The Good Intentions that Built Student Loan Hell
An interview about the corrupt history that led to the current SCOTUS case, with reporter Josh Mitchell
SCOTUS struck down President Biden’s attempt to forgive a huge chunk of student loan debt. Ugh. To understand how student debt got so out of control in the first place—and why it was bound to continue exploding—I spoke to Josh Mitchell, an expert on the topic.
Josh writes about banking and finance out of the Wall Street Journal's London bureau. He previously spent 14 years in the Journal's D.C. bureau, writing about the U.S. economy and the student debt boom. In 2016, the Education Writers Association named him the nation's top higher education beat reporter among major news outlets for his coverage of student debt. In 2021, his book The Debt Trap: How Student Loans Became a National Catastrophe, was named a best book of the year by NPR and the New York Post.
In conversation, Josh revealed why the US began making federal student loans, and how a corporation called Sallie Mae steered the program way off course. A condensed transcript edited for clarity is below. Paying subscribers can also listen to the audio of the conversation, where Josh expounds on the government’s ludicrous accounting shenanigans, the Sallie Mae lobbyist who married one of the company’s biggest foes, and more:
Ben: Josh, thank you so much for being here.
JM: Glad to be!
Ben: Today, I'd like to explore how 43 million people ended up with a total of $1.6 trillion in student loan debt, and trace how the path to student loan hell is rooted in good intentions.
To begin, can you discuss why the Eisenhower administration initiated a student loan program in 1958?
JM: It all started with Sputnik, the first satellite to make it to space. The fact that the Soviets beat the US to space caused a lot of consternation in DC and Congress. Legislators thought we needed to get more people into college and train more scientists to reclaim the lead in the space race.
Eisenhower backed the idea, aiming to help 40,000 people go to college through a program that would last around four years, and then that would be that. But JFK widened the program, and when LBJ became president in 1963, he saw education not just through the prism of the Cold War, but as integral to reducing inequality, especially for lower-income citizens of color.
Ben: And yet the good intentions soon took a turn for the worse.
JM: Right, you have to understand that LBJ was an incredibly ambitious, impatient person. At the same time that he was trying to get more people into college, he was also trying to improve the K-12 education system, provide more people with healthcare, and ramp up the Vietnam War.
All of these programs started to add up, and LBJ wondered how to give more people assistance to go to college without it looking expensive from a budgetary perspective. He said, Aha! Let's convince the banks to make the loans, with the idea that if a student failed to repay the loan, Congress would reimburse the lending institution.
Ben: As we’ve covered on Skipped History before, LBJ’s simultaneous wars on poverty, crime, and in Vietnam pushed federal spending over $100 billion for the first time in 1965.
Editor’s note: you can read more about LBJ’s spending here
But to reiterate, because of this spending, so much of which was misguided, LBJ turned to banks to help more students go to college. It’s kind of like showing up at somebody's hospital bed and saying, sorry, I couldn't afford flowers because I stopped to buy a cheeseburger and a Game Boy, but here’s a monster I met who said they’d be happy to give you a bouquet.
JM: To your point, LBJ’s plan morphed into a Frankenstein.
Even though the government offered banks a federal guarantee, where they could make loans without any risk, the banks still preferred to make other transactions like home loans, which drew better returns on investment.
To sweeten the deal, Congress offered the private sector higher and higher interest rates on student loans, but banks still wouldn’t budge. When Nixon entered office in 1969, members of his administration said, wait a minute, relying on banks to make student loans makes no sense. Let's just have the Treasury Department give loans to students.
A top Nixon appointee to the Treasury Department, named Charls Walker, overruled them. Formerly the head lobbyist for the banking industry, Walker insisted that only the private sector had the know-how to make student loans. He crafted the idea of a private corporation funded by the Treasury Department to pay banks to make student loans. Nixon and Congress went with his plan, creating the Student Loan Marketing Association, or Sallie Mae, in 1972.
Ben: Congressman Bill Ford of Michigan described this convoluted process as money laundering. “Everybody who touches it makes something off of it and the student is left with a loan to pay back,” he remarked.
JM: What Ford meant by “money laundering” was that the Treasury Department had an opaque way of taking taxpayer money and giving it to this for-profit company—which would, in turn, give the money to banks, who’d give that money to students, who’d give the money to colleges. Sure, through accounting somersaults, the process kept student loan money off the government’s books, but it was the most dysfunctional thing.
Now, Congress and the White House appointed members to Sallie Mae’s board. But under Walker’s plan, Sallie Mae's shareholders were colleges and banks, which meant there was a natural financial incentive for Sallie Mae to give as much loan money out the door as it could.
It was like the fox watching the hen house. The schools, banks, and Sallie Mae made money, but a lot of students ended up defaulting on their loans.
Ben: How did things get even better for the private sector and even worse for families in the 80s?
JM: As the manufacturing sector in the US started to shrink in the 80s, a lot of jobs were shipped overseas. Meanwhile, as computer companies came online and transformed how businesses operated, even more workers started losing their jobs, particularly employees who had not gone to college.
So, this was really when the “wage premium” started to open up: the wages of college graduates rose, even after adjusting for inflation, but the wages of non-college graduates fell. Going to college rapidly became an economic imperative for many households, particularly for the middle class.
Notably, too, the U.S. News & World Report began publishing its annual college rankings in 1983, and colleges started to get into the game of prestige. Not by coincidence, this is when the cost of college began to skyrocket. Why? Well, to impress the rankings folks, colleges began raising their tuitions, theorizing that the more expensive they were, the more prestigious and selective they’d appear.
Ben: Full disclosure for anyone reading this, and totally unrelated to anything Josh just said, I paid him $100,000 for our interview. Infer what you will about the quality of his scholarship.
JM: And I'm sure you took out a loan for my payment.
But to sum up, the new economic imperative to go to college combined with the rising costs of college juiced the demand for student loans. And Congress, which was heavily, heavily lobbied by Sallie Mae, decided let's just give out more money for loans.
Ben: So entering the 90s, Sallie Mae was making billions of dollars. The universities were making untold billions of dollars as well. And more students were going to college, but more and more students were defaulting. Can you connect the dots from then to the explosion of the crisis in the 2000s?
JM: The Clinton administration did a couple of things to try to address these problems, including barring loans to for-profit schools that had high levels of students defaulting. Congress also cut subsidies to Sallie Mae, and the Clinton administration introduced a direct loan program, which was essentially what Nixon aides had advocated for before Charls Walker came up with his plan.
Sallie Mae fought back, and entering the 2000s, there were two federal loan programs: one run by the Treasury Department, the other by the banks, both backed by taxpayers.
The upshot is that college enrollment continued to soar, and as Wall Street got more and more involved in opening up for-profit schools, student debt went into overdrive, particularly from 2005 to 2011. During the global financial crisis, millions of people couldn’t find work, so they went into two-year public colleges or for-profit schools. Even still, graduates had a really hard time finding a job, so they came out of school unemployed and owing student debt. It was the worst of both worlds.
Obama entered office facing this unprecedented crisis. He used the economic meltdown, when banks were on their knees, to cut Sallie Mae out of federal student lending. From 2010 onward, the federal government has been the only institution that provides federal student loans to students.
Ben: And yet student debt has continued to explode.
As we record this, SCOTUS is considering whether or not to uphold President Biden’s decision to forgive $400 billion in student loans to tens of millions of borrowers. You argue that regardless of yet another well-intentioned move, the root issue of student debt will persist. Can you elaborate on that?
JM: The main problem that I identified is that schools have no incentive to cut their tuition, and they never have. In fact, the student loan program gives them every incentive to raise their tuition, whether the banks are involved or not. While President Obama saved taxpayers money by ending the process that began in 1972, the fact of the matter is schools still have easy access to a government-guaranteed pot of money.
And now, when a student takes out a loan, they just go to a student financial aid officer of their college, who’s essentially a deputy of the government’s lending program. It's like if you wanted to buy a house and the owner of the house had a blank check for you to fill out to buy it. The bottom line is that if you want schools to be more disciplined, you have to make sure that they're on the hook for some of the lending money, otherwise students will keep borrowing money for ever more unaffordable education.
Ben: Disheartening, though I must thank you for only writing “$100,000” in the blank check I sent you prior to this conversation.
JM: Sure thing.
Ben: Josh, thank you so much for your book and your help sorting through this complicated history.
JM: Thank you. I really appreciate your interest.