costs at public and private colleges were, are and have been rising
faster than just about anything in American society – health care,
energy, even housing. Between 1950 and 1970, sending a kid to a public
university cost about four percent of an American family's annual
income. Forty years later, in 2010, it accounted for 11 percent. Moody's
released statistics showing tuition and fees rising 300 percent versus
the Consumer Price Index between 1990 and 2011.
After the mortgage crash of 2008, for instance, many states pushed
through deep cuts to their higher-education systems, but all that did
was motivate schools to raise tuition prices and seek to recoup lost
state subsidies in the form of more federal-loan money. The one thing
they didn't do was cut costs. "College spending has been going up at the
same time as prices have been going up," says Kevin Carey of the
nonpartisan New America Foundation.
This is why the issue of student-loan interest rates pales in
comparison with the larger problem of how anyone can repay such a huge
debt – the average student now leaves school owing $27,000 – by entering
an economy sluggishly jogging uphill at a fraction of the speed of
climbing education costs. "It's the unending, gratuitous, punitive
increase in prices that is driving all of this," says Carey.
As Collinge worked to figure out the cause of those cost increases,
he became focused on several highly disturbing, little-discussed quirks
in the student-lending industry. For instance: A 2005 Wall Street Journal
story by John Hechinger showed that the Department of Education was
projecting it would actually make money on students who defaulted on
loans, and would collect on average 100 percent of the principal, plus
an additional 20 percent in fees and payments.
Hechinger's reporting would continue over the years to be borne out
in official documents. In 2010, for instance, the Obama White House
projected the default recovery rate for all forms of federal Stafford
loans (one of the most common federally backed loans for undergraduates
and graduates) to be above 122 percent. The most recent White House
projection was slightly less aggressive, predicting a recovery rate of
between 104 percent and 109 percent for Stafford loans.
When Rolling Stone reached out to the DOE to ask for an
explanation of those numbers, we got no answer. In the past, however,
the federal government has responded to such criticisms by insisting
that it doesn't make a profit on defaults, arguing that the government
incurs costs farming out negligent accounts to collectors, and also
loses even more thanks to the opportunity cost of lost time. For
instance, the government claimed its projected recovery rate for one
type of defaulted Stafford loans in 2013 to be 109.8 percent, but after
factoring in collection costs, that number drops to 95.7 percent. Factor
in the additional cost of lost time, and the "net" projected recovery
rate for these Stafford loans is 81.8 percent.
Still, those recovery numbers are extremely high, compared with, say,
credit-card debt, where recovery rates of 15 percent are not uncommon.
Whether the recovery rate is 110 percent or 80 percent, it seems
doubtful that losses from defaults come close to impacting the
government's bottom line, since the state continues to project massive
earnings from its student-loan program. After the latest compromise, the
10-year revenue projection for the DOE's lending programs is
$184,715,000,000, or $715 million higher than the old projection –
underscoring the fact that the latest deal, while perhaps rescuing
students this coming year from high rates, still expects to ding them
hard down the road.
But the main question is, how is the idea that the government might
make profits on defaulted loans even up for debate? The answer lies in
the uniquely blood-draining legal framework in which federal student
loans are issued. First of all, a high percentage of student borrowers
enter into their loans having no idea that they're signing up for a
relationship as unbreakable as herpes. Not only has Congress almost
completely stripped students of their right to disgorge their debts
through bankruptcy (amazing, when one considers that even gamblers can
declare bankruptcy!), it has also restricted the students' ability to
refinance loans. Even Truth in Lending Act requirements – which normally
require lenders to fully disclose future costs to would-be customers –
don't cover certain student loans. That student lenders can escape from
such requirements is especially pernicious, given that their pool of
borrowers are typically one step removed from being children, but the
law goes further than that and tacitly permits lenders to deceive their
Not all student borrowers have access to the same information. A 2008
federal education law forced private lenders to disclose the Annual
Percentage Rate (APR) to prospective borrowers; APR is a more complex
number that often includes fees and other charges. But lenders of
federally backed student loans do not have to make the same disclosures.
"Only a small minority of those who've been to college have been told
very simple things, like what their interest rate was," says Collinge.
"A lot of straight-up lies have been foisted on students."
Talk to any of the 38 million Americans who have outstanding
student-loan debt, and he or she is likely to tell you a story about how
a single moment in a financial-aid office at the age of 18 or 19 – an
age when most people can barely do a load of laundry without help –
ended up ruining his or her life. "I was 19 years old," says 24-year-old
Lyndsay Green, a graduate of the University of Alabama, in a typical
story. "I didn't understand what was going on, but my mother was there.
She had signed, and now it was my turn. So I did." Six years later, she
says, "I am nearly $45,000 in debt. . . . If I had known what I was
doing, I would never have gone to college."
"Nobody sits down and explains to you what it all means," says
24-year-old Andrew Geliebter, who took out loans to get what he calls "a
degree in bullsh*t"; he entered a public-relations program at Temple
University. His loan payments are now 50 percent of his gross income,
leaving only about $100 a week for groceries for his family of four.
Another debtor, a 38-year-old attorney who suffered a pulmonary
embolism and went into default as a result, is now more than $100,000 in
debt. Bedridden and fully disabled, he accepts he will likely be in
debt until his death. He asked that his name be withheld because he
doesn't want to incur the wrath of the government by disclosing the
awful punch line to his story: After he qualified for federal disability
payments in 2009, the Department of Education quickly began garnishing
$170 a month from his disability check.
"Student-loan debt collectors have power that would make a mobster
envious" is how Sen. Elizabeth Warren put it. Collectors can garnish
everything from wages to tax returns to Social Security payments to,
yes, disability checks. Debtors can also be barred from the military,
lose professional licenses and suffer other consequences no private
lender could possibly throw at a borrower.
The upshot of all this is that 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 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 bullsh*t." 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.
But that's not how it is. For one thing, the check on crappy schools
and sleazy "diploma mill" institutions is essentially broken thanks to a
corrupt dynamic similar to the way credit-rating agencies have failed
in the finance world. Schools must be accredited institutions to receive
tuition via federal student loans, but the accrediting agencies are
nongovernmental captives of the education industry. "The government has
outsourced its responsibilities for ensuring quality to weak, nonprofit
organizations that are essentially owned and run by existing colleges,"
Fly-by-night, for-profit schools can be some of the most aggressive
in lobbying for the raising of federal-loan limits. The reason is simple
– some of them subsist almost entirely on federal loans. There's
actually a law prohibiting these schools from having more than 90
percent of their tuition income come from federally backed loans. It
would seem to amaze that any school would come even close to depending
that much on taxpayers, but Carey notes with disdain that some schools
use loopholes to go beyond the limit (for instance, loans to servicemen
are technically issued through the Department of Defense, so they don't
count toward the 90 percent figure).
Bottomless credit equals inflated prices equals more money for
colleges and universities, more hidden taxes for the government to
collect and, perhaps most important, a bigger and more dangerous debt
bomb on the backs of the adult working population.
The stats on the latter are now undeniable. Having passed credit
cards to became the largest pile of owed money in America outside of the
real-estate market, outstanding student debt topped $1 trillion by the
end of 2011. Last November, the New York Fed reported an amazing
statistic: During just the third quarter of 2012, non-real-estate
household debt rose nationally by 2.3 percent, or a staggering $62
billion. And an equally staggering $42 billion of that was student-loan
The exploding-debt scenario is such a conspicuous problem that the
Federal Advisory Council – a group of bankers who advise the Federal
Reserve Board of Governors – has compared it to the mortgage crash,
warning that "recent growth in student-loan debt . . . has parallels to
the housing crisis." Agreeing with activists like Collinge, it cited a
"significant growth of subsidized lending" as a major factor in the
One final, eerie similarity to the mortgage crisis is that while
analysts on both the left and the right agree that the ballooning
student-debt mess can be blamed on too much easy credit, there is sharp
disagreement about the reason for the existence of that easy credit.
Many finance-sector analysts see the problem as being founded in
ill-considered social engineering, an unrealistic desire to put as many
kids into college as possible that mirrors the state's home-ownership
goals that many conservatives still believe fueled the mortgage crisis.
"These problems are the result of government officials pushing a social
good – i.e., broader college attendance" is how libertarian writer
Steven Greenhut put it.
Others, however, view the easy money as the massive subsidy for an
education industry, which spent between $88 million and $110 million
lobbying government in each of the past six years, and historically has
spent recklessly no matter who happened to be footing the bill –
parents, states, the federal government, young people, whomever.
Carey talks about how colleges spend a lot of energy on what he calls
"gilding" – pouring money into superficial symbols of prestige,
everything from new buildings to celebrity professors, as part of a
"never-ending race for positional status."
"What you see is that spending on education hasn't really gone up all
that much," he says. "It's spending on things like buildings and
administration. . . . Lots and lots of people getting paid $200,000,
$300,000 a year to do . . . something."
Once upon a time, when the economy was healthier, it was parents who
paid for these excesses. "But eventually those people ran out of money,"
Carey says, "so they had to start borrowing."
If federal loan programs aren't being swallowed up by greedy schools
for expensive and useless gilding, they're being manipulated by the
federal government itself. The massive earnings the government gets on
student-loan programs amount to a crude backdoor tax increase disguised
by cynical legislators (who hesitate to ask constituents with more
powerful lobbies to help cut the deficit) as an investment in America's
"It's basically a $185 billion tax hike on middle-income and
low-income citizens and their families," says Warren Gunnels, senior
policy adviser for Vermont's Sen. Bernie Sanders, one of the few
legislators critical of the recent congressional student-loan