The Root of Student Debt

A Canada-sized problem

Good morning, subscriber,

When I first sat down to write to you, it’d been a slow news week, a sad testament in itself to how fast popular media moved on from the Buffalo shooting. Hours later, a gunman entered a school in Uvalde. Coach Steve Kerr’s raw mixture of rage, despair, and exasperation summed it up well:

Golden State Warriors @warriors

Steve Kerr on today's tragic shooting in Uvalde, Texas.

I don’t have too much more to add right now, other than I hope you have some restorative forest bathing planned for the weekend. You might need the mental cleanse after we dive into the murky history of student loans.

While the world implodes, student debt continues to explode. 43 million people owe $1.6 trillion in student debt, an amount that has tripled since 2006. US citizens owe more in student debt than they owe in credit card debt or car loans, and combined, this debt is the size of Canada’s economy (I love random comparisons to Canada). To stem the crisis, last week, President Biden signaled he might cancel tens of thousands of dollars of student debt for low-income and middle-class students who’ve attended public colleges and universities. His indication comes amid continual pressure from top Democrats like Chuck Schumer, who regularly tweets things like, “Today would be a great day for President Biden to #CancelStudentDebt.”

But other than serving as a reminder that Democrats in the Senate have accomplished as much in the last two years as Canadians in the Senate, Schumer’s Tweet obscures a shadier reality. The structure of the student loan system is rooted in LBJ’s dual, self-defeating goal of broadening a student loan program while keeping the federal deficit down. The banker-led accounting gymnastics that followed under Nixon’s watch all but ensure students will continue to take on onerous levels of debt, regardless of what Biden decides to do.

To see how the road to student loan hell is paved with good intentions, let’s head to the 1960s.

Today’s story comes from The Debt Trap by Josh Mitchell

Then-President LBJ, a former school teacher, wanted to bring education to the masses.  “Higher education is no longer a luxury but a necessity,” he told Congress in January 1965. President Eisenhower had initiated a student loan program in 1958 after scientists warned him that, intellectually, the Russians “could pass us swiftly.” LBJ agreed that student loans were integral to winning the Cold War, but he also thought they’d advance racial equality. In a speech at Howard University in June 1965, Johnson stated that centuries of oppression meant Black citizens “lack training and skills.” A deeper national investment in education was vital to closing the gap.¹

LBJ at Howard in 1965

There was one problem: LBJ’s wars on poverty, crime, and in Vietnam pushed federal spending over $100 billion for the first time that same year. Enlarging the student loan program and pushing the federal deficit to unprecedented levels might scare investors in the government and slow the economy. To solve this conundrum, the LBJ administration could’ve stopped arming police departments and killing Vietnamese citizens. That would’ve freed up money not just for the government to provide loans but to give lower-income students scholarships, which the government also began doing on a small scale around this time. Alas, I’m describing an alternate universe, and instead, LBJ asked the finance industry for help.

On the surface, this seemed a tidy solution. If private institutions made the loans, they’d remain off the government’s books, but to get banks to lend, the government had to incentivize them. LBJ gave this a shot, guaranteeing that the government would pay banks back 80% of their losses if students defaulted. This guarantee wasn’t enough: as the 60s wore on, Wall Street showed a limited appetite for student loans, and the market dried up. 

To generate further incentive—and again, instead of not spending billions of dollars building prisons and bombing Southeast Asia—the Nixon administration came up with a different plan. Specifically, Charls Walker, the deputy secretary of the Treasury Department, suggested the government create a private corporation to provide money to banks to make loans to students.

Charls Walker (left) in 1971

The corporation would be modeled after Fannie Mae, which Congress created after the Great Depression to buy mortgages from banks (a nasty story for another time). A few Nixon aides wondered if Walker held “greater concern for the interests of bankers than those of college students,” an understatement only surpassed in size by 400,000 Canadian Warblers. But as LBJ noted, “that son-of-bitch Walker’s got elbows,” and with the weight of the banking lobby behind him, his proposal won out.²