Expert: Biden Plan Doesn’t Fix The Student Loan Catastrophe

SARA SIDNER: And President Biden recently announced student loan debt relief for millions of Americans, a game-changer, some said. Too little, say others. But how did American students become so burdened with debt in the first place? Josh Mitchell is a reporter for “The Wall Street Journal”. His new book, “The Debt Trap”, traces the roots and explosive growth of $1.7 trillion student debt, a behemoth in the United States. And he tells our Hari Sreenivasan why he thinks a lot more needs to be done to break the cycle.

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HARI SREENIVASAN, CORRESPONDENT: Sara, thanks. Josh Mitchell thanks so much for joining us. First, the word catastrophe. I mean, it’s a strong word. And you don’t pull any punches in this book. You have used phrases like predatory lending in here, and cronyism. Lay out the problem as you started to see it as you’ve been investigating student loans.

JOSH MITCHELL, “THE DEBT TRAP” AUTHOR: Well, there are several big problems. One is just how expensive higher education is. If you look at how quickly colleges have raised their prices, that’s at triple the rate of inflation over the past 20 years, or actually probably the past 40 years. So, it hasn’t stopped. I mean, it slowed in recent years, but it has gone to such a tremendous level that it now requires people to take on tens of thousands of dollars in debt just to go to college. If you look at the amount of people that were defaulting on their loans, it was about one in five, prior to the pandemic, with student loans were three months behind on their loans. Eight million people defaulted on their loans. Meaning, they had gone at least a year without a payment. That is about the same amount of people who lost their homes to foreclosure when the housing crashed, and we called that a crisis. So, if you look at all these different things, the price, how many people are unable to pay their loans, I think it’s pretty accurate to call it a crisis.

SREENIVASAN: $1.6, $1.7 trillion. I mean, that’s a number that’s impossible, for most people, to even visualize. Put that in perspective. This is the amount of outstanding college loan debt that exists out there.

MITCHELL: Right. So, this is basically the highest form of household debt outside of mortgages. It’s about the side of Canada’s economy, that’s how big it is. And this happened very quickly. As of 2007 — late 2007, there was about half of the trillion dollars of student debt. By 2013, it was over a trillion. So, this — a lot of this has to go with that — go back to the housing crash. When unemployment skyrocketed, people enrolled in droves in college and grad school to escape the weak labor market. And very quickly overnight, people took on a lot of that, thinking they were making an investment in their future. And for a lot of people, that investment has not paid off.

SREENIVASAN: When you think of the number of people who has outstanding that, give us a picture, if you can, just on how many people have, for example, $100,000 or $200,000 in loans? And what’s the likelihood, percentage-wise, of these people that are going to default?

MITCHELL: So, there’s about 43 million people in total who have student loans. The average, coming out in college if you spent four years is about 30,000. There are many people now in graduate school who have gone to graduate school in recent years, and those are the ones where you see, you know, people taking out 50, 000, 100,000, you know, in some cases, 200,000. I actually wrote about a borrower who had $1 million in student debt. He went to UST to become an orthodontist. The people with big student loans, they’re still a minority. They are a slice. But they — but they’re — there are growing ones. So, there’s — there are several million people with those big student debt or who have that much student debt. And that’s one of the things that I hear a lot as people say, you know look, the average student debt is only 30,000. Why should we worry about this? But there’s a lot of variation on the average. And I think the average that scares a lot of the problem areas.

SREENIVASAN: The Biden administration has launched a forgives this plan. They said, essentially, they’re going to hand back about $20, 000 if you did qualify for a Pell Grant. And 10,000 if you did not. What went through your mind when you heard about it?

MITCHELL: There were three things that went through my mind. So, I think it’s very questionable whether what the president has done here is constitutional. And we’re already seeing Republicans talk about whether they’re going to challenge this in court. It looks like they are. But President Biden himself, as well as Democrats in Congress, said last year leading up to this that they had serious doubts about whether the president had the authority to cancel student debt wholesale without approval from Congress. And so, after Biden — after President Biden spent months, you know, urging Congress to pass a law that he could sign, they did not do so. And so, he has gone ahead and said that he would cancel student debt for people who make under $125, 000, $250, 000, per household. So, there is a question of whether this is going to stick. And ultimately, it could end up in the Supreme Court. If this is a conservative court, we’ll have to see, you know, what happens there. But I don’t think we should foreclose the possibility that this does not sick. That’s number one. Number two, aside from whether this is constitutional, I don’t think people realize — a lot of people in the public discourse realize how much toxic debt is out there. How many loans were just not going to get repaid? If you look at the number of people who had subprime credit scores when they took student loans, it was a very high share of people. I asked a private bank to give me the numbers. These were anonymized numbers. It was a very high share. It was about twice the level of people who took on sub — who were subprime in the housing market. Point being is that there is a lot of bad debt on the books that was not going to get repaid. And I think that this is an acknowledgment that a lot of that debt was not going to get repaid. And if this were a private bank, they would have written down this debt. They would’ve already done that. But the third point is, you know, what is the Biden administration doing to prevent another runup in student debt? And I’m very surprised that they’re not really carrying this with broader changes to the program because, you know, without any changes, we’re going to see another runup in student debt in the next few years.

SREENIVASAN: One of the critiques of the Biden plan has been — from economists, is that this is regressive. It’s actually penalizing people who are more impoverished which might seem counter to what is trying to do. And it’s giving a leg up to people who already have more money, who might already be on their way to a comfortable life where they can pay these loans off. Is there any modification that can happen to this plan?

MITCHELL: There is research to show that, you know, even with this plan, it’s going to go to hiring com-workers. But really, these are not — a lot of them are not wealthy workers. Again, this is for people who are earning under $125,000 Somehow it solves $250,000. Again, one of the points that I made though, and I think it is very important, is that even if some of these benefits are skewed, there is a huge cohort of people that are just not paying down their loans. We’re talking about millions of people who, again, went to community college, went to a for-profit program, and they dropped out, or even if they graduated the program, they did not get the high-paying jobs that they thought they were going to get. And that debt is just sitting there. So, I think, you know, this going to, you know, wipe out a big chunk of that debt that probably was not going to get repaid. So, yes, on average. You know, workers who go to college and who actually leave college and get a, you know, will get a decent job. But there’s a huge cohort that aren’t.

SREENIVASAN: I didn’t realize how much of this stemmed from. Really, kind of, the space race and the Cold War and how America felt like we needed to make these investments to be competitive on the world stage. And that’s well-intentioned. We also made investments saying we wanted to try to get as many of our people educated as possible. Again, noble interest, right?

MITCHELL: Yes, and one of the things that I don’t think that Congress or society ever really decided early on was, should everyone go to college? After the USSR launched Sputnik, basically, Congress created the first student loan program. And the idea, in general, was to, you know, have schools graduate more scientist than engineers so that we can reclaim the space race. It was really about STEM, you know, science and tech. But then, very quickly, you know, when LBJ enters office, he takes on, you know, this idea that he wants to, you know, really help Americans. He wants to level the playing field and solve inequality or at least, reduce inequality. Give everyone an opportunity to go to college. And that’s when really, you know, higher education and college sort of became known as this entitlement program that everyone should have access to. But even he, back then — and you know, would say things like, you know, this is for people who are able to go to college. You know this is for people who have the academic ability to succeed in college. And it was never really defined what that meant. And so very quickly, as the economy changes over the next 40 years, you know, and as we see the decline in manufacturing jobs. And as we see the rise in technology and the computer age, people — more and more people, more and more jobs require people to go to college. And — but again, we’ve never really decided whether it is for everyone. Whether you actually need to go to college to get every single job. One of the things we’ve seen over the past few years, for example, is the college wage premium has gone down. And employers are dropping the requirements to go to college because the labor market is so tight. Which makes you think, OK. If some of the — if they’re dropping these requirements now, why didn’t they do this, you know, prior to this — prior to the pandemic?

SREENIVASAN: Let’s talk a little bit about, kind of, the industry that you look at here. Now, when you’re talking about running up student debt, part of that is because the price of tuition keeps going up. You connect the dots, so to speak, between money from the treasury, Congress, a company called Sallie Mae, which our overseas audience might not know about, and banks and universities. Kind of paint that diagram for us, if you can.

MITCHELL: Yes, so prior to 2010, most student loans were made by private banks and Congress would guarantee the loans. So, it was a federal loan, but basically, taxpayers stood behind these loans. And this was a way for Congress to pretend like this program wouldn’t cost taxpayers anything. It would — it was a way to keep a lot of these costs off the books. It would — the program was essentially on the banks’ books. And Congress paid banks, feats (ph) to ensure that this — that it stayed on their books. Meanwhile, then when the students failed to repay, Congress would come back and reimburse the banks. So, for many, many years this was a very profitable program for the private sector and for Wall Street. And if you look at, for example, for-profit schools, many of which were publicly traded companies, and still are, on Wall Street, their biggest source of money was the student loan program. Congress would give students blank checks. Students would use those checks to go to a lot of for-profit schools. And those schools, whether it wasn’t for-profit schools or nonprofit schools, kept the money regardless of the ability of students to repay. This is a program with the most perverse incentives you could think of. And that is the reason why student debt — that is one of the reasons why student debt rose so quickly. Because even when students couldn’t repay, schools knew that they could continue to charge high prices regardless of the outcome.

SREENIVASAN: There is data that shows that somebody who graduates, a man who graduates college, is likely to earn somewhere around $900,000 more than his counterpart that didn’t go through college. And a woman, maybe $630,000 or $740,000 more, right?

MITCHELL: Yes. You know, so, there has been what you’re referring to as the college wage premium. It’s actually really opened up to ’80s. I grew up around that time. And so, you know, it was drilled in my head, as well as everyone’s head, that if you wanted to make something of yourself, you had to go to college. And then for a lot of people, it became a grad school in the 2000s. And so, yes, there is a premium. But there’s so many people outside of the average who are defaulting. There are — there is a high level of people who drop out of college. And so, they end up with student debt, but they don’t have the college diploma that they need to get a lot of jobs. And so, you know, there — it’s somewhat counterintuitive. But most people who default on their loans actually owe between $5,000 and $10,000 in student debt. And again, that’s because a lot of people only last a year and then they drop out. You know, when you go to apply for a home loan, you have to get an appraisal for that loan. The bank requires you to get an appraisal for that loan to make sure that you’re not overpaying for the home because the bank, you know, wants to make sure you’re going to be able to pay that back. And that the investment you’re making is actually worth it. There’s no similar appraisal process when students go to college. They go to the financial aid officer of their college. They say I want to go here. They’re 18 years old. They haven’t really had any experience with, you know, taking out a loan of any sort. And there’s — they’re just told that this is what they need to do in order to get a good job. And so then, they come out and they realize real quickly that their loans are too big to stay on top of the monthly payment, and they end up defaulting on their loans.

SREENIVASAN: As you’ve researched this space, what are the things that both politicians and economists and students and administrators can agree on to try to fix this?

MITCHELL: One of the main points I argue in my book is, if you want to fix the system, there’s got to be consequences for schools if they’re going to saddle students with debt that they simply can’t repay. And this is what I meant by the lack of systemic reform that the Biden administration has paired with this forgiveness program. One of the provisions of this plan of his is if you take on college debt, you will — your monthly payment will be cut in half compared to what you currently have to pay. Basically, it’s five percent of your discretionary income that you have to pay each month toward your undergraduate loans under his plan. That will help students stay on top of their loans. But it’s a further — it’s a big gift to the schools because now schools can increasingly go to the students and say, don’t worry about the balance. Don’t worry about how much student debt you’re going to have to take on to attend this school. Because you’re only going to have to pay five percent of your income regardless of whether you owe, you know, $10, 000, $100,000. So, I actually think there is a very big risk here that this is going to further incentivize schools to just raise their prices. So, I think one of the things that both parties could agree on, and they both said this, members of both parties, is that schools need more skin in the game. Now, how do you do that is the big question. And a lot of politicians talk about that but they have not, you know, put forward a real plan. One of the things that I point out in my book is that before the government got into the business of student loans, a lot of schools themselves actually made loans themselves to students. And the default rates were very low. And I would argue that the reason why the default rates were low is that the schools knew that if they were setting up students to fail, the schools would those — would take on those losses. They would lose money. And so, I would argue that if you really wanted to change the system, you have to change the incentives so that schools are responsible for some of the losses if students default on their loans. And currently, they really aren’t.

SREENIVASAN: What about the students that need to borrow this fault? What should they be doing? If they — should they be factoring in that some debt might be forgiven? Because universities are, as you said, likely to say, hey, there’s a debt forgiveness plan that’s on the table. Whether it’s passed or not, whether it’s constitutional or not. I’m just going to put it in my brochure and jack up my prices perhaps?

MITCHELL: Yes. You know, I think that that’s a big issue here, you know. It’s — President Biden has opened up a can of worms, I think, in terms of not just with forgiving $10,000. But they’ve also — it wasn’t just him. So, it started with Trump where they put in place this pandemic pause, and that lasted almost three years. President Biden has extended that to the end of this year. So, we have in three years where people have not made a payment on their student loans. And right now, you know, inflation is very high. So, there are problems out there. But the labor market is very hot. And people — unemployment is very low. And so, there is this big question of, like, OK. So, what happens the next time there is an economic downturn? How quickly is the administration just going to turn the taps off again, and that require people to pay off for student loans? So, I do think that there is an issue here of whether students are becoming more and more desensitized to paying down their loans. I think it’s — I think the good thing about that is is that students are not going to default on their loans. But I think that there’s this bigger issue that no one is really addressing, which is it could further encourage students — schools to raise their prices. And ultimately, taxpayers will have to take on those costs.

SREENIVASAN: Josh Mitchell, the book is called “The Debt Trap: How Students Became A National Catastrophe.” Thank you so much for joining us.

MITCHELL: Sure, thank you.