Most everyone knows someone adversely affected by student debt: More than 40 million Americans are shouldering a crippling $1.3 trillion in loans.
That burden is obstructing careers, families, dreams, employment and even retirement.
Uncle Sam and Wall Street have made lots of money off the crisis.
We’ve covered this issue in many ways, including the debates, the players, tips for easing debt, how debt is affecting young people’s decision making and a lot more.
But how did we get here? Who has profited most and how?
The Center for Investigative Reporting and its weekly radio show Reveal recently dug deep into these questions and profiled people who’ve been affected. I reached out to CIR reporter Lance Williams, who co-investigated the story with journalist James B. Steel. Here’s an excerpt of our conversation.
Let’s talk about the student lending giant Sallie Mae. You report how the decision to privatize Sallie Mae in 1997 played a huge role in helping to create this debt crisis. Explain.
Sallie Mae was a government-affiliated corporation whose board was made up in part of public officials. When it first came into existence, it was supposed to help create a market for the student debt that the feds were issuing. But after privatization, it became a full-service, for-profit corporation that really “verticalized” its involvement in the student debt industry, everything from issuing loans to running collection bureaus. The concern now is we replaced a program whose real purpose was to help people go to college with something where that’s kind of a secondary goal. The primary goal, of course, for for-profit institutions is the bottom line.
Privatization of Sallie Mae was a key victory for banking and financial industry lobbyists when the Republicans controlled Congress in the mid-’90s, yes? President Clinton tried to maintain his new direct-lending program, which made Uncle Sam the lender — not just insurer — of the loans.
Yes. President Clinton wanted to take back the issuing of federal student loans. In the dust-up over that, he was forced to accept the privatization of Sallie Mae to get what he wanted. This was the [Newt] Gingrich Contract with America-era Congress. There was widespread suspicion that government can’t do things efficiently and we need to get the private sector to roll up their sleeves and make this stuff work, and that’s what we got.
Suddenly, hedge funds, investors, lots of banks had a more direct role, not just in lending, but in the fees, services, in the collection. And Sallie Mae and other financial organizations began marketing private loans with higher interest rates and fees and with fewer relief options?
Right. All of the functions of the student loan program originally were run by government agencies, bureaucrats, I guess you could say in a dismissive way, but they were not motivated by profit. They were there to make the program run. When you privatize collections, you get really aggressive companies that come in there and work really hard to get the money back. That’s totally understandable in the corporate context. But we started this trying to help people get educated and get on with their lives. And now you’ve got thousands upon thousands of students who fall behind on their debt harassed from dawn to dusk, hassled, pushed hard, and in some cases even when they aren’t in arrears on their debt, having to deal with all kinds of crazy stuff that’s really in the name of a government program.
[Note: In 2014, Sallie Mae spun off many of its operations into a separate company called Navient Corp., which today is the largest servicer of federal student loans and serves as a loan collector on behalf of the U.S. Department of Education.]
You write that in the three-year period 2010 to 2013, when students began to shoulder more and more debt, Sallie Mae’s profits were $3.5 billion. And the former CEO of Sallie Mae, Albert Lord, was instrumental in that. In your story, Lord says, “Look, it wasn’t the private lenders that made this mess.” He blames universities and the government. And universities, and state governments in particular, are not blameless here. Budget cuts led schools to raise tuition, and the debt burden widened. Doesn’t Lord have a point?
He does. There’s been tremendous disinvestment in public higher education in our country. It peaked in the 1970s. Our reporting showed that if state legislatures had continued to support higher ed at the rate they were in 1980, they would have pumped an additional $500 billion, billion with a B, into state university systems. Interestingly, that’s just about how much outstanding debt is now held by people who attended public colleges and universities. You see the symmetry. As the states disinvest, the burden is picked up by the students, and the way they pay for it is they borrow the money.