advancements in labor efficiency, but that hasn’t meant improved learning conditions.
The AIR report found that universities have been hiring professional workers—business analysts, human resources staff, admissions staff, etc.—at the highest rate, exceeding the rate at which enrollment increased. The report describes the growth in this sector:
The explosion of new workers attending to the noninstructional side of higher education has not gone unnoticed on college and university campuses. Although the most visible positions—such as newly hired executives, managers, and administrators—tend to draw the greatest attention, most hiring has occurred within the administrative offices they often oversee. Professional employees—such as business analysts, human resources staff, admissions staff, computer administrators, counselors, athletic staff, and health workers—are the largest group of noninstructional staff on campus. These positions typically either support the business functions of colleges and universities or provide noninstructional services to students.26
All types of private and public nonprofit colleges have added these kinds of professional staffers while increasing reliance on part-time instructors. To the high degree that this has occurred, universities have deprioritized education and prioritized business administration. The consequences as I detail them in this chapter have been the natural and predictable outcomes.
What this all amounts to is a clear tendency for both public and private colleges to behave like businesses, passing off a lower-quality product at a higher price by tacking on highly leveraged shiny extras unrelated to the core educational mission. Stadium skyboxes, flat-screen monitors, marble floors, and hors d’oeuvres for the alumni association. Consultants of all flavors and salaried employees to make sure it’s all efficient. Competition hasn’t improved the quality of higher education, it has made colleges more like sleepaway camps or expensive resorts, cruise ships with lucrative fast-food concessions and bookstores full of branded tchotchkes for sale.
With young Americans consistently ranking student loans among their biggest concerns—and with economists scared that five-figure debts will depress consumer spending—you might expect there would be some substantial reform proposals on the table. You would be sadly mistaken. Rather, policymakers have treated higher education costs like a public relations problem. There’s no way to address the underlying issue of too many young Americans owing too much in student debt without the lender (the United States government, in most cases) taking a hit. But neither the administration nor the Congressional leadership of either big party has shown any appetite for taking major steps to even reduce the state’s profits.
While escalating student debt makes headlines, the federal government is understandably embarrassed about raking in more profits than Exxon. Senator Elizabeth Warren has made student loan profits a national issue. “It’s time to end the practice of profiting from young people who are trying to get an education and refinance existing loans,” Warren said in a January 2014 statement.27 Though she’s right to draw attention to a particularly egregious symptom (the profits), a January 2014 report from the Government Accountability Office (GAO) highlights how deep the problems with the student lending structure go.
Senator Warren’s hope has been that the government could set borrower interest rates in advance to precisely and consistently balance federal revenues and costs. This was a hope the GAO quickly dashed in their report, helpfully titled “Borrower Interest Rates Cannot Be Set in Advance to Precisely and Consistently Balance Federal Revenues and Costs.”28 It’s the oldest play in the book when it comes to pretending to address an intractable policy issue: Commission a report that says it’s not feasible to do anything at all.
The report was ostensibly a response to H.R. 1911—the Bipartisan Student Loan Certainty Act of 2013. Congress and the administration fought long and hard over this bill, which sets interest rates on direct loans for three different loan categories in perpetuity. As the Department of Education tried to figure out how to become the nation’s largest student lender, they were pressed for time by student loan interest rates that were set to double—the result of the last time Congress negotiated a quick fix. While factions offered six various proposals, the deadline lapsed and borrower rates did double.29 Luckily, this lender doesn’t just make its own laws, it makes its own time too; when Congress finally agreed on the bill, they made it retroactive. The bill they ended up with looked most like the proposal from Republican Representative John Kline, which was found to generate revenue: $3.7 billion, to be exact.30 That the ultimate (revenue-neutral) resolution was worse for borrowers than the most conservative plan on offer points to how little daylight there is between the major parties on this issue.
In return for slightly higher interest rates than the president had proposed, the Obama administration won a new repayment program called Pay As You Earn (PAYE). This provision is an improvement on the complicated and rarely used Income-Based Repayment (IBR) program that existed previously. Under PAYE, new borrowers who opt in can cap their payments at 10 percent of their discretionary income, and after twenty years of on-time monthly installments and annual income reports, their loans will be forgiven. It sounds almost like a real answer to the student debt crisis, but the numbers don’t bear that out.
At no point in the White House press release is there a reference to how much money the program expects to save student debtors as a whole.31 That’s because it doesn’t save them any. Not only does the government’s own student aid site admit that PAYE will most likely cause enrollees to pay more interest over time, the Obama administration brags that the program won’t cost taxpayers a dime.32 Since there’s nowhere else for the money to come from, that means that if there are any borrowers getting a break on their overall payments, it’s because another borrower is paying for it with higher interest rates. The number are revealing: The Congressional Budget Office estimated that opening PAYE to all borrowers would cost the government a near-term total $3.6 billion, a near-even trade for the $3.7 billion revenue in the GOP’s interest rate proposal.33 The Student Loan Certainty Act was a good deal for both sides: The Obama administration and the Democrats got an accomplishment in PAYE, and the GOP got a revenue-neutral bill. It’s an expert reshuffling that makes it look like a problem is being addressed, while sweeping the issue of student debt under the sofa to deal with later.
The White House press release on PAYE was titled “We Can’t Wait,” but the opposite is true: The DoE can and will wait decades for borrowers to pay back their loans. The New York Times ran the numbers on PAYE compared to standard repayment for the median borrower and found that PAYE actually costs over $3,000 more over the life of the loan, for one simple reason:34 longer repayment periods mean more interest. Not only do these reforms not address the scale of the problem, they’re not even reforms at all insofar as “reform” is supposed to mean a good-faith effort to solve a problem. The only problem student loan reform exists to solve is the perception that the government isn’t doing anything to solve the student loan crisis. And that perception is well founded in reality.
Risk of massive student loan default looms large in the American public imagination. Since the 2008 mortgage crisis, many commentators—myself included at one point—have likened the escalating mass of student debt and its derivative financial products to the housing bubble. The idea is that if a bunch of borrowers couldn’t pay all at once and the quality of their loans had to be downgraded, it would be a disaster. Given what we know—over a trillion dollars’ worth of outstanding student loan debt and the increasing scarcity of jobs that will put borrowers in a position to pay that money back quickly—that scenario doesn’t sound farfetched. To test the likelihood that a wave of defaults could put the government on the hook for serious costs down the line, the GAO projected a scenario in which the portion of total loans in the highest risk category went from 6.7 percent to 51.2 percent. That’s a huge swing, a nightmare in the conventional wisdom. What lender wouldn’t be concerned if over half their loans were suddenly super-high-risk? The federal government, it turns out. The GAO estimated that, compared to change in the underlying variable, the risk would have almost no effect on the lending program’s costs, tiny compared even to low-risk income-based repayment.35 Why doesn’t it worry the government when student borrowers threaten to default on their loans?
Defaulted student loans don’t just disappear into a government loss column—in fact, they don’t disappear anywhere. The idea of defaulting implies that the debtor is unable to, and therefore does not, pay off the loan. But that’s not how it works. At the time of this writing, the latest numbers are for loans issued in Fiscal Year 2014: The government expects to make a staggering $140 billion in student loans,36 of which around 17.5 percent are projected to default at some point in the future.37
During the mortgage crisis, homeowners who found themselves with negative equity (owing more on their houses than the houses were worth) could walk away. Students aren’t as lucky: Graduates can’t ditch their degrees, even if they borrowed more money than their résumé can command on the market. Americans overwhelmed with normal consumer debt (like credit cards) have the option of bankruptcy, and although it’s an arduous and credit-score-killing process, it’s a way out. But students don’t have that option. Before 2005, students could use bankruptcy to escape education loans that weren’t provided directly by the federal government, but the facetiously named Bankruptcy Abuse Prevention and Consumer Protection Act extended nondischargeability to all education loans, even credit cards used to pay school bills.
Today, student debt is an exceptionally punishing kind of debt to have. Not only is it very hard to escape through bankruptcy, but student loans have no expiration date and collectors can garnish wages, Social Security payments, and even unemployment benefits. When someone like Vox’s Dylan Matthews writes that the government is “better at making collections than private lenders,” it sounds like he’s talking about economies of scale.38 But the government is more like a loan shark who can make riskier investments than private lenders can because he has ways of collecting from delinquent borrowers that are not on the menu for other lenders.
The Mafia aren’t the only lenders who make their own rules. Through the use of its own special set of compliance tools—particularly wage garnishment, something not available to any other lender—the federal government has tied student loan repayment very closely to the continued functioning of the US economy. As long as enough college-educated workers survive to work more and make wages that can be garnisheed, they will pay their loans. And the Treasury doesn’t need borrowers to hurry on repayment as long as they can count on getting the money back someday. These conditions make student loans effectively just as safe as Treasury bills, which are themselves low-risk investments in the continued expansion of American production. That’s why the average defaulted student borrower still ends up paying the Treasury more than 100 percent of their loan’s principal.39 Student loan default does not, on average, exist.
Here’s where we are now: All American children are told to exercise self-discipline and spend the only things they have (their time and effort) working and competing for a spot in a college freshman class. If they’re lucky enough to achieve this goal, they’ll borrow on average tens of thousands of dollars from the government for an increasingly diluted education. Schools take this $100+ billion a year in government money, backed by their students’ ability to do work in the future, and spend it like their job is to produce more spending. Colleges have dug themselves so deep into their shining marble pit that not even the vultures in the bond market want much to do with them. Meanwhile, debtors can’t walk away from student loans unless they can walk away from themselves.
Even if it were larger, the subprime housing market is a less sophisticated and stable way to gin up demand than the student debt industrial complex. People can’t default on their human capital, even if it’s overleveraged. That means that as long as the government keeps treating student loans as a special type of practically inalienable debt, when this value is created, it’s created for real. Student debt is a kind of time travel for value: Borrowers take out loans based on the idea that the returns on a college education will always exceed the costs, and they’re made to pay regardless.
Here’s how the time machine works: Say you—hypothetically—need to generate demand for a bunch of construction projects (a state-of-the-art athletic facility, perhaps, or a new performing arts center designed by a famous architect) because the housing market collapsed. You look high and low, and everyone is tapped out. It’s a bad economy. But you’re smart, and you know money is more complicated than that. Just because the demand doesn’t exist now doesn’t mean it won’t exist later, and if it exists later, then making it appear now is just a matter of the right forecasts and the right lender with the right interest rates. You don’t want another bubble, though, so you need to anchor these predictions to something that can’t evaporate if market conditions change. And if there’s one thing you know about a future in which firms are able to collect debts, where we have to spend money to buy food and stay alive, it’s that people will be working. Human capital is the present value of the one thing you know, in aggregate, has to happen in the future: Workers are going to work.
Of course, a national scheme in which young people pledge the product of their future labor for straight cash is suspect, and besides, who knows what kids might buy with their pockets full? They might not invest in large real estate projects, for one thing. But universities turn the paychecks of tomorrow into construction today. And because of the government’s extraordinary collection abilities, there’s no easy way for the value to disappear. If you’re really sophisticated, you’ll project future increases in the costs you can charge students, then go to the bond market and get even more money to build stuff. When the government and nonprofit foundations and employers say we need more kids in college, part of what they’re saying is that we need to mine more value from the future and spend it in the present, even if they don’t think of it that way.
But what kind of labor market do borrowers enter with these loans? When the bill comes due, what kind of position are they in to repay, and can they make a life for themselves at the same time? And what about the kids who aren’t “properly equipped” for the twenty-first-century job market, the ones who didn’t go to college, or didn’t go to the right one, or didn’t graduate? Getting into college is the first big test of what a kid’s human capital is worth, but college itself is at best an opportunity for further investment. The job market is where the investments start yielding returns. Or not.