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Debt 101: our system now saddles students with loans that make low-paying but meaningful work impossible. Here's how to fix it.

Since its debut the night before the Clinton inauguration, Fox television's new baby-buster series "Class of '96" has been called a lot of things--many flattering, some critical, even a few unprintable in a family magazine. But no one seems to have noticed that "Class of '96" is, incidentally, a legacy of the Great Society. Not that the show's treatment of campus life is especially liberal or PC. Instead, it's that "Class of '96" owes its plausibility to an idea hatched by Lyndon Johnson in 1965: rederally subsidized college loans.

The predictably pimple-free characters that populate Havenhurst, the ersatz Ivy League school where the show is set, don't all hail from "Beverly Hills 90210." The hero is working-class Irish; another is a poor, black Brooklynite; others are resolutely middle class. If their fictional financial aid files ever get opened on the air, you can bet student loans will be there in abundance. And for the real-life counterparts of students like these, government-guaranteed student loan programs are essential to paying for private and public universities alike.

According to the College Scholarship Service, the average student today finishes school $10,000 in debt. For graduate students, the figure is a crushing $35,000. This level of indebtedness among young adults is unprecedented in American history. Indeed, for all the media hubbub about twenty-somethings, the one thing that really sets them apart from their elders isn't Nirvana or lumberjack shirts, but coming out of college deep in hock. Forget Generation X. Call them Generation Debt.

There is sad irony in this. The loans which once promised to open doors for young people have instead ended up trapping them inside what Generation X author Doug Coupland calls "Student Loan Prison." Having taken the money to pay for a degree, students are frequently forced to make a bitter compromise: They must, after college, give up doing socially useful but ill-paid work, like teaching or public-interest law, and settle for uninspiring jobs that bring in enough to cover hefty monthly loan payments. For others (usually the less well-off), the fear of Student Loan Prison has them thinking twice about going to college at all.

Fortunately, there's a straightforward way of reforming the student-loan system that will make it more efficient, more accessible, and less punitive to those who want to chase their ideals before jumping on the fast track. And Bill Clinton knows all about it. But trouble looms. The interests with a stake in keeping the current system are circling, and Clinton's simple idea for fixing the loan program is bound up with his entirely admirable--but infinitely more complicated--plan for a sweeping national service scheme. There's a simpler way to fix the problem, whether national service ever comes to pass or not.

Just as higher education has become more and more necessary, it has also become less and less affordable. Between 1980 and 1990 the cost of attending the average college soared by an astonishing 126 percent--way ahead of inflation and, more importantly, way ahead of median family income. With college costs skyrocketing, families have turned increasingly to the government to keep up. Where loans once accounted for 15 percent of the total student-aid budget, they now make up fully half of it. In part, that's because middle class kids who once counted on mom and dad to foot the bill are now lining up for loans. Meanwhile, for poorer kids, grants are tougher to get, and grant levels have not kept pace with rising education costs.

Thus, federaly guaranteed student loans--also known as Staffords--have become the bread-andbutter of student aid. In 1980, the government loaned out around $6 billion in Staffords; in 1992, the figure was $14.6 billion. More than a third of all students today take out such loans. And that's only at the federal level: These same students and millions of others also borrow from state governments and individual colleges. No doubt most are grateful. In the absence of alternatives, low-interest loans are often the most sensible--and sometimes the only--way to get hold of the costly keys that open so many doors of opportunity. And to the extent that student loans have helped millions of young Americans do just that, they have been a success.

But that success has come at a price not easily measured in dollars and cents. Take Carl Botterud, who graduated last year from Whittier College of Law in California. Botterud had thought about doing public-interest law; then, after contemplating his $50,000 debt--or $600 a month--he thought again. Many public-interest attorneys earn about $25,000 a year, if that. Now he's working for a mid-sized law firm in Los Angeles for $48,000 a year.

Such stories are typical among the members of Generation Debt. Forget working as a doctor at a free clinic in Anacostia; or heading to Central America for Catholic Relief Services; or working as a house painter while you write a book of poetry; or starting a program like Teach for America. With any of these jobs, you'll be in default before you can say "slacker."

There's no question that some who claim to lust for virtuous work are using their debt as an excuse to go off and get rich. But some are sincere: the law student or soon-to-be Wall Streeter who really does plan to quit after a few years of paying down debts and go teach high school. But even the most well-intentioned souls become acculturated. The fat paychecks come; all your friends are getting them, too. The career ladder beckons, then there's the new house and with it mortgage payments that dwarf the loan payments- and on and on.

Sallie mayhem

Although the fear of Student Loan Prison dramatically influences career choices, it has also scared some middle class families away from higher education altogether. Joseph Ham gan, an Ohio ironworker with a daughter who recently came out of Fordham Law School $40,000 in debt, told The Washington Post last year that "a lot of people think that you'd be ahead if you bought a house instead. You can come out of graduate school owing $35,000 and not get a job. I'm beginning to wonder if they're not right."

So are a lot of families less well-off than Harrigan's. According to a Carnegie Endowment study, huge loan debts are increasingly forcing many poorer students to forget about going to college. Financial worries have also led to a trend toward educational "buying down." Kenneth Green of the UCLA Higher Education Research Institute says, "Students who would have gone full time are going part time. Students who would have gone to four-year colleges are going to two-year colleges. And more students from poor homes go to vocational schools instead of colleges." Indeed, vocational schools--schools of cosmetology, drafting, barbering, air-conditioner repair and the like--have thrived on the flood of student-loan money that has poured out of Washington in the eighties and nineties.

And these trade schools--4,000 strong across the country--attract students who, because they are poorer, have a harder time paying back the loans. Students from such schools are about four times as likely to default on their loans as others, the Department of Education has found. In 1982, the government had to pay out $300 million to banks, which administer loans for the government for a fee, to cover students who had failed to pay up. By last year, the total had climbed to $2.9 billion--$700 million more than the program's other major cost, the interest subsidy.

Meanwhile, as students pile up debt and taxpayers shell out bigger and bigger sums to help them do so, one group is getting really rich: the country's banks, led by Citicorp and Chase, and the Student Loan Marketing Association (Sallie Mae). To them, student defaults matter not a bit. Their handsome profits are guaranteed. In fact, the Department of Education reports that student loans are more profitable for banks than almost every other kind of debt (except for that generated by credit cards and industrial loans). Last year they collectively made more than $1 billion from the student-loan racket. To the banks, defaults just mean they see this money sooner rather than later.

Sallie Mae has reaped its rewards as well. Set up as a federally chartered corporation by President Nixon, Sallie Mae buys student loans from banks and then resells the debt to investors. Currently, Sallie Mae owns about 5 million such loans, or a third of the total outstanding. Yet for a quasi-governmental agency, Sallie Mac has bosses who pay themselves like princes of the private sector. The General Accounting Office says that Lawrence Hough, Sallie Mae's president, paid himself more than $2 million in 1991. His deputy got $1.7 million. Jack Anderson recently reported that even the fifth man on Sallie Mac's totem pole earns more than twice what the president of the United States is paid.

Audacious Sallie Maestros, burgeoning default costs, the travails of Generation Debt--no wonder Bill Clinton wants to scrap the whole system and start over again. Originally, Clinton said his plan would revolve around three things. First, he would cut banks (and Sallie Mae?) out of the picture, making loans directly to students through their schools and collecting repayments through the IRS. Second, students would pay loans back at rates that vary with their incomes. Third, students could repay all or part of their loans by taking part in a national service program.

Already, it's clear that because of the deficit, Clinton is backing away from a grand scale national service plan. That's too bad. As this magazine has argued for years, national service is a noble and attainable goal. But the problems Clinton is having with it shouldn't blind him to the need to fix the student loan system anyway. And it is here, happily, that he already has many of the fight ideas.

Clinton has suggested using the IRS, either by collecting the payments along with income tax returns or by withholding the fight amount from people's paychecks. This way, students wouldn't have to send out checks each month to a handful of notoriously indifferent lenders. Better still, the new system would slice the $3 billion a year in defaults by at least a third, thinks Illinois Senator Paul Simon.

What would Clinton do with these savings? In the past, he has talked about offering college loans to anyone, regardless of family income. But so long as loan reform goes forward without the national service scheme, he should leave eligibility alone: Under the program's lenient rules most of the middle class already qualifies, and America can hardly afford to be pointlessly generous to the rich. What might make sense is raising the amount that students can borrow, though Clinton says he worries about subsidizing tuition hikes. In this he sounds like William Bennett, who used to say similar things when he was secretary of education. But Bennett and Clinton are wrong. Tuition hikes have become obscene, but they started long after the loan boom did, and they continued long after loan levels stopped rising to keep pace.

Aid nauseum

Even so, Clinton may well need those savings to finance the most important aspect of loan reform: letting students pay back their loans at different rates depending on how much they earn after graduation. Critics of the idea say that with many graduates paying less than they otherwise would, it might take years to reach the point where there was enough money coming in to cover new loans. They also say it would be an administrative nightmare, pointing to a failed experiment with income-contingent loans at Yale in the seventies.

But, according to Yale's director of financial aid, that program failed because it proved difficult to get hold of the students' tax returns. Having the IRS collect repayments would solve that. As for the costs, it's certainly true that it might take some years before the program broke even. But it is not breaking even now. By letting students pay according to how much they make, an income-contingent plan would probably do as much as the IRS to end defaults. As a National Commission on Responsibilities for Financing Post secondary Education report, which advocates the idea, points out, most graduates who default do so because they just can't make the payments on their salaries. With appropriately tailored repayment schedules, that problem would all but disappear. Yes, some people would pay their loans back very, very slowly, maybe into their fifties and even sixties. But few would fail to pay at all.

Even if income contingent payment plans ended up costing as much (or a bit more) than the current system it would still be worth doing. Why? For a start, there is the matter of fairness. On its face there is something absurd about asking two people with the same amount of student debt, one a social worker and the other a corporate lawyer, to repay the same amount each month.

But, most importantly, such a change would turn student loans back into what they were intended to be: a means of liberating young people. For many poorer students, knowing that those debts will not crush them could mean the difference between going or not going to college. For many others, undergraduates and graduates alike, it would mean opening up a world of options rather than closing them down.

John Heilemann is the acting Washington bureau chief of The Economist.
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Author:Heilemann, John
Publication:Washington Monthly
Date:Mar 1, 1993
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