« The Weeds

Who broke student loans?

2023-07-26

Last month, the Supreme Court struck down President Biden’s student loan forgiveness program. Student loan debt these days weighs in at about $1.7 trillion. Leah Litman and Josh Mitchell join us on the latest episode of The Weeds to dive into the legal landscape and discuss how we got this student loan system in the first place. 

Read More:

The Supreme Court’s student loan decision in Biden v. Nebraska is lawless and completely partisan | Vox

The Supreme Court put itself in charge of the executive branch with its major questions doctrine | Vox  

Student Debt Relief Bad, Bigotry Good | Crooked Media 

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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
- Support for this podcast comes from Planned Parenthood. It's hard to imagine a world where we leave future generations with fewer rights and freedoms. Since the Supreme Court's decision to overturn Roe v. Wade, politicians in nearly every state have introduced bills aimed at blocking people from getting the essential sexual and reproductive care they need, including abortion. Planned Parenthood believes everyone deserves access to care and with supporters like you, they can reclaim our rights and protect and expand access to abortion care. Visit plannedparenthood.org/future to learn more and support their cause.
So to pounds, euros to yen, Wwise can help you manage your money in different currencies. With Wwise, you can send money to your cousin in Australia with ease. Travel internationally without having to brave an airport currency exchange desk and take away the guesswork that goes along with converting currencies. Wwise lets you send and spend money worldwide at the real-time mid-market exchange rate, all without any hidden fees. Join 16 million customers already using Wwise worldwide. To learn more about how a Wwise account could work for you, download the app or visit wwise.com. That's Wwise, W-I-S-E dot com. Wwise dot com. This is the weeds. I'm John Colan Hill. About a month ago, the Supreme Court made its decision in Nebraska v. Biden. Now, even if you aren't familiar with the name of the case, there's a pretty good likelihood you know what it did. It blocked President Joe Biden's student loan forgiveness plan.
The reason you probably know so much about this case is because there's a good chance that you or Or someone you know has student loan debt. It's true that most Americans don't have college degrees. The Census Bureau, a little over 30% of adults aged 25 and older have bachelor's degrees. But for those that have gone... There's a lot of debt. About one in eight Americans has student loan debt, and that debt has added up to the tune of over 1.6. $7 trillion. When the decision was handed down, you could feel the disappointment emanating from people who are relying on it, like Tatiana Mendez. I'm 36 years old. I'm originally from Bogotá, Colombia, and I currently live in Silver Spring, Maryland. In the nonprofit sector with refugees from Central America.
College career really started in Colombia. I graduated high school in 2004 and I-- I did two years of marine biology there. Then I was waiting for the visa process to complete. It got a little delayed, so I stayed there for a little bit. I went through some life changes and I changed careers, then studied audio visual media there. And then just a year after I had started that new career, I moved to the US. So when I got to the US, I basically... I basically just kind of had to work in order to pay the bills. And I was working a very entry-level job for about four years when I felt like I wanted to make some changes, that I wanted to do something. Else I was in retail then I and then I started volunteering in nonprofits and
I wanted to get involved in working for nonprofits. Tatiana went to community college first, and after she got her associate's degree, she transferred to a private university. She took out a private loan for it, but didn't really enjoy the school. So that's what she did. She transferred to a public university, the University of Maryland, Baltimore County. She graduated from UMBC with a degree in political science back in 2019. She's proud of her degree. She needed it to reach her career goals. But from the beginning, She struggled to find a way to pay for school. - When I started in 2014, since I was already older, that I found out when I was trying to find scholarships, that because of age, like the options were much more reduced. I really didn't have any savings or anything, so really my only option was to take up on student loans. I kind of knew that...
I was gonna be in it for the long run, you know, kind of like how long it's gonna take me to pay all of this. Because at the same time I went to school full time and I didn't work while I was in school for different. Reasons but um I think mainly because I had to work my Maybe a little harder because English was not my first, it's not my first language. So that was the very first time that I was gonna start taking college level classes. In English so that was you know like a little harder I had to spend more time studying and that kind of thing. So I still don't drive, but you know, back there I didn't drive. So it was a lot, a lot of public transportation. Transportation and in this area while public transportation is great, it takes you a long time to get anywhere. So, you know, like if I were like going to class and like working the day just didn't have enough hours for me to
do all of that, so like I did take more money to pay for my living expenses as I completed my courses. Right now I owe about $46,000 thanks to the PAWS. Because of the pandemic, I was able to focus on the private loan that I had acquired. Is able to pay that off just this month. But in terms of what I'm looking for, once the payments start again, and now I'm married and we file taxes together, so we account for both. he has a side. From my $46,000, there's some more, but we're looking at about $800 monthly payment. - How did you feel when you heard that the Supreme Court-- Struck down student loan forgiveness? I felt pretty sad, really. I just, I mean, I kind of followed a little bit, but I didn't want to get too involved because I tried to kind of prepare.
For the worst every time even though there's still a teeny tiny little bit Of hope very deep in you. It's like, no, maybe this will change. But I was trying to kind of like assume that it was not going to happen. And I understand that I took a responsibility when I took the loans out, but it was at the same time, it didn't really. Feel much of a choice because I didn't really have like, okay, take the Or this other route will give you education for free. Like I wanted it. I realized I needed to go, you know, to get my college degree and that was my only option to take up one loan. So it doesn't feel like Choice. And that's kind of like what makes me feel like why would anyone stop others from benefiting from something, even if they didn't benefit themselves? I don't know. It's kind of like, sad.
I think in terms of, you know, the whole process, the little, you know, thing, but I think also in a broader sense of like, self-help. I guess. So I think while that was not a solution, it would have been such a big relief. For just so many people. You know, I'm in a relatively privileged position, but you know, we-- You have to put up some kind of dreams or, you know, or things that we would like to accomplish because we have to pay so much. And I think I also. I also think that the payments are definitely too high. It's a big chunk of your income. Definitely reduce the cost of education overall and at the very least see how they can reduce the monthly payment or give more flexibility for people. So they... That we can also kind of have a life. It's unfortunate that, you know, some people just kind of have to stop just because of the cost.
Something that I feel should be more of a right for everyone to access education. Tatiana on a story is just one example of the personal stakes. But I also wanted to get into the legal landscape that got us here. So I got in touch with Leah Littman. At the University of Michigan Law School and co-host of Strict Scrutiny. Court made a lot of controversial decisions this past term. There was affirmative action. There was the 303 creative decision. And of course there was student loans. Can you briefly explain the case that got us here? Nebraska v. Biden. I think it's important to understand that there were actually a bunch of different cases wherein... People sought to end the president's student loan program. Actually, in addition to Biden versus Nebraska on the same day that the Supreme Court issued that.
Opinion. They also decided another opinion, Department of Education v. Brown, which involves some individual plaintiffs who sought to end the student loan program. But the case in actually ended the student loan program was Nebraska versus Biden. And it's captioned that way because the plaintiffs in the case, the people who... Who are actually challenging the program, were a group of Republican-led states. And they're Republican-led states because under the Supreme Court -- It's cases, some earlier cases had suggested maybe states. Could or would have an easier time establishing what's called standing, which is the ability to have a federal court hear your case at all. As standing, plaintiffs are supposed to say, I have an injury in fact that's caused by whatever the program is I'm challenging.
Argued they had an injury, in part because Missouri had set up MOHELA, which was a student loan servicing program. And Missouri argued, if you end the student debt of all of these borrowers, then that's going to result in Mokila closing out the accounts of Students who no longer have any loans and if they close their accounts then mojila won't actually be to get any money from servicing those accounts that will cost mojila money and that is an injury to us. Under that theory, the Supreme Court said, You're right, we can hear this case, and they used it to blow up the President's student debt cancellation program. Could you go into the ruling that the Supreme Court made? What was the-- Their reasoning in this being unconstitutional. - Technically what the Supreme Court--
said is the president's student debt cancellation program is illegal because it's not authorized by federal law or federal statutes so there's The federal law, the Heroes Act, that authorizes the Secretary of Education to waive or -- certain terms of federal education law in the event... And that the president declares a national emergency. And what the Supreme Court said is that statue -- authorizes, you know, the waiver or modification of certain provisions of federal education law does not authorize the cancellation or elimination of student debt, but only The modification of the terms under which it is offered. So basically they included the student debt cancellation program violated federal statute because the federal statute didn't give the president the authority to cancel student debt. That sounds like.
Such a narrow ruling. I mean, because the Heroes Act, which, after 9/11 is still law, but they're saying it's just this particular act they can't do. So it sounds narrow in that sense, but I think you have to read the case. Both in light of its reasoning, which could extend to other statutes, as well as with a series of other cases in which the Supreme Court has given really cramped. Interpretations to federal laws empowering, you know, executive. Officials, agency heads, or administrative agencies to take some action. So in this case, What they did is they invoked something called the Major Questions Doctrine, which is, as Justice Kagan called it in dissent, a judicially invented made up rule that the court used
is to say, even though this federal law, as maybe like best read, might also The president or secretary to do this, we, Supreme Court, are going to say, No, it does not. Because we think the regulatory program is just too big. It's major, and therefore, we're going to require Congress to-- Specifically authorize it. So that reasoning, even though the court is ostensibly applying it to this particular statute and this particular regulatory program, is something the court has used across several different statutes and several different regulatory programs. So I don't think it came... As a surprise to many of us, whether watching the court closely or not, that this iteration of the Supreme Court decided to get rid of student loan forgiveness.
- Curious, in your opinion, what's wrong with this interpretation of the HEROES Act? First, putting aside the major questions doctrine for a second, the statute Authorizes the secretary to not only modify the federal education guidelines, but also to waive them. And to waive something is... To eliminate it, to let it go entirely. And I think that the Supreme Court's opinion in Biden versus Nebraska made a huge -- Huge deal about the word modified. It was like, Well, you can't eliminate something and call it modifying it, but that's never the federal government's argument in this case. They said, We're waiving student debt. And the Supreme Court-- just minimized the word wave by choosing to focus on the word modify in order to get to this result. So I think that they just played fast and loose.
With what words in the statute they were focusing on. Second, the major questions doctrine, I think is hugely problematic because that's basically just a rule. That says the court can ignore the meaning of statutes, you know, when the court doesn't like the results because one political party is raising a stink about what a President of the other party has done. And it just can't be the case that. Federal laws don't allow administrative agencies or presidents to do big, significant things that benefit a lot of people just to be. Because one group or another is unhappy about it. - So that's the path that got us to where we are now. And in response. Biden is canceling $39 billion in student loan debt, and this is set to impact. Under a million borrowers rather than, you know, the roughly 40 million people who were set to have their debt canceled before.
Are we likely to see legal challenges to this cancellation as well? So there's one cancellation that we might not see challenges to, and another possibly planned. One that I think we will see challenges to. The student debt cancellation that the president announced where they said were canceled. Student debt that is attributable basically to mathematical errors that we, the federal government, made. It's not totally... Clear to me that we would see a challenge to that student debt cancellation since that's an admission of error about debt that shouldn't have existed in the first place. Or the president also said, I am considering relying on another statute to -- cancel the student debt of some number of people, not because of mathematical error, but just because, like I concluded, that--
This student debt should be canceled in reasons of the public interest. And I think if and when that rule or regulation actually is implemented, then we probably will see challenges to that program as well, you know, for reasons similar to why we saw challenges to the initial one. This is sort of a big question, but you know what happens now, especially legally with those students or former students who thought I don't have to go to school. Have to pay this. I mean, it's really messed up because basically you wake up one day and. The Supreme Court made you, you know, 10 to $20,000 poorer than you thought you were the day before. The administration is, you know, trying to find other paths to providing that relief, but at the The day, you know, this Supreme Court and the Republican controlled lower.
Federal courts are still going to stand in the way of any democratic President pursuing major initiatives through administrative agencies. Like this court is just extremely hostile to that. And so I think we are like. To see future challenges to plans that try to accomplish a similar result using other legal means. What's the solution from a legal... what's the solution from a lead? Standpoint, you know, is there is there any way that student loan forgiveness can be done that you know, would have a legal standing from this Supreme Court that we have, or is it just a non-star? No matter what. I think it's really tough to say. I can imagine if Congress, for example, wrote a statute.
That eliminated student debt, that would not be vulnerable, right, to the kinds of legal challenges that we have seen being raised to, you know, Biden and me. Administration initiatives, namely that, you know, this administrative agency's actions aren't authorized by statute. You know, Congress, if it wanted to, could write a statute canceling the student debt that was issued. By the federal government and that would ostensibly be fine. But the reality is, you know, we live in a world with a filibuster, Republicans control. The House, that's not a viable path in the near future. And that shouldn't be the requirement, given that Congress has written a bunch of different federal. -...all laws that are supposed to allow the president and administrative agencies to make... Regulations that actually make people's lives better. So is there some possibility that this might say some federal statute actually does specifically enough authorize.
You know, the cancellation of student debt, perhaps, but you know, I'm just not certain that that case or that statute, what it looks like, again, given that the federal law here said, You can waive the terms of the federal education guidelines in the event of a national emergency. Declared COVID a national emergency. Thank you to Leah Littman for helping us navigate the Supreme Court decision and to take a look at the results. For sharing her personal story with us. The weeds is where policy gets personal, which means we want to hear your personal stories. Whether it's a call out for a story or a story that's not about policy, future episode, or if you have a burning policy question you want us to do an episode on. You can email your questions, comments, thoughts, whatever to weeds@vox.com. That's weeds@vox.com.
Leah mentioned that if lasting debt forgiveness or reform happens, it'll likely have to come from Congress, which makes sense when you think about the fact that Congress got us here in the first place. The long and winding road to Sallie Mae after the break. - Support for this podcast comes from Planned Parenthood. Your body is your own. That's why Planned Parenthood is committed to ensuring that everyone has the information and resources they need to make their own decisions about their bodies, including abortion care. Who oppose abortion are challenging Planned Parenthood. Affordable, high quality, basic healthcare for more than 2 million people is at stake.
Planned Parenthood believes that healthcare is a basic human right. That's why they fight every day to push for common sense policies that protect our right to control our own bodies. They also work tirelessly to oppose the onslaught of new policies aimed at interfering with personal decisions, best left to patients and their doctors. They won't give up and they won't back down. You can join Planned Parenthood in the fight to help make sure that the next generation can decide their own futures. The organization needs your support now more than ever. For supporters like you, they can reclaim our rights and protect and expand access to abortion care. Visit plannedparenthood.org/future to learn more and support their cause. you - This broadcast comes from Planned Parenthood. Your body is your own. That's why Planned Parenthood is committed to ensuring that everyone has the information and resources they need to make their own decisions about their bodies, including abortion care.
Who oppose abortion are challenging Planned Parenthood. Affordable, high quality, basic healthcare for more than 2 million people is at stake. Planned Parenthood believes that healthcare is a basic human right. That's why they fight every day to push for common sense policies that protect our right to control our own bodies. They also work tirelessly to oppose the onslaught of new policies aimed at interfering with personal decisions, best left to patients and their doctors. They won't give up and they won't back down. You can join Planned Parenthood in the fight to help make sure that the next generation can decide their own futures. The organization needs your support now more than ever. With supporters like you, they can reclaim our rights and protect and expand access to abortion care. Visit plannedparenthood.org/future to learn more and support their cause. This is the weeds. We're back. And before the break,
we talked about the recent SCOTUS decision that ended the Biden administration's student loan forgiveness program. All of this started long before the pandemic. One of the first instances of the government assisting with higher education was the GI Bill, available for most soldiers coming home after World War II. But it was a different kind of... Of conflict that gave us loans as we know them today. To dig into that history, I made a transatlantic call to Josh Mitchell. -I am a reporter. For the Wall Street Journal in London. My book is called The Debt Trap, How Student Loans Became a National Catastrophe. The long path to the student debt crisis started on a Friday in October 1957. Until two days ago, that sound had never been heard on this earth. It's a report from man's farthest...
This frontier, the radio signal transmitted by the Soviet Sputnik, the first man... Made satellite as it passed over New York earlier today. -That created sort of a crisis in Washington. A lot of members of Congress, including Lyndon Johnson. Became very concerned that the Soviet Union was starting to overtake us in the space race. And so within a year they passed the first student loan program and that's really The government got into the business of student loans. They wanted more students to go to college to become scientists and engineers so that we could retake the lead in the space race. - That's so interesting that it was this idea of like, okay, we have to prepare Americans so that they can fight. This Cold War or participate in the space race or work on nuclear power. That was the driving force to make the government say, Hey, maybe we should fund people going to school.
I think this is a very important point. There was a debate back then as there is now about should everyone go to college. Eisenhower, who was a conservative, he really wanted to limit, you know, how many people would be covered under this program. He felt that education policy was the realm of the states, that Washington should have small role in helping people go to college. He wanted this to be a Targeted program to have maybe, you know, tens of thousands of people get access to loans to be able to go to college. And you know, the goal at this point, at least in his eyes was to specifically boost the ranks of scientists and engineers so that we could reclaim the lead in the space race in the Cold War as you say. But then you have the Democrats in Congress who wanted something much broader.
They felt that it should not just be a limited temporary program, but that if you were poor, if you were disadvantaged, regardless if you wanted to be a scientist. Or an engineer, you should have access to go to college. Why should college just be the realm of the middle or upper middle class? And so they... And so we passed this temporary program, but very quickly it expanded. And that discussion still goes on these days. So that program was called the National Defense Education Act. Can you tell us about how that works? So the National Defense Education Act is where Congress approved a lot of money that they gave directly to colleges and then the Colleges themselves could choose which students got loans. And the colleges were essentially loan officers.
They decided who needed the money, who should get the money, and so there was obviously a lot of discretion and there was a lot of subjective calls on the part of colleges about who got the money. And very quickly, a lot of people were saying, Well, I'm not going to do this. A lot of people started taking advantage of this program, or at least were trying to apply for loans on this program. And this became a very popular program. And colleges very quickly said to Congress, we don't have enough money. You need to approve more money because we have all these students banging on our doors. By 1965, there was this really big question hanging over Washington this whole debate that I just laid out really came to a head, which is, okay, Congress has already acknowledged that there should be some type of federal program to help Americans go to college. How vast should this program be? And so the 1965 hired
This is really the first time that basically Washington provided loans to students. So instead of giving money to... Colleges to give to students. This is where basically students started to gain direct access to loans backed by taxpayers to go to the college of their choice and this really empowered your average American high school student to now Have access to college. This was essentially a broad civilian GI Bill acceptance of grants it was loans. The 1965 Power Education Act relied on banks to make loans to students. Congress relied on banks to make loans and then if the student failed to repay the loan, Congress would quote-unquote guarantee the loan, meaning that Congress would step in and make the banks whole. They would repay the loan on behalf of the student and basically taxpayers would pay the loan.
Ultimately be on the hook for the loans. And the reason why this was done was because the accounting standards that Washington, that Congress used at the time, made a loan program look very expensive on the front end because any money that essentially went out the door On any given day was considered an expense. And so they decided if banks make the loans on the front end, that'll be quote unquote off the books, but will not show up on the federal budget. And then, you know, look on the back end of students' federal repay, Congress will come in and repay the banks on the behalf of the students. But guess what? That's not going to really be needed because, again, students are going to come out, get good jobs, and repay their own wealth.
So this is all kind of new. So again, you know, this was all under this rosy thinking that this is a win-win-win. Banks will make money. Congress can extend access to college essentially for free and students can ultimately pay it back because they're gonna get this big boost in their income. What were some of the holes? in that legislation though. Did it go smoothly or were there gaps or things that could have been improved upon at the time? First of all, one of the most important things to understand is that the Lyndon Johnson administration consider the risks that were inherent in running a national student loan program and in getting a lot of people into higher education.
What some of his advisors were saying, they really felt that going to college was like this risk-free, surefire investment. That if you went to college, you would automatically get a good education, good job, and that therefore, of course, you would be able to repay your loans because To this big increase in earnings. One of the flaws or one of the problems with the 1965 Higher Education Act is there probably wasn't enough consideration. To just how risky a college education can be. There just wasn't really a lot of guard rails that were created on the-- End of this to ensure that students, a lot of them who are perhaps naive, were not... Of spending loan money that they wouldn't be able to repay. - I wanna dig into something that's the bane of many people's existence and that's.
The young lady known as Sally Mae. - Sally Mae. - Sally Mae. Sally Mae. Sally Mae. Sally. Sally. Sally. Sally. Sally. Sally Mae. How did that institution come to be and what did that institution come to be? What exactly does Sallie Mae do, other than shake people down for repayment? So, Sallie Mae is a really, really interesting beast that was created by Congress in 1972. Congress had, when they created the student loan program, had said, Look, we will attach a 6% interest rate to student loans, meaning that once students come out of college, we will work... To pay the banks 6% interest on their loans. Now this at the time when it was passed seemed like it would make banks profit but as inflation rose...
In the late 1960s, 6% was no longer a high enough interest rate for banks to make profits. So banks kept on coming back to Congress and saying, Look, if you want us to continue to participate in this program and extend loans to students, you're going to have to give us a higher rate. Interest rate because otherwise we can spend our capital making homelucks and making more money. So Congress throughout the late 60s had to keep on raising the interest rate on student loans. And there would be like, you know, one crisis after the next. And so that's when in 1972, Congress said, look, we're tired of doing this haphazard raising interest. Here and there type of thing. Let's just create this new animal called Sally Nang. This is where I think Congress shot itself in the foot and created the monster.
They created under federal law a for-profit company that was essentially mandated to make profits. And then what it would do is it would take that very cheap money... That was essentially provided by the taxpayer, and it would buy loans off of the books of banks so that the banks could then use the proceeds to make even more... So this was essentially a fire hose that would spew all of this cheap taxpayer money into the banks and then the banks would then give that to students to spend at the would then give that to students to spend at the-- Colleges and then as soon as the banks made those loans then Sally May would then buy those loans from the banks Take them on their books and then the banks Would continue the process so that it was this cycle of taxpayer money being funneled through this opaque, complicated animal that no one really understood how it worked. It was ultimately backed
And so this leads to the next important facet of this beast that I'm describing. Who owns Sallie Mae? Sallie Mae's owners, its shareholders, was colleges and banks. So this is the private sector. I mean, this is like crony capitalism. It's the worst type of neoliberalism that I think you could ever dream up. Think about This from the school's perspective. Some of these were like really like prestigious schools that were charging high tuition, like some of the Ivy League schools like were owners of Sallie Mae. And so the These schools benefited from Sallie Mae in a very direct way, but also in an indirect way.
Benefited from Sallie Mae is that the more loans that Sallie Mae encouraged students to take on through this convoluted process, the shareholders directly profited. They directly got a cut of the profits from Sallie Mae each year. But then they benefited indirectly because schools had been wanting for years to raise tuition. And... The reason why they had for so long been infringed upon raising tuition is because families simply couldn't pay for it. Now families can pay for it because they can go to the local bank. And the local bank, by the 1980s, all they had to do was press the computer key and they would be able to extend a loan to students. All of a sudden now students just had like easy access to student loans. So the schools were now able to raise their prices pretty easily because all the student would have to do was just go to the local bank and get a loan.
So this is really when this like incestuous, profit hungry. profit hungry the industry started to spring up was shortly after Sallie Mae came to be. - When did we start to see the cost of school rise so much? So the 1980s are really when the era of skyrocketing college tuition starts, because that's really when several forces collided all at once to cause college tuition to all of a sudden explode, to start to rise at double or triple the rate of overall inflation. There were several things that happened. One was just the impetus to go to college really started to rise really quickly during this era. The US manufacturing sector started to rapidly decline. If you look at what happened in the 80s with wages, college graduate wages started to go...
Up above inflation around 4 or 5 percent whereas non-college graduate wages started to fall by 4 or 5 percent. So just economically speaking you can go into college really started to be an economic mandate if you were a middle class or even in the poor classes of the US basically this is when this concept of you have to At a college to succeed really started to take hold. But then on top of that, in the early 1980s, US News and World Report started to publish its famous college rankings. Ah, yes. So this became a really big deal because all of a sudden colleges. Particularly the schools that charge higher tuition, private colleges, prestigious public colleges. They really wanted to do what they could to. Who move up in the rankings. This became a game of prestige. And colleges, some of them concluded that one--
To do this was to actually charge higher prices. There was this theory that some of these college started to latch onto, which was based on a theory that had to do with consumers who buy Scotch whisky. The idea went like this, if you were an uninformed consumer who wants to buy Scotch whisky, you You go into a liquor store and you have no idea which brand is good. So you go with the more expensive brand because you assume that the more expensive brand brand is higher quality whiskey. So college. Started to apply this theory to college tuition. They started to think to themselves... Look, if we raise tuition, maybe families will assume that we're higher quality and we'll get more people to apply to our college. Of the presidents that I profile was the president of George Washington University, who in the late 80s, this is what he did. He said, Look, we're just going to randomly raise our
tuition one year by, you know, x percent. Let's see if more people apply. And surely enough, they did. And so, college. Started to raise their prices in order to get more people to apply which would them look more selective, and therefore that's one way to move up in the US News and World Report rankings. For the student loan crisis. I would say like we're planted in the 80s. What about the 90s? What changes did we see happen to student loans then? There was a big fight between the banking sector and the Clinton administration. For years Congress had had been complaining that the banking industry and Sallie Mae was making money hand over fist off of the taxpayer. And so this idea... Started to take hold among experts in Washington of why don't we just cut out the banks and let them go.
Just have the Treasury Department make loans directly to students because if we reform our accounting standards... We could do so in a way that won't make a loan program look so expensive on the front end. And so Congress reformed its accounting. It made the role of banks essentially obsolete. So Bill Clinton comes into office and he essentially proposes to kill off the bank participation in this program and just have the Treasury Department make loans. But the banks had a really strong lobbying force in Washington and Republicans in Congress who were their allies, as well as Democrats, by the way. Really fought any efforts by the Clinton administration to kill this bank-based program. So from the early 90s onward until the Obama years, you essentially had two loan programs. One was carried out by the banks and the other was carried out by the Treasury Department and it became a competition between these two taxpayer-backed programs. They both kind of competed with each other in terms of which students
Which schools borrowed from which program. And so this was a really big battle that took place over the next 20 years. After the break, where we are now when it comes to student loan debt and what the future could look like. Support for the weeds comes from hydro. Finding the time to exercise can be hard. With the Hydro Rower, finding time for a 20-minute full body workout can be a piece of cake. Hydro is a state of the art, low impact home rowing machine that's actually designed by rowers. To all fitness levels and their classes are taught by Olympians and world-class athletes alike. Eric Maxwell from the. Side of things here at Vox, got to try it out. Here's what he thought. The hydro definitely felt like a nice workout. It felt challenging, intuitive, it kind of felt natural without being...
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Ahead of us after graduation. I wanted to know how the Great Recession impacted the way we go to school and how we pay for it. Too. So you know, everything I just described was kind of like the was how the seeds were planted. And then it was really around 2007.
Or so that the actual student loan crisis really exploded. When the economy crashed in 2008, you had millions of people who were out of work. And unlike a lot of downturns, unemployment remained high even after the economy technically was in recovery. One of the main things that Americans did to cope with this historically weak, historically long weakness in the labor market was to go to college and graduate school. And so it kind of became like a mantra during this era that now is a good time to go back to school because obviously there aren't a lot of jobs available. You'll be able to get a better job. You'll have a boost to your income because you'll have all these new skills that you learned in college and graduate school. And so enrollment in higher education, whether it was two-year community colleges, whether it was four-year colleges, whether it was graduate school, exploded during this era.
And a lot of these students had to take on debt to go to college because prices over the past 30 years had risen at double and triple the rate of inflation. And so, you know, for the first time, you really had a lot of not just middle-class families take on debt who had traditionally been the biggest source of people taking on student loans that used to be middle-class families. families now you had what economists and researchers call Non-traditional families. And a lot of these families are from disadvantaged a lot of racial minorities, and a lot of people who go to, quote unquote, open enrollment schools. Well, all of a sudden... All these students who for whatever reason are at a really high risk of dropping out or are at a really high risk of not succeeding in repaying their loans because maybe the college itself was not a good college. All of these quote-unquote non-traditional students were taking...
On debt. And lo and behold, a lot of these people ended up defaulting on their loans. You had like hordes of people in part. Because they graduated into this weak recovery, even if they went to a good school, even if they studied something good, a lot of them weren't able to find a job because the labor market was still really weak. I hate to use the cliche perfect storm, but there really was like a perfect storm of factors here that caused the student debt crisis in the early 2010s. - Are there any changes to student loan policy from the Obama administration? T. You know, finally, after years of the Democrats in Congress trying to kill off the bank-based program, he succeeded in... Doing so as part of one of those bills that expanded health care coverage.
And Congress attached a provision that basically said the government is no longer going to use banks or Sallie Mae, we're now going to have the Treasury Department directly make loans. Now from a practical perspective that didn't really Change anything from the student's perspective, so to speak, because the loan program, the underwriting standards were roughly the same, whether it was the bank-based program or the direct loan program, but it also stopped profits from going to all these banks that had been profiting off of the student loan program. So that was a big change. I also want to fast forward and kind of talk about the... The pandemic era payment pause. I mean, it's early, but I'm interested. And how that shifted how we think about going and paying for college. And after about three years of not paying, it's gonna be hard for some people to go back. And I have friends who are straight up like,
Doing it, okay, consequences, my credit score takes a hit, I wasn't gonna be able to afford or buy a house anyway, what's the point, I'm not doing it. Like, I'm curious what you're thinking about looking at.
That pause and its aftermath. - I think ultimately the way policies have unfolded, they've ultimately benefited the colleges themselves. What I mean by that is increasingly over time, Congress has enabled students to pay more and more and more to go to college, regardless of their ability to repay. And the colleges have become very shrewd at understanding how this system works. And so they have increased their prices knowing that they won't face any consequences. And I think that there's a big risk with what's happened in the past few years over the pandemic to simply accelerate or strengthen that dynamic. And for people who might be skeptical or who might think I'm being overly cynical here, this is based on my reporting. These colleges have consultants. There's this cottage industry that exists
On how much down to the penny to charge each student to maximize how much they're charging. And then these colleges and these financial aid directors have increasingly been telling students in some cases, don't really worry about the balance because when you come out, you can enroll in this program called income driven repayment. And so the balance is becoming moot because you're just going to pay 10% of your income anyhow. And so my point is when you increasingly detach the cost of consumption or the cost of college from what students are actually paying, I think that that has proven to be a recipe. For higher and higher tuition. Because again these schools are learning that they can charge, they can continue Continue to charge exorbitant sums and they won't suffer any consequences because at the end of the day taxpayers
aka Congress, are just gonna come and pick up the tab. - Is there a solution here? Like, is there a viable way out of Congress? Crisis. Evenly distribute the risk here so that the risk doesn't just fall on taxpayers or it doesn't just fall on students but it actually falls on schools and I think ultimately because history can be a guide here you know Schools, when they have some skin in the game, are going to be more careful about how much they charge. Overcharge students. There was a national student loan program that was put in place in the early 60s prior to the government creating the national 1965 Student Loan Act and this was actually a private sector program. There were several CEOs of big corporations that had recognized even as college enrollment was increasing.
...that society in the United States needed even more college graduates so that these companies could get... War-skilled workers and strengthen their companies and strengthen the US economy. Decided to combine with banks and schools to put money into a pot that essentially served as an insurance fund. So this was essentially the federal student loan program before the federal student loan program and it was privately funded. And you had these Three parties, schools, banks, and companies, putting money into this fund, which-- And so this is how it worked. The banks would make loans to students, and if the student defaulted on the loan. For whatever reason, money would come into that pot to reimburse the bank at least partially. And so this-- The program actually worked pretty well if you consider that default rates were actually pretty low. And also a lot of people were starting to use it, so it was expanding.
One of the reasons why default rates were low is because schools had to be really careful about who they gave loan money out to because if the student defaulted, the schools would actually be on the hook for some of the money. To lose money, there was actually consequences. And so this is what I mean by like having proper incentives in place, schools actually had skin in the game and they were forced because of their own financial incentives to care for the wellbeing of their students after they left college. So, you know, this program was not a universal program, and this actually created some problems because, you know, for example, and I quote This is my book, Howard University, a really prestigious historic Quebec College in Washington, D.C. When Congress...
Was debating whether to create a national student loan program. One of the officials at Howard University was saying, look, you know, these banks are not lending to some of our students and needs it like this is not a universal program. And some of the students who actually need this money don't have access to it. So, you know, it's not that this program is perfect, but it was actually increasing access to higher education and the default rates were low. And so I think If you want to lower default rates, that's one way to go about doing this. You know, make sure that the schools themselves have some skin in the game because... Right now, schools really don't suffer consequences if they raise tuition to exorbitant amounts. And then there's this whole question of, okay, what happens to the students who might not have access to higher education under the... Program that I just described. And that's where I say in my book, there's a second possible component. Which is if the country decides that we should still provide universal access to higher education,
And to do that is to boost funding for public community colleges so that community colleges are free, so that people do have an avenue to continue their education, at least for time before taking on student debt where they are most likely to default. If we move away from this idea of you have to go to the most prestigious is college, the most expensive college, or else your career is doomed. I just don't buy into that. And part of that is from personal experience, but I just also think that going to in-state public schools is a great way to get a college education at a time. Cheaper price than going to some of these other schools. I don't want to say that you shouldn't go to a private school. So like ultimately that's everyone's personal choice. But I just want to emphasize that there are cheaper alternatives out there. Josh Mitchell, thank you so much. Thank you, I really appreciate it.
That's all for today! Thank you to Tatiana Mendez, Leah Littman, and Josh Mitchell for joining me. Our producer, Sophie Lalonde, Vince Fairchild engineered this episode, Serena Solon and Kim Eggleston fact checked it, our editorial directors, A.M. Hall, and I'm your host, John Glenn Hill. I'm John Glenn Hill. The Weeds is part of the Fox Media Podcast Network.
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Transcript generated on 2024-05-20.