College Student Loans: From Whence to Where?
By Greg Ganske
April 7, 2024
A recent “Tuition Madness” bracket for the NCAA basketball tournaments listed the schools’ 4-year costs in the pairings. The range was from $66,000 for Green Bay to USC’s $374,000. In general, state universities were in the $115,000 range while the private colleges and universities averaged around $300,000.
Of course, some students at each of these colleges receive student aid or scholarships that help cut the cost. Nevertheless, the cost of a college education has far outstripped inflation by factors of 5 or more in inflation- adjusted dollars. Colleges and Universities have grown so used to annual 4% or higher increases in tuition that when a university like Purdue keeps its instate tuition under $10,000 for twelve straight years, people want to know how that is possible.
So how did we arrive at today’s burgeoning college costs and resultant college debt problem and how do we fix it?
Sometimes the best intentions go awry. Education is terribly important in this competitive global world personally, nationally and internationally. Higher education helps many attain all that they can be, contributes to the national weal, and helps our country to compete in a global economy.
The beginning of federal college loan assistance had its start in President Johnson’s Great Society with good intentions to wipe out racial injustice and raise people out of poverty. Yet, this laudable goal carried with it the seeds of the current debt crisis for many. More than 40 million Americans now bear $1.3 trillion in debt, an average of $30,000.
We should keep in mind that the vast majority of those with college loans are repaying those loans but that about 3 million borrowers have defaulted (7%) and the rates of default can reach 50% for some for-profit colleges.
Nevertheless, the press is replete with stories of people being slaves to their college debt. While not defaulting, their debt is altering lives, relationships like being able to afford getting married, ability to own a home, and even retirement. By law federal loans can’t be erased by bankruptcy and the federal government has ways to collect on its loans through deductions from tax returns, garnishments on wages, and deductions from social security. Unless something is done to prevent and fix this problem some face the prospect of paying on their federal college loans until they die (although if one makes 240 payments on income-driven IDR loans they are forgiven).
As the cost of a college education has exploded, a college degree is still seen as a necessity for a competitive role in today’s economy. A Georgetown study estimates that two-thirds of jobs require more than a high school degree. At the same time, Business Insider reports that the return on this investment has fallen and that the 40% of kids who don’t graduate are left with no return, only the debt.
The possibility of federal student loan forgiveness grabs the headlines, but experts say that no single policy is going to solve the problem in the long run, not even wiping the slate clean for millions of borrowers. There is no $1.7 trillion silver bullet. I wrote a previous op-ed on this topic, “Biden’s College Loan Forgiveness is Unfair, Unconstitutional and Unwise” predicting that the Supreme Court would rule that Biden’s executive order on college loans was unconstitutional and also why it was unwise. Since then, Biden has tried to skirt the ruling.
President Nixon expanded Johnson’s 1965 student loan program by private lenders and guaranteed the loans by creating a quasi-government agency, the Student Loan Marketing Association, otherwise known as Sallie Mae, to increase the amount of money available for student loans. Banks loaned to students, Sallie Mae bought the loans from the banks, then flooded the banks with cheap cash, and used the student loans as collateral.
Two federal initiatives in the early 1990s spurred student borrowing. The 1992 reauthorization of the Higher Education Act broadened eligibility for subsidized federal loans, increased annual loan limits and formed a new unsubsidized student loan program available to anyone regardless of income.
The concern over the burgeoning college debt is not new. When Congress was balancing the budget and paying down national debt from 1995 through 2000, we introduced a modest proposal to eliminate the interest subsidy that the government was paying on student loans while the borrowers were in college. This would have saved the government $2,2 Billion.
We thought that everything had to be on the table if we were going to be serious about debt reduction. The higher education establishment went ballistic.
This did not mean the GOP Congress was not sympathetic to the rising costs of a college education. We renewed the Higher Education Act to cut the interest rate on student loans to its lowest level in 17 years. In addition, we provided $40 billion in tax breaks over 5 years to help students and their families pay for college while also increasing federal spending on Pell Grants for the poorest students and College Work Study Programs to record levels. In the 8 years I was in Congress federal education spending increased 70 per cent.
We differed with President Clinton on whether the federal government itself should do direct lending with longer pay back times. Critics argued that this would lead students into more interest and even more debt. Also, the Department of Education had no experience in administering such a huge expansion of responsibility. Competition between lenders would go out the door. Clinton wanted to eliminate the middleman; Sallie Mae and the banks couldn’t compete with the federal government offering lower rates than the banks which had to make some profit.
To keep his government program, Clinton agreed to privatize Sallie Mae. As a private company now listed on the stock exchange, Sallie Mae could buy other companies and make its own loans not guaranteed by the federal government at higher rates. There are maximums on the amounts of federally guaranteed loans that can be purchased by individuals (to reduce government cost exposure).
Sallie Mae could then make additional loans to students who had maximized their subsidized loans. Sallie Mae consolidated the array of services that had been done by different government agencies and contractors such as collecting premiums and penalty fees. Free of government control it became the dominant player.
Sallie Mae paid college financial loan officers to serve as consultants. For instance, a New Jersey agency was paid $15 million to steer business to it. Sallie Mae placed employees in university call centers to field questions from students who thought they were getting advice from college loan officers.
By 2007 the direct loan program had declined more than 40 percent. The universities loved this as it was providing more students who could pay for increasing college costs. Many invested in Sallie Mae and made huge returns as Sallie Mae’s stock shot up like a rocket. Sallie Mae’s CEO said that the universities were as much their customer as the students.
Then came the 2008 financial crisis, and Sallie Mae’s stock dropped like a rock. Schools like Northwestern University and many of the Ivy League schools lost $millions on their investments in Sallie Mae.
In 2010 Congress and President Obama, as part of the legislation authorizing the Affordable Care Act, eliminated the Federal Family Education Loan Program (FFELP) which enabled banks to issue federally assured loans. The federal government was now the only player in the direct loan business. Today Sallie Mae only provides private loans.
About 90% of student loans are now backed up by the government, while the rest are private loans by banks and companies. Private contractors like Navient, a former Sallie Mae subdivision, collect fees to administer the federally backed loans.
Student loan bearers have been given a respite from repaying their loans during Covid. This has cost the federal government about $5 billion per month. Collection activities will resume in September. A wise borrower would have used the moratorium on interest to pay down as much principle as possible. One can only hope that at least some took advantage of this.
Back in 1987 then-Secretary of Education Bill Bennett argued that “increases in financial aid in recent years have enabled colleges and universities to blithely raise their tuition, confident that Federal loan subsidies would help cushion the increase.”
The higher education establishment vigorously denied this, but a 2017 study from the Federal Reserve Bank of New York found that the average tuition increased 60 cents for every additional dollar of loans Administrators salaries rise (not so many professors). bureaucracy greatly expands, more courses are offered, and dorms, dining halls, and recreation centers become lavish.
The former CEO of Sallie May, now on the board of Penn State, had an epiphany, “Colleges are incredibly inefficient businesses, and the student loan program enabled them.”
Colleges complain that the reason they’ve had to raise their tuition so much faster than inflation is because state governments under the pressure of increased health costs like Medicaid have cut back on their support.
While it is true that states support of state institutions has gone from about 50% to about 30% of tuition, an article in the New York Times claims that is misleading. From 1960 through 1980 public funding for higher ed increased by 309% and that more recent cuts are more like a correction than an abandonment of support for the importance of higher education.
This reminds me of the arguments that constituents made when we in Congress were balancing the budget in the second half of the 1990s. Constituents claimed that we were “cutting” when we were slowing the rate of growth while still appropriating more money each year.
The New York Times article made the same point, “It is disingenuous to call a large increase in public spending a “cut,” as some university administrators do, because a huge programmatic expansion features somewhat lower per capita subsidies. Suppose that since 1990 the government had doubled the number of military bases, while spending slightly less per base. A claim that funding for military bases was down, even though in fact such funding had nearly doubled, would properly be met with derision.”
There are ways as outlined in a WSJ article by Purdue resident emeritus Mitch Daniels to hold tuition increases steady. It isn’t any one big thing but a constant commitment to watch spending, to develop efficiencies and to be prudential.
I am not advocating a return to the 1970s spartan World War II era Quadrangle dorm at the University of Iowa with its linoleum floors and locker room showers that I lived in as an undergrad, but facilities are much more lavish than necessary and don’t increase learning.
Instead, colleges could sell a competitive lower total cost instead of a fancy dorm room as has Purdue. Students flock to Purdue.
Colleges are now competing for a dwindling college age population and entice them to enroll for the nicest college experience possible. They then raise tuition and dorm rates to pay for these luxurious amenities while paying 60% increases for administrators with higher salaries than the professors. This is Amenity Madness!
Members of the resulting debtor class talk about how easy it was to borrow for college and how no one–not even their parents–warned them of the risk they were assuming. Colleges assured them that everyone had loans. There was little talk about how they would pay back their loans based on probable future earnings for their particular majors.
Somehow colleges must have some skin in the game for their students to repay their loans. Maybe the college or university loses some of its state and federal funding for higher rates of graduates not repaying their loans? That way, they might not push loans so readily to students with debt beyond their ability to ever repay.
One emerging private lending solution to get Colleges involved is income-sharing agreements. Students get financing from their schools and pay it back based on a percentage of the income after graduation. Their monthly payments would be lower when their income is lower, or they could pay them off quicker when their income is higher. Employer sponsored repayment programs could ease the debt burden.
The Federal government similarly should put stricter limits on the amount of loans they will issue to a student based on likelihood of repayment. Both the federal government and universities need to act more like banks do in making home and auto loans. Banks look at income, credit ratings, assets and statistically decide whether they can take on the risk of default. The federal government and colleges need to do the same.
In a sense, the attention the college loan debt problem has generated in the press has focused students and their families on the long-term consequences of too much debt. We need improved financial literacy of borrowers. My daughter, Briget Ganske, mentored a Royal Oak, Michigan high school group in creating a video for PBS Nightly News Hour Student Reporting Lab in which they discuss going to college, how to pay for it, and how their decisions are affected by future ability to repay college loans. With higher education costs soaring and the perception that college is no longer the guarantee to financial advancement it once was, more parents and young adults are considering alternative paths post high school.
Currently there are income-driven repayment plans of the federal government in which loan repayments are set as a portion of a borrower’s income. The four current income driven options and the three federal repayment plans could be streamlined into one. Borrowers close to defaulting would be automatically enrolled.
Pell Grants are subsidies to students with exceptional financial need. These grants help students with the least financial resources. The current maximum of about $6900 should be increased which would focus federal assistance on the most needy. These are grants, not loans.
Another way to reduce loan costs would be to reduce interest rates on federal loans. The rates are set each year based on the 10-year auction rate for Treasury notes and “other factors.” Currently the student loan rate is 5.05% while the ten-year treasury note is 4.2%. A 1% difference is significant over the length of a college loan.
Reducing the national debt and lowering interest rates is crucial to lowering the ten-year treasury rate. One of the reasons, besides the inequity of making non college grads pay for the loans of those who go to college, for not writing off significant amounts of college loans is the added deficit spending that increases debt and inflation thus raising the ten year note interest.
Canceling debt is just not fair to those who choose not to go to college or those who have faithfully paid off their debt because they then have to pay for it in the form of inflation. Besides, the vast majority of current outstanding college loans will be repaid and losing those payments would be a real hit to the budget.
The best way to reduce the debt and rising college cost problem is to avoid the loans in the first place. A credit hour at Des Moines Area Community College (DMACC) costs half as much as the state universities. There are even cheaper on-line courses at DMACC. Attending a community college for two years allows the student to save on room and board by living at home. After two years the student can then transfer those credits to a 4-year college saving more than half of the expense rather than starting at the university.
The history of college loans shows that both political parties have wanted to help students go to college. Those college loans have made it possible for many to pursue their dreams.
However, these best intentions need some correctives now as the size of the national student loan debt has grown so much. This will require individual realistic assessment of the benefit of adding personal debt, colleges to be part of the solution, and the government to offer ways to help those who need it the most.
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Greg Ganske, MD, Member of Congress (ret), is a retired surgeon who cared for women with breast cancer, children with cleft lips, farmers with hand injuries and burn patients. He served in Congress representing Iowa from 1995-2003.
Comments 24
I went to Rutgers back in those austere ‘Spartan’ 70s. I only spent one year in the dorm and lived home [rent free -thanks Mom & Dad] and commuted by bus and train to school the last three, while working a 2nd shift full time for most of it. I took every loan I could get, but banked most of it in a MMF in the double-digit interest years while paying everything I could out of hand. Total cost was about $9,600.00 [better than $3,000.00 the first year]. I paid off the loans interest-free after 6 months with the principal and pocketed most of the interest. Grad school was similar.
I’m the only male member of my family with a college degree. I would NEVER expect any of my cousins [mostly construction workers] to pay off my debts! I now have many millennial colleagues who did similar and feel the same [though they all take the service forgiveness]. Where is all the support for this? DC interns?
Student loans in principal are great. However the onerous interest is unsustainable. We took out a $60,000 for our daughter. The monthly nut was $365 but we paid $500. After 20 years I calculated that we MORE than repaid the original amount yet we STILL owed $19,000. ALL ACCUMULATED INTEREST! I tried to negotiate a payoff but couldn’t. That is what needs to be addressed!!! And it’s a federal loan to boot.
BORING. YAWN.
COLLEGE TODAY IS LITTLE MORE THAN HIGH SCHOOL WITH EASY ACCESS TO DRUGS, CONTRACEPTIVES AND ABORTIONS. MOST OF THE FOUNDERS OF COMPUTERS/INTERNET COMPANIES HAD NO DEGREES.
HOW DOES MAJORING IN BLM, WOMEN STUDIES, ASTROLOGY HELP ONESELF
As Frank Zappa said, “If you wanna get laid go to college. If you want an education, go to the library.”
If YOU take ANY loans? YOU need to pay them back! No sympathy!
There are 2 parties solely responsible for the crisis:
– Those who took the loans and can’t pay them back.
– Those who took the money (teachers, administrators, institutions) and gave out worthless degrees.
It’s extremely easy to identify the individuals in both groups:
– Those that took the loans are already identified.
– Those who provided the useless degree can be directly tied to the above.
The problem is that both of these groups are politically-favored. So I guess they’ll get a bail-out. Remember – if enough people are involved with a crime, no one goes to jail (remember anyone who went to jail for the 2008 meltdown? You probably don’t, because no one went to jail for it).
So if you were responsible, paid your own way or succeeded without going to college, it’s coming out of your hide, not theirs.
We need a program of Paid Federal Internships for Student Debtors. Fix the renumeration at 1) $25,000/ year off the loan balance, 2) salary equals E-1 3) mandatory room and board. Every government unit would have to host interns according to size of their workforce and budget. Units would match by chosen completed degree (USFS would match 1,000 forestry BS grads, DoAg would match 10,000 agriculture BS grads, etc) or by random. Military and/or law enforcement internships only by choice.
After these first half million jobs filled then service programs would start matching with 100,000 RN grads as “Nurses Across America” serving underserved rural areas. 100,000 education grads serving as teachers in school districts with recruiting issues. 250,000 interns in an “Environmental Action Corp” to help mitigate America’s environmental issues a) Asian carp infestations, b) wildfire prevention, c) plastic in oceans and d) climate change.
Instead of loan forgiveness, let’s exchange service from young people. Favoring useful degrees would tip more towards a) accounting b) nursing c) primary education. Even degree non-completers would be eligible for internships.
M Hantsch, I agree wholeheartedly.
I provided services in an underserved/depressed area for 3 years to help pay off my loans. It was certainly an opportunity to gain experience with a population I’d never before encountered, as well as a boon to help take care of the loans.
Several problems with tuition cost here. 1. The number of administrative positions with crazy high salaries has ballooned. 2. BS courses in esoteric fields have no nope of a real job at graduation to pay off the debt. In the 60’s we called them “basket weaving” today, whatever some faculty member proposes if it fits with DEI LGBTQ+ or other liberal claptrap goes on the course books. Colleges and universities wanted to grow. Country club like dorms with spacious living areas and widescreen TV’s everywhere does not a college education make. My first college roomie and I shared about 120sq ft and a bath/shower for six. For profit institutions also created a major problem. Many are taught useful careers but at high cost and some of the students there were not as likely to pay off their loans. Plus exorbitant salaries on the admin side contributed to many for profit schools folding (but not surprisingly being reborn in the same facility – why? Federal $$$)
Back to basics. Period.
John, you hit the nail on the head. I worked at an Illinois college for 20 years. What I learned is that 25% of the revenue the institution received from the State is swallowed up by the Administration. The program subdivisions and operating departments have to squabble over the remaining 75%. It never seemed to go far enough. How about eliminating the plethora of Vice Presidents and Administrators who provide no substantial value to the operations of the institution? Those administrative positions are what increases the cost of tuition. More revenue could be utilized for the students, and curb the outrageous fees students pay for their courses. An honest, “slap-in-the-face” audit would vastly curtail all the excessive costs.
I hate to put more stress on the government but in the spirit of we all are created equal as guaranteed by the US Constitution, all the people who paid for their own education should get reparations from the government equal to the amount of loan forgiveness being provided to people who have unpaid student debt. The added benefit of college debt reparations is it would discourage politicians from trying to bribe groups of people to vote for them.
Can’t these universities tap into their massive endowments to offset the cost of tuition?
One would think, agree on endowments. I used to be able to go down to Greenwood Beach in Evanston and look north into darkness, except the Observatory at Northwestern. Now it’s like someone just dropped a small city on the lakefront. Not from beaches to the north or south can one miss Northwesterns’s massive admin and recreation buildings. And during this time, the endowment has gone from $2 billions to $11 billion. How can his happen? And every university must follow suit somehow to remain competitive. Harvard gets my alma mater’s ENTIRE ENDOWMENT, EVERY SINGLE YEAR ($600 million or so). And then what do they teach. Can’t unsee that lady on stage at Northwestern, naked and enjoying a phallic object attached to a sawzall in front of the entire Human sexuality class. Can’t unsee how Northwestern does not pay a DIME in tax to the city to support the services they get for free – and if you challenge them lets just say they get a little nasty.
Thank you for the insightful column.
I also suggest a few changes.
If you take a look at the highest paid state official usually it is a coach of Basketball or Football. A state university has to pay in part some of the exorbitant cost of a sport. It used to be that a sport was ancillary to higher education. Today it is not. Almost every major university or college touts its sports program. Lets go back to education first, sports last.
Additionally, you briefly mention the higher salaries for administrators. If you take a look at the number of administrators per student it has exploded; along with useless departments like DEI. At the end of the day, these departments offer little academic enrichment.
Endowments: they have become so large that they stagger the imagination. No longer are they there to help the students, they are there to make the university a powerhouse politically and financially with little concern for the students. Since many universities become a local economic powerhouse with their hospitals and land ownership or investments, perhaps we start treating them more like corporations and not universities. Apply the same trope to them that the left says about corporations that they don’t pay their fair share?
Lastly, let’s go back to suggesting that a trade is a good career path. Too many students matriculate high school and go to university only to fail due to not having the aptitude for higher education. These students are not stupid, just that their skills lie elsewhere. We need plumbers, bricklayers, concrete finishers, steel welders, and the like. Not all high school students should go to university, many will thrive and flourish through a trade.
Excellent post, John. You’ve nailed it on all your points. Thank you.
The last time Biden successfully lied to student debtors prior to the midterms, the Chicago Fibune did a story about the needy students who would like their debts forgiven . One was a theater major who graduated into a successful career as a barista. Another was getting a master’s in chemical engineering. You don’t need a master’s degree for that occupation. My brother in law has a bachelor’s degree for the same thing and does quite well with it, working for a major petroleum company here in Houston. The last was a doctor who stated she couldn’t maintain her status in life as a medical professional without debt relief. You wouldn’t expect a doctor to drive a Chevy now would you? As we went to vote and we observed our successful, late twenty somethings parking their ninety thousand dollar Audis to go vote for the Democrats since they were going to make taxpayers pay for their toys. Yes, it worked. The Red Wave, once predicted never occurred. My guess this new hustle by a different name was timed with the Supreme Court not hearing this in time for the national election. Let’s round ’em up again. Just because they have college degrees doesn’t make ’em smart. Money? Just keep printing more of it. Ink is plentiful.
This is a conversation that needs to be had with an eye towards realistic solutions.
I’m not surprised we ended up here. Politicians from both sides of the aisle are to blame. What could go wrong with voting to extend student loans to include *for-profit* colleges as was done a decade or two ago?
I graduated in the ’90s on the hook for loans about 50% of the pre-tax salary of my first job. I did it because I was in the top 10% of my high school class. It took me 8 years to pay off my loans. I paid them off early because of the 7-8% interest and did it by both working my a** off and leading a somewhat frugal lifestyle. I paid it off because one honors their commitments.
Another part of the conversation, which gets to the point of colleges & universities having skin in the game, is about a realistic conversation about who will succeed in college. With attrition rates approaching 60%, the answer is clearly not anyone who simply has a dream and little to no high school academic success. By saying college is for everyone, we’re being dishonest as a society and to a majority of our young people.
If politicians could put aside the donations they receive from interested higher education business parties, perhaps they could do something constructive here for the good of the people. But now it sounds like I’m one with unrealistic dreams…
When I did financial planning for some years, we told clients that college tuition is the only cost that has consistently risen at 8% per year – over past 30 years!!! It’s gotten worse as well!! Colleges when challenged would defend – “well we have to keep up with the private sector!” To which I say BS. Nothing and no one in the private sector gets an annual raise of 8% a year in my lifetime, except maybe a millionaire CEO. C’mon guys, this is no different than usury. And to boot, the graduates can’t find jobs either. So what does that “degree” do them, which is nothing more than a receipt??? Better they learn a trade which will provide sustainable income and pension in their lifetimes.
Bill Bennett hit the nail on the head. I believe if we want to get higher education costs under control you have to reduce the federal dollars, direct and indirect. If college’s know students are getting more government money they can increase fees by that amount with passing that cost to students directly.
Why are the colleges and universities not culpable in all this? Plus, when the USA guarantees the loan, tuitions increase.
As a credit manager in my past, we approved limit increases only when we felt you would not be overcome with debt, assuring future sales.
Have universities lowered student cost? What is their solution? Another bailout in 10 years?
Yes, excessive and irrelevant administrators and their high salaries are one part of the problem. But what about grossly over paid professors. When the Yale president Gay was relieved of duty, she went back to a $900,000 a year professorship. I know in Illinois many of the highest paid state employees are the college professors making $300,000 and much more. Why, many of them only teach one or two classes. The money to pay these extravagant salaries has to come from somewhere, so tuition keeps going up and up and up. And, of course, the pensions they get after they leave are based on their salaries.
treat student loans like a GMAC loan, have the college offer and back it from the endowment funds. They get a 5% return and it stops bad loans and useless degrees. Allow bankruptcy protection for useless degrees.
SIU-Carbondale has a vice chancellor for Racism, Diversity, Equity and Inclusion. They have a vice president for the same thing. They also have bureaucrats for LGBTQ. All the state schools have the same thing. Is there really a problem with this type of discrimination? I’d like to see the documentation that verifies incidents of this kind of discrimination. Why are they hiring these people who get very generous salaries? Can they show documentation that they’ve found discrimination and have eradicated it? Why can’t the Dean of Students handle this sort of thing? How many students would receive scholarships if we eliminated these high paying jobs?
There are 2 parties solely responsible for the crisis:
– Those who took the loans and can’t pay them back.
– Those who took the money (teachers, administrators, institutions) and gave out worthless degrees.
It’s extremely easy to identify the individuals in both groups:
– Those that took the loans are already identified.
– Those who provided the useless degree can be directly tied to the above.
The problem is that both of these groups are politically-favored. So I guess they’ll get a bail-out. Remember – if enough people are involved with a crime, no one goes to jail (remember anyone who went to jail for the 2008 meltdown? You probably don’t, because no one went to jail for it).
So if you were responsible, paid your own way or succeeded without going to college, it’s coming out of your hide, not theirs.