The federal government's role in causing and fixing the student debt crisis

President Biden is toying with the idea of student loan forgiveness.

Loan forgiveness is politically popular in some corners. But it's also an action that does nothing to solve the actual problem of why student debt is so high to begin with.

"Colleges can set the price, knowing that the government is just going to give their customers, the student, a blank check to pay for that price," the Wall Street Journal's Josh Mitchell says.

"And so not only is there no incentive under this current system for colleges to keep the prices in check, there's actually every incentive for them to raise the prices."

Today, On Point: Beyond loan forgiveness. The federal government's role in causing and fixing the problem of high student loan debt.

Josh Mitchell, Wall Street Journal reporter, covering the U.S. economy. Author of The Debt Trap. (@JMitchellWSJ)

Beth Akers, economist studying higher education and labor markets. Senior fellow at the American Enterprise Institute. Author of Making College Pay: An Economist Explains How to Make a Smart Bet on Higher Education. (@DrBethAkers)

Rep. Ayanna Pressley, Democratic representative for Massachusetts' 7th Congressional District. (@AyannaPressley)

MEGHNA CHAKRABARTI: Today ... we want to talk about solving actual problems for the future. And what, if anything, the federal government, both holder and backer of this mountain of debt, can proactively do to solve the student loan debt crisis. And joining us to talk about that is Josh Mitchell. Mitchell is a reporter for The Wall Street Journal. … Josh, welcome to On Point.

JOSH MITCHELL: Yes, hi. Thanks.

CHAKRABARTI: I firmly believe that to understand best where we should be going, we need to have a clear understanding of where we have been. So let's sort of do a speed course in student loan and federal loan history here. And we're going to start back in the Johnson administration.

So when President Lyndon Johnson signed the Higher Ed Act of 1965, he was out at Southwest Texas State Teachers College in San Marcos, Texas, the school he had attended, by the way. And which he credited with helping him escape the crushing poverty of his upbringing. Here is what he said.

LYNDON JOHNSON [Tape]: Here are the seeds we're planted from which grew my firm conviction that for the individual, education is the path to achievement and fulfillment. And for the nation, it is a path to society that is not only free, but civilized. 

CHAKRABARTI: So, Josh Mitchell, we already had the GI Bill, but what did LBJ do in 1965 that further expanded the federal government's role in financing higher education?

MITCHELL: Well, he convinced Congress to create what we now know as the Higher Education Act, and the main student loan program. And basically, he put the loan program on a path toward becoming an entitlement. So basically, everyone who wanted to go to college and needed help going to college would now have access to student loans.

And there would essentially be no underwriting. Meaning you didn't really have to qualify. You didn't have to have a certain academic background or a certain income background. You could qualify for a loan if you were of college age. And so this really became an entitlement.

CHAKRABARTI: An entitlement. Okay. I could also phrase it as an expansion of access to higher education that was critical for the continuing development of the United States. And as Johnson himself in that clip pointed out, pulling people out of poverty. But what happens by the time the 1970s roll around? Was the system working the way LBJ had hoped it would?

MITCHELL: No. And so LBJ again wanted banks to make loans to people who needed money. And banks were having trouble doing so, in part because just as we're going through a lot of inflation right now, inflation was becoming an issue back then. And banks were essentially saying, If you want us to make loans to students, Congress is going to have to give us money to do so. They're going to have to give us higher interest rates on these loans so that we can turn a profit. Otherwise, we're not making enough profits in this inflationary environment.

So this is when in the 1970s to solve this problem, to further entice banks to make loans to students, Congress created Sallie Mae. Which was a so-called quasi-public agency. It was a for-profit company that was overseen by Congress. And it was essentially a vehicle where the Treasury Department infused Sallie Mae with taxpayer money. And then Sallie Mae gave that money to banks and schools to make loans to students. And I argue in my book that this is really when higher education kind of became a big for-profit business.

If you've ever wondered how colleges went from being a so-called public good to this big industry that makes money, this is really when it happened. Because, again, Congress set this up to be so, a for-profit company. And by the way, Sallie Mae's shareholders were colleges and banks.

So colleges benefited from this new student loan system in two ways. Not only did their students now have access to loans, which made it easier for colleges to raise their prices on students. They also got some of the direct profits every time that happened. And so by the eighties, this whole system started to really ramp up. And this is, again, when profits became intertwined with higher education.

CHAKRABARTI: So just to emphasize what you said, because Congress designed Sallie Mae to be this way, and this happened under the Nixon administration?

MITCHELL: Yes.

CHAKRABARTI: Okay, then that's where the profit motive essentially becomes a major factor here in the federal financing of higher education. So that's the 70s, moving into the 80s. And sort of the massive ballooning of Sallie Mae. Then I'm really fast forwarding through a lot here. Because is it fair to say that the next great sort of federal act regarding higher education is in the early Clinton administration? Or is there something during Reagan and George H.W. Bush that we should touch upon here?

MITCHELL: Yeah. So Reagan was crucial. And the Reagan era was crucial because there were a lot of things going on. The first thing that happened was there was a deep recession in the early eighties, and when the country came out of that downturn, businesses really started to invest in technology. The computer age came to be. And so this era of globalization started to take hold, which meant that if you were a worker who had gone to college, your wages were going up. Because workers with skills in this new globalization environment were being paid a lot. Employers were looking for highly skilled workers.

Meanwhile, workers who did not go to college, a lot of workers who worked in manufacturing, for example, their wages were going down. And so the so-called college wage premium, the difference of what college graduates make versus non-graduates. It was the 80s when that really started to increase. And so what that meant was you all of a sudden had all of these families in the 80s and 90s that felt this economic imperative to go to college and graduate school, and they were just pounding on the doors of schools.

Now, coupled with that, that is when loans really started to come into play. Because like I said, Sallie Mae was created in 1972. But it wasn't until the 80s that Sallie Mae and the Education Department, or the federal government, really started to learn how to run this program, and in a way that banks were paid on time. And so it became a really efficient operation. And so just at a time when all of these families were seeking to go to college, students were seeking to go to college. The federal Education Department and banks and Sallie Mae were making it extremely easy for these students to get access to loans.

And that's when schools started to raise their prices in response. You had more people going to college. You had more people with more money through loans to go to school and pay the price of going to college. And if you look at a chart of when tuition really started to pick up, it was right around this time. And by the way, this was also when President Reagan was really emphasizing this idea of, You should pay your own way, individual responsibility. And paying for college as the burden of the household. It's not necessarily the federal government's responsibility to pay for college. Students should do it themselves through loans.

CHAKRABARTI: Okay. So we go from Reagan through George H.W. Bush and then comes Bill Clinton, because he's looking at the situation that you described, Josh, and then the would-be president is saying, Well, there's got to be a way to get a handle on this problem. So here's Clinton in 1992 at a campaign stop in Las Vegas outlining the new direction he wanted America to go in. He told the crowd there that there was one proposal, more than any other, that symbolized what that new direction was all about.

BILL CLINTON [Tape]: And that is our program to open the doors of college education to all Americans. We proposed to replace the wasteful student loan program with a national trust fund, out of which any American can borrow the money to go to college and then pay it back. Either as a small percentage of their income after they go to work, or even better, by giving a couple of years of service to our country before or after college.

You think about it. Without a government bureaucracy, we could solve the people problems of America from the grassroots up and educate a whole new generation of Americans. It would be the best investment this country ever made.

CHAKRABARTI: Bill Clinton, then candidate in a 1992 Las Vegas campaign stop, talking about what would become the direct loan program.

CHAKRABARTI: … We started with LBJ expanding the use of the federal government to help finance education for America, talking about inflation in the 70s, that bringing on Congress' creation of Sallie Mae in 1972, that quasi-public institution that was run by banks and universities who also then could profit from student loans. And then the college degree premium, which you accurately described in the 80s, and the rush for many more American families to want to send their kids to college.

And that forming kind of seems like what you were describing as a positive feedback loop between tuition rate rises and the amount of debt that students were taking on. Then we get to 1992 and Clinton, who then becomes president, wanting to create the direct loan program. It was created. And how did it differ from what had come before?

MITCHELL: Okay. So up until that point, banks had been making loans to students. And this was really a way for the government to provide loans without making the program look expensive because it was, quote unquote, off the books. And Bill Clinton said, Look, this doesn't make sense. Let's just have the Treasury Department directly make loans to students. Let's cut the banks out of the process. We'll save a lot of money for taxpayers that way. And also, we'll give students access to this new repayment plan called income based repayment, which basically is a form of insurance.

It basically means that if you go to college and you don't end up making a lot of money afterward, but you have all this debt, you could just pay a share of your income. And so that your monthly payments will always be commensurate with how much you're earning. If you earn a lot, then you pay a lot back. If you earn little, then you don't pay much back as a form of insurance. So the banks really fought back. But the banks and Sallie Mae really fought hard to keep this program in place. And so there was a compromise that Congress worked out where suddenly there were two loan programs and students had access to both.

And so that led to 20 years of fighting between these two programs who were both backed by taxpayers but competed against each other. Meanwhile, this income based repayment plan, Congress approved it. But the terms weren't quite that good. So a lot of students did not enroll in it. It was set out that you could pay 15% of your income, for example, if you used the program that Bill Clinton created.

But not a lot of students ended up using that. Because the bank-based program started to work with schools to convince students to do that program. So long story short is that President Clinton had this great vision to help students with their loans, but there were a lot of problems that came to be. And a lot of students didn't have access to that.

CHAKRABARTI: Okay. So and like you said, it kicked off this long running battle. But the battle was intense from the start. Right, because it was, what, 1994, 1995, that the Republican controlled Congress had proposed to cut the direct loan program entirely. I mean, what was their argument? Did they have an argument saying it was costing the federal government too much? I mean, what were they saying?

MITCHELL: So the argument from the banks was this administration, or any administration, is not going to be able to efficiently run a bank. And that's basically what President Clinton wanted the Education Department to be, was essentially a consumer bank. And so the bank said, Look, the private sector knows how to run these things. We can run it smoothly. So we should stay in the program. And so again, you just had this fight between these two programs for the next 20 years until Barack Obama comes into play, which I'm sure we'll get to at some point.

CHAKRABARTI: So just to be clear, though, again, that the federal government was giving loans directly through the direct loan program and subsidizing the loans from Sallie Mae.

MITCHELL: Right. So what would happen is the school basically, this is where it gets interesting. The school was basically deputized by the Education Department to manage these two programs. So if you went to college, you would go to your financial ... aid adviser and they would steer you to one of these two programs. And so later on, one of the things that ended up happening was some of these banks were accused of basically offering kickbacks to schools to use the bank based program as opposed to Bill Clinton's program.

But the school, and this is where I think it became easy for schools to raise their prices. The school would advise the student and still does, on which loans they can get access to, which programs they can get access to. And the school is essentially, you know, providing these students the blank check, even though the school doesn't have to put up its own money.

CHAKRABARTI: Uh huh. Okay. So I'm going to stick with the mid-90s here for a second because it is fascinating. In '94, '95, Bill Clinton continues to make this argument that he believes that the federal direct loan program is better for students, schools, and he says it cost taxpayers less money. But here is the view from the GOP. This is in 1996.

Then-House Republican Congressman John Kasich of Ohio was talking at a press conference in '96. And at the time, Congress and the White House were debating the details of the next year's budget. And as we were talking about, the previous year, there had been that vigorous debate between the GOP and the Clinton administration about the federal direct loan program. So in 1996, Republicans proposed actually a 42% increase in funds available for student loans.

JOHN KASICH [Tape]: But I really want to make a comment to the mothers and fathers and the students that may see this show. I think, frankly, you ought to be asking the presidents of these colleges and universities why their costs are absolutely out of control. And I really I think we better all come to terms with the fact that even a 42% increase, frankly, is not enough to keep up with an education program whose costs are running at inflation levels far above everything else in our society.

CHAKRABARTI: John Kasich in 1996 there. Now, look, we could spend 100 hours talking about why costs have gone up so much in higher ed. And of course, we're touching on that a little bit this hour, Josh. But the fact is, is that as far back as 1996, John Kasich and others were raising this question of like, We could give billions more dollars in federal funding. But that still wouldn't answer the question of why costs are out of control. So let's continue our history sprint here, and move forward to the Obama administration. Because the date that stands out to me, and correct me if I'm wrong, is 2010. Is that where we should look at for Obama?

MITCHELL: Yes and no. So Obama,  his first speech to Congress, after taking over the White House. He basically said he wanted everyone to commit at least one year to higher education. So he doubled down on this idea that college is the path to a good job and that everyone should pursue it. So I think it's really important to actually start there.

CHAKRABARTI: Hmm. Okay. And why, though? Is it because if further increased that college degree premium that you were talking about the first emerges in the 80s?

MITCHELL: ... One of the things I ask people who have student loans, both the students and the parents themselves, why did you sign on the dotted line to take out so much debt that you're now struggling to repay? Help me understand what your thinking was. And they all invariably said, especially the parents, they said, My kid came home and told me to sign this document or I won't be able to go to college. And why would I ever deny my child the opportunity to make something better of themselves?

College is the key to the middle class in the United States. And if they don't go to college, then they're not going to make something of themselves and they'll never make enough money to live a good lifestyle. And so the reason why I say it's important to start with Obama's first speech is one of the big reasons why so many families have gotten into so much debt, is because they've had this faith in higher education as being not just a good investment, but an investment that they need to make in order to make something of themselves in the United States.

CHAKRABARTI: ... I do want to just touch one more historical moment. And then that will give us this very significant background of the federal government's constant role here in getting us to where we are, that $1.7 trillion of student loan debt. Because I'm thinking perhaps another significant moment is 2010, right, when President Obama signed the Health Care and Education Reconciliation Act of 2010. And that act, it ended the federal government subsidizing of banks and other institutions who were issuing student loans, and furthered the direct borrowing program. Is that right?

MITCHELL: Right. So, again, just to recap, there are these two programs that were competing against each other, the bank based program, the direct loan program. President Obama comes in, says we are going to end the bank based program that's going to save taxpayers, according to the math at the time, $60 billion over ten years.

Part of that funded the Affordable Care Act, but it didn't really change anything from the student's perspective. Because, you know, whether you were using the bank based program or the student loan program, it was still, again, for lack of a better term, an entitlement program. You know, you are guaranteed access to loans if you met minimum basic requirements. And so from the student perspective, it didn't really change much. But from the taxpayer's perspective, it was designed to save money.

Wall Street Journal: "The Long Road To the Student Debt Crisis" — "The U.S. student loan system is broken. How broken?"

Manhattan Institute: "Ideas for the New Administration: Higher Education" — "Higher education took center stage during the Democratic presidential primaries, and congressional leaders in the party are calling for universal student loan forgiveness and tuition-free public college."