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Take Note: Josh Mitchell on how the history of student loan programs led to the current student debt crisis

Josh Mitchell
The Wall Street Journal
/
Author and Reporter Josh Mitchell

Today we're going to hear about how the well-intended government student loan program started during the Cold War has led to a $1 trillion student debt crisis. The guest will be Josh Mitchell, a reporter for The Wall Street Journal covering the economy and higher education. Mitchell is also the author of "The Debt Trap: How Student Loans Became a National Catastrophe" in which he draws parallels between the housing crisis of the late 2000s and the consequences student debt has had on families and the nation's future.

Today's interview is from the Democracy Works podcast, a collaboration between WPSU and the McCourtney Institute for Democracy at Penn State. The Institute's Jenna Spinelli interviewed Mitchell.

Here's the conversation:

Jenna Spinelle 
Josh Mitchell, welcome to Democracy Works. Thank you so much for joining us today.

Josh Mitchell 
Yes, thanks. I'm glad to be here.

Jenna Spinelle 
So, you know, we talk a lot on this podcast about the role of higher education in a democracy and your book, "The Debt Trap" really stood out to me because it explores maybe a different side of that relationship or a different aspect of it, or that tension between higher education as a public good and higher education as a commodity. And how that all has played out over the past 50 or 60 years through the world of student loans and the people involved in it. So why don't we start, if you wouldn't mind, just talking a little bit about how the government got involved in the business of of granting student loans or just sort of how this whole commodification kind of got started?

Josh Mitchell 
Sure. So the government's role in student lending goes back to the space race, and specifically to our rivalry with the Soviet Union. And it's specifically the spark that led the US Congress to get involved in student lending was Sputnik, which the Soviet Union launched on a Friday in October in 1957. And you know, Sputnik was obviously the first manmade satellite to reach space. And that really concerned Congress and members of Congress like Lyndon Johnson, as well as President Eisenhower, this was a really come to Jesus moment for our country. Because it made us second guess just how smart and how strong and how advanced of a country we were. You know, think think about it just a decade earlier, we had succeeded in World War II, our economy had grown very quickly in the first half of the 20th century. And then all of us, all of a sudden, the Soviet Union, you know, has this great feat that we had been trying to do ourselves. The United States had been trying to reach space first, and the Soviet Union beat us to it. And so very quickly, Lyndon Johnson, who was the majority leader of the Senate, at the time, said this has as much to do with education and higher education, as much as as anything else. We need more scientists and engineers so that we can reclaim the space race. And less than a year later, Congress passed, the National Defense Education Act was really...which was the first major student loan program. And the intention, let's get more people into college who can come out as scientists and engineers, so that we can reclaim the space race and reclaim our role as the world's best economy.

Jenna Spinelle 
And so that's that all sounds like it's still very much grounded in this notion of we're helping the public good here, right? We're both creating upward mobility for more Americans, and we're helping America become a stronger country. Is that a fair characterization?

Josh Mitchell 
You know, the concern, you know, part of the concern was just the the state of the economy itself. And, you know, so it was, state of the economy was intertwined with Americans living standards, which was intertwined with the strength of the country, which was intertwined with technological advances. You know, part of my research when I was when I was researching this book is I research a book that was written by two Harvard professors, two very well known Harvard professors, Larry Katz and Claudia Goldin, they wrote a book called "The race between education and technology". And it was all about how investments in education were really intertwined with technological advances that really allowed the United States to become such a global superpower in the 1900s. And so, you know, all of these things are intertwined. And so you can say it's a public good, and I would argue that that's what it was. It was thought to be a public good that this helps society, it helps, you know, people, it helps households. But it was all sort of intertwined with our view of the United States as the greatest, strongest economic superpower.

Jenna Spinelle 
The way you described earlier made it seem like it was automatic that people are going to have to take out loans to pay for these degrees, whether in science and engineering, or, you know, whatever other field. I mean, were there other alternatives considered so that, you know, we that, you know, families and students would not have to go down the path of student loans at all?

Josh Mitchell 
Yes. So let's step back and look at the GI Bill, which really was the impetus for the discussion about student loans in the first place. You know now the GI Bill was passed in 1944, as all of these service members were returning from World War II. There was this big concern that, you know, they're coming back to the US on mass, and employers are not going to be able to hire them quickly enough. So let's give society time, let's give the private sector time by allowing people to go to college. And so each soldier got basically a check from Congress to go to the college of their choice. And so that essentially was free college, because even though there was a limit, that there was a limit on how big the voucher was, the size of the voucher was covered, you know, the average price of going to college at the time. So essentially, it was free college, even though it was a voucher. And essentially, it was free college for people who were able to use it. And so ever since then, Congress was embroiled in this big fight over whether everyone should have a voucher not just, you know, people who served in the war. But you know, should free college, should everyone have access to free college? And so then let's go back to Sputnik. You know, the there was a big question, there were two things that I would say that led Congress down the path to student loans. One was obviously the cost. And there was a concern, as there is now about, you know, how much should Congress how much money should Congress put out there to help people go to college? Student loans look really cheap from the perspective of Congress. Because, yes, he had to put some money up front, but students will pay it back. And so really, taxpayers are not having to put out all this money and the burden is on the households. But the second reason is, and I discovered this by reading the congressional transcripts at the time, is there was this idea of, you know, you have to pick yourself up by the bootstraps. And, you know, this is, the US is known for hard work and you know why should students get a free ride? And so, that concept of not getting a free ride and, you know, working your own way was was intertwined with this other idea of Congress needs to really watch its spending. You know, this was during the McCarthy era, where whenever the Democrats in Congress at the time, you know, brought up things like free college, Republicans would accuse them of socialism. So you know, there was a big concern that if Washington expanded its reach, and things like higher education that we would get away from the concept of having a small role for Washington.

Jenna Spinelle 
Keep the story going, historically, how do Pell Grants enter the picture? And then I know we're going to get to Sallie Mae, eventually, not not too much farther down the road here as well.

Josh Mitchell 
Yeah. So I think that this is an important point, because, you know, Lyndon Johnson, and every president after that they had this vision that, you know, if you were poor, if you were from a disadvantaged background, college would be free. That you would get a grant. It would kind of be like a GI Bill, and that it was the middle class that would take out loans, and that if you were wealthy, you would just pay your own way. And so really, you know, loans were seen as a way for members of the middle class who might not have access to loans from a private bank, to be able to cover the cost of college by taking out low interest loans backed by Congress. And that the poor would have most of their education paid for with grants. Now, again, the issue was spending from a federal perspective. You know, at the time in the 60s, because Lyndon Johnson had such ambitious goals, his Great Society programs was not just education, it was health care, and a lot of other things. As well as the Vietnam War was starting to get ramped up, these were starting to become very expensive as a whole. And so, you know, while there was a lot of, you know, speech coming from Lyndon Johnson, a members of Congress saying we're going to, you know, make college mostly free for the poor. They still envisioned the poor taking out at least some loans to cover their education because Congress just wasn't willing to spend enough money to cover the entire bill for the poor. So, you know, in theory, the poor weren't supposed to really take out a lot of loans, if any, but the way it played out from the start was that Congress, you know, allowed for them to take out student loans so that Congress wouldn't have to put up a lot of taxpayer money to carry out this program. And so Lyndon Johnson said, Let's just have the banks lend to students, and taxpayers will guarantee the loans. And that way, it'll look really cheap on the front end. And so what's....the Congress essentially shot itself in the foot here. Because, well, banks put up the money on the front end, what that meant was if students defaulted taxpayers, Congress, would come in on the back end, and repay the banks. So it may have looked very cheap on the front end, but it actually got very expensive five years down the line, 10 years down the line, 15 years down the line when students started defaulting on their loans. But again, Congress didn't look that far ahead. At the time, they only looked at spending and that year, and so you know, in the name of saving taxpayers money, they actually set up taxpayers to cover a lot of costs down the road.

Jenna Spinelle 
Right. And you know, the other....so I want to come back to this, this congressional piece. But the other thing that starts to happen here, and maybe leads to some of these, these defaults down the road is, you know, universities are getting a lot of money, whether directly from the government in the form of grants or through this influx of loan money that's coming in, what are they do? How do they change their operations as as a result of these, these changing dynamics elsewhere?

Josh Mitchell 
Right. So colleges at the time, obviously, were facing a really big increase in enrollment, just because there were a lot of people who were turning 18,19,20 years old. Keep in mind, the baby boomer generation was starting to hit college age around this time. And so they were entering college en masse. And so colleges had to, you know, they had to add classrooms, they had to increase the number of instructors they had. And so they were expanding at a very quick pace. Now, they also started to raise their prices. And this is sort of a controversial thing within higher education, that wasn't the only factor. There are a lot of factors behind why colleges raise their prices. But I really think this was right, when colleges started to figure out, you know, that you can get more money, more funding simply by raising prices. And again, colleges told themselves, this was a good thing. The problem is, from my perspective, is that they never really, you know, said, "Okay, we finally have as much money as as we need." You know they raise prices in good times and bad. And I really think this started when, you know, Congress started providing money to students for student loans.

Jenna Spinelle 
Well, and the other piece of it, too, I think they, you know, university sold this to students and families as it's an investment in your future. You know, before I had this job, I worked in college admissions, and I said that line all the time. And so you're investing in your own futures.

Josh Mitchell 
Right, it was right around this time when economists started to, you know, really think of higher education as an investment from the household perspective. And the idea was that, you know, if you're a business, you can, you know, invest in tech to improve your business. And so the idea was students can do the same thing, if they, you know, went to college. They could improve how much they earned, once they got got out of college. And so this was really known as you know, if students should the the idea was from the start that students can borrow a little bit of money up front, but it'll be a surefire investment that they'll be able to, you know, repay the loans with ease, because you know, they'll be going to college, which will get them a better job, which means they'll earn more, and then they can just repay the loans. This was seen as very low risk from the students perspective. And so that's why, you know, Congress didn't really, you know, blank when they started handing out all these loans, they told themselves, this was a good investment.

Emily Reddy 
If you're just joining us you're listening to Take Note on WPSU. I'm Emily Reddy. Today's guest is Josh Mitchell, a reporter for The Wall Street Journal, and the author of "The Debt Trap: How Student Loans Became a National Catastrophe." Today's interview is from the Democracy Works podcast, a collaboration between WPSU and the McCourtney Institute for Democracy at Penn State. Interviewer Jenna Spinelli talked to Mitchell about the history of student loan programs and the student debt crisis.

Jenna Spinelle 
So at what point does the House of Cards start to, if not collapse, at least a look a little shaky? Like all of these grand ideals might not work out the way that everyone had had hoped or had planned that they would?

Josh Mitchell 
Right. So let's let's talk about 1972 When Congress created Sallie Mae. Now, so we talked about how banks, you know, Congress depended on banks to make loans. Well, and this gets a little wonkish. But at the time inflation was increasing pretty quickly, which meant that banks needed more and more money to make student loans to ensure that they made a profit from student loans. And they kept on going back to Congress and saying, "if you want us to continue to make loans pay us more through higher interest rates." Congress sets the interest rates on student loans. And so Congress kept on doing that. But inflation kept on rising and so Congress created this for profit company called Sallie Mae. And basically what Sallie Mae did was it took taxpayer money and it gave that money to banks so that the banks could use that taxpayer money to give to students. But keep in mind, Sallie Mae was a for profit corporation, and it was owned by schools and banks. So it essentially was using Treasury Department money, taxpayer money to make a profit off of. And again, the only reason why Congress did this was because it wanted to keep federal spending low. And so it was kind of like this off the books, you know, for profit agency, that was, you know, fueling taxpayer money into the student loan industry to the banks. And so now you have banks making money, making a lot of money off of this system, because as soon as they made a loan to a student, Sallie Mae would come in and buy that loan off the banks. And then the banks would use the proceeds to make more loans. And so then the schools would get quick money. You know, the student would take that loan, and then go and pay the school to cover the price of college. And so everyone, now all of a sudden, was making money off the student loan program, and Sallie Mae was just pushing money out the door, to get it into the hands of banks as quickly as they could. And then the banks are trying to get it into the hands of students as quickly as they could. And then the students were going to college and giving that money to the colleges. And so banks started doing things...schools started doing things like they would go to the parking lot of the local high school and set up a van and try to sign students up right there on the spot to go to college. And then they will tell them that there's loans that they could take out to go to the college.

Jenna Spinelle 
And so does Congress or the Department of Education or, you know, any other type of of government entity that has a role on this? Do they try to put the brakes on this at any point?

Josh Mitchell 
Yeah, so there were a lot of people, particularly in the in the 80s, who were saying this is getting out of control. We need to rein in the student loan program, we need to rein in the colleges. You know, Bill Bennett was the education secretary in the Reagan administration. And he wrote this notorious column in the New York Times, that basically said, the more money we're putting in students hands, the more schools are raising their prices. And so the Reagan administration, to some extent, really was the first to sort of, you know, try to raise the red flag and say, "you know, there's a problem here." And there were also Democrats in Congress who started holding hearings. Mostly the focus was on for profit schools. There were a lot of mom and pop shop owned for profit schools that cropped up in the 80s and learned that they can make a profit off of the student loan program, if they opened up a school in a strip mall. And you know, and got students maybe high school dropouts, or you know, people who had a low wage job, you know, if they got them to enroll, and then they would, you know, take out student loans and pay the school. And so there were people who were saying, "Look, this, this program is getting out of control." The problem is this, you know, colleges lobbied very hard against any cuts to the program. There were also a lot of members of Congress, particularly Democrats, who said, you know, "hey, if you deny students access to student loans, they're not going to be able to go to college and make something of themselves." You know, and again, this gets back to the whole idea of this program leads to the American dream. So every time someone raise concerns, there was always an excuse not to reform the program.

Jenna Spinelle 
And I want to talk about HBCUs here for a minute, kind of speaking of this, this upward mobility. I know one of the individuals you write about and reported on in your book attended an HBCU. And I think that there's a particular bind, perhaps that they're in because of their situation, and the the students that are coming to them. And it just seems like they are more vulnerable than other types of of institutions.

Josh Mitchell 
Yes. You know, what's interesting, let me just start this part of the conversation by saying that, you know, in many ways, higher education and the student loan program was designed to reduce inequality. And one of the arguments that I make in my book is that in a lot of ways, it actually increased inequality. And again, it was one of the reasons why is because the was this idea that if you took out a student loan, it was automatically going to be an investment that paid off. But for a lot of people, that hasn't turned out to be the case. When I mentioned earlier, you know, the idea was that, you know, poor students would have most of their tuition covered. Well by the 2000s, Congress hadn't approved enough of an increase in the Pell Grant to make it free for low income students. And so by default, some of the poorest families, including many black families, had to take out some of the biggest loans just to go to college. And if you think about this, it makes sense. If you look at the average, you know, the average wealth of the average black household, it pales in comparison to the average wealth of the average white household. And so that means that a lot of black families have had to take out student loans just to go to college. And these are not necessarily like prestigious, you know, high cost schools, like, you know, Princeton. These are, you know, schools that you know, opened up, you know, to provide access to, you know, black students who otherwise would not have had access to college. And so there's...so if you look at a chart of student debt, by race, black households have seen the biggest increases in student debt owed than any other major race over the past 20 years. At least black households who took out student loans. So if you limit it to, you know, households that have student debt, black households have seen the most dramatic increases.

Jenna Spinelle 
So, you know, political scientists, maybe some of your colleagues at the Wall Street Journal who cover politics, there's this sort of notion out there that your level of education is increasingly contributing to, or a marker of political polarization in the US. Now you can look at, you know, who voted for Joe Biden in 2020, versus who voted for Donald Trump, and there are very clear divisions about education levels there. And we're also seeing trust in institutions across the board continue to go down. And I'm wondering if any of these these aspects, these trends, came through in your reporting for your book, as you're talking to people who have kind of gotten, you know, chewed up and spit out by this the student loan system?

Josh Mitchell 
Yes, I'm so glad you bring that up. I think these issues are very intertwined. You know, if you look at the Occupy Wall Street movement that occurred and around 2010 or so. That had a lot to do with people frustrated with student debt. And I think that, you know, the Occupy Wall Street movement, the rise of Bernie Sanders, and even the rise of Donald Trump, I think is tied to many people becoming disillusioned with, you know, major institutions, including college. And the main character in my book was a woman who was a single mother in the 1990s, who went to college and grad school so that she could become a psychologist. And she borrowed year after year 10s of 1000s of dollars. And she told me, she was proud to do so because, you know, she was making an investment in herself. And this would lead to her dream job. And it did lead to her dream job, but the amount of debt she owed $125,000, coming out of grad school, far exceeded, you know what she actually earned. And she could never keep up with her bills. And as she spent year after year, paying $700 A month toward her bills, but not seeing it go down because the interest was accruing so quickly. She became very disillusioned by Congress, which provided the loans by her lender, Sallie Mae. And she became disillusioned with her schools, because all of these big institutions told her, she was making this great investment. And not only should she do it, but she almost had to do it if she wanted to get a good job. And so, you know, and I think that we're still saying that distrust play out.

Jenna Spinelle 
So as we start to wrap things up here, Josh, how do we move forward? Are there things that the government can do to help untangle some of these knots?

Josh Mitchell 
I'd say there are two or three things, you know, one of the problems right now is that there's a lot of outstanding student that debt that's probably never going to get repaid. And I think Congress is confronting that. And so the question is what to do about that. And I think one of the bipartisan ideas where there's support from members of both parties is to make it easier for students to declare bankruptcy on their student loans. Right now, it's very hard to declare bankruptcy. Much harder than it is if you have credit card debt on student loans. And so there's been a lot of talk about let's make it easier for people who can't pay their loans to get a loan so that these loans don't hang over their heads for the rest of their lives. That's that's one thing. Number two, you know, I think history can be a guide here when it comes to what to do. about student loans from here. But before Congress got into the business of student lending, there were a lot of schools that actually used their own money to make loans to students. And at the time, default rates were very low. And I think there's an easy reason why. When schools know that they are going to lose money, when they make reckless loans, they're less likely to make reckless loans. In other words, schools need to have more skin in the game. And again, I think this also can be a bipartisan point of agreement. So one idea I threw out there in my book is, you know, go back to the way it was where actually have schools put up some of their own money, particularly in these these schools with big endowments. If they feel like they're providing a superior product that's going to lead off to this great investment that's going to pay off for students, then why shouldn't the school share in that, and put up their own money? As you know, so have schools put up some of their own money so that they have their own skin in the game. Number three, just what we talked about, which is get away from this idea that everyone has to go to a four year college. I think that we have as a whole in the United States come to that conclusion. But really keep that in mind. And not only do you not have to go to a four year college, but if you do go to a four year college, don't be convinced that you have to go to the most expensive college or the most prestigious college. There are affordable options out there. I think for too long, particularly people my age. I'm 41. When I was coming of age, you know, the idea was you have to go to the best school you can it doesn't matter what they charge. Don't fall into that trap. Colleges love that when students think that because then they get to charge you so much. If you actually, you know, price compare, you know, consider the more affordable options instead of taking on 10s of 1000s of dollars in student debt.

Jenna Spinelle 
Well, we will leave it there. Josh Mitchell, thank you so much for joining us today.

Josh Mitchell 
Sure, thanks.

Emily Reddy 
Josh Mitchell is a reporter for The Wall Street Journal covering the economy and higher education. Mitchell is the author of an NPR Best Book of 2021 called "The Debt Trap: How Student Loans Became a National Catastrophe. Today's interview is from the Democracy Works podcast, a collaboration between WPSU and the McCourtney Institute for Democracy at Penn State. Jenna Spinelle was the interviewer. You can hear more Take Note and Democracy Works interviews at wpsu.org/radio. I'm Emily Reddy, WPSU.

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