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Overview
IntroductionWhen someone at the age of 18 signs their first student loan note, they see aid offered by the school or government. What the student usually does not realize is that before they can legally buy a beer, they have entered an enduring, solitary relationship with a powerful and sophisticated industry. The number of student borrowers and the amount of borrowing is rising dramatically every year. The appearance of private educational lending further enhances this dynamic. These data are well documented and the NSLA Library provides some of the sources. Student loans are a good thing. Most people cannot pay for college out of pocket and college would be unattainable for many more people if they did not exist. NSLA recognizes this reality. Our intention is not to dishearten people who need a student loan. Student loans do have their virtue. But they also are like a four-wheel drive off-road SUV: a great way to get stuck someplace you could not otherwise reach. NSLA's intention is to empower the borrower through education, so that when he or she commits to the contract, it is with fully informed consent. In other words, to help students not get themselves stuck. Benjamin Franklin said, "neither a borrower nor lender be". These modern social forces increase the need for students to understand the impact of their borrowing decisions before they sign on the dotted line. Because once committed to a student loan, its repayment is uniquely unavoidable. One can divorce from a marriage; lose a mortgage and the house in bankruptcy; default on a car loan and have it repossessed; refinance a high-interest home mortgage at a lower rate with a competing lender; be registered for the draft and disqualified for physical reasons or simply never be called to service. There is nothing comparable for a student loan. A century ago, private higher education was for the wealthy. After World War II, Congress tried to make college accessible with grants and a few loans. A few grants became many loans and tuitions went up. Fifty years later we are back where we started. Education can be an elevator between classes in our society, but education debt has become a class enforcer. Your relationship to the student loan industryThe actors
The student loan system is what it is today, because millions of individual students keep making the individual decision to take out a loan and give the funds to their school. Your relationship to different components of the student loan industry is important. Each has aspects that are immediately visible, but it also has aspects that become apparent only after the student is well into college or repayment. Office of Financial Aid - Students view the financial aid office as a friend and ally, usually exceptionally nice people who come to their aid, when they have set their heart on college and can already picture themselves there. At the same time, however, the financial aid office is one arm of the institution as a whole, and schools are revenue-generating institutions. And they have their own agenda for the evolution and direction of the institution. You might take loans to enroll and major in a well-regarded Russian department. The institution may decide to shift its focus to Chinese and cut resources to your department so that it no longer is well-regarded in the field. But the institution is not going to give you a refund. While schools give some grants and scholarships (aid), much of what happens in these offices is simply financing. At the risk of putting too fine a point on it, what happens in the cubicles of the school financing office is rather like what happens in the side office of a car dealership. Schools - through the mechanism of the Office of Financial Aid - do not tell a student not to come when the debt is unaffordable or the product might be a poor investment. The school is a sophisticated institutional and financial actor, and it conducts business accordingly. It functions on the assumption that the student can and will advance his or her interests in the same way. Banks - Students view banks as another kind of ally or perhaps rescuer. Students are aware that in most cases, lenders providing loans under Federal law, and so are confident that with Uncle Sam in the background, their interests are protected. At the same time, however, banks too are revenue-generating institutions. Their revenue comes from some provisions built into the law and also primarily from interest on the loans they give. Publicly traded banks have stockholders who demand quarterly dividends and the market demands their stock prices go ever upward. Privately held banks have investors with similar expectations for return on their investment. There is no such thing as too much profit here. Lenders have strong incentives to have students borrow heavily and pay as much interest as possible, for as long as possible. This is why no refinancing or bankruptcy exists for student loans. It is why banks advertise the availability of lowered monthly payments and say as little as possible about the provisions that would save borrowers money while reducing bank profits. Like the schools, lenders are sophisticated institutional and financial actors and they conduct business accordingly. They function on the assumption that the student can and will advance his or her interests in the same way. Borrowers themselves - At the age of 18, most people do not know what they want to be when they grow up believe they will find it out in college. At the age of 18, the people who do know what they want to be when they grow up assume it will not change. At the same time, however, neither is necessarily true. People change constantly over the course of their lives. There is a good deal of research now on how our bodies and even brains do not fully mature until the late 20s. Student loans have the effect of freezing the borrower financially at one point in time, closing off opportunities down the road. People have much more trouble changing course when the debt of who they thought they were at 18 still demands to be paid at 30, when they have become someone else. Borrowers are surprised to find that when they look back they feel angry at the lender or to a lesser extent the bank. If they engaged in practices that were illegal or unethical, this is clearly appropriate. However, a good deal of the bad feelings that surface relates to a sense that the institutions did not protect them or even intentionally encouraged them to make decisions they would regret. There may also be some anger at the self, for having been innocent or failing to protect themselves. It is not hard to find a borrower in repayment who has these negative feelings. NSLA provides education so that borrowers can be empowered at the outset and control their destiny, protecting and advancing their interests effectively - within a system that operates on the assumption they will do exactly this. The wider circle - Students today understand that college is expensive and few actually expect someone else to pay for it all out of pocket. At the same time, however, students can be disappointed that it did not happen. It can feel unfair that your parents could not or did not pay for college; that other relatives did not offer to help; or that life has been unkind by sending hardship. The power of this dynamic is increased by the fact that it is unspoken. This disappointment increases the tendency to view schools and banks as benevolent rescuers and college as full of hope and possibility. In this frame of mind, it is all the more difficult to approach education financing as hard-nosed consumer of services. Taken together, these dynamic can contribute to a later sense of having been mis-treated. Policymakers - Until now the borrower's relationship to policymakers has been remote. The Federal laws that created the student loan industry as it exists today were passed over the course of decades, resulting in a patchwork. The Department of Education has jurisdiction to administer Federally guaranteed loan programs, which are implemented by private sector banks, but it is not the Department's role to define the industry. It primarily acts as a conduit for funding and certain information, and exercises oversight of only those loan programs that Congress created and placed under its jurisdiction. Loans that are not Federally guaranteed are outside the Department's control and fall within the jurisdiction of the regulators that already oversee the banking industry as a whole. Across all Federal government bodies, there has developed a pervasive tendency toward "public-private partnership". In practice, the result is often that government gives industry the role of defining and policing itself. As a practical matter, when we use the word policymakers, we usually mean Congress. Senators and Representatives are responsible for a wide range of issues and education financing is only one of them. Periodic elections mean that there is a constant turnover over staff who may benefit from education on the topic. The lending industry is worth about $85 billion / year. Yes, that's billion with a B, folks. Colleges also have a large financial stake in the industry and both devote considerable resources to educating policymakers about their own concerns. Although a number of organizations (PIRG, educational foundations, and professional associations of doctors, lawyers, dentists, etc.) care deeply about how student loans affect the nation and their professions, like Congress, student lending is just one of many topics they handle. Although student loan issues have periodically flared up in the media, there has been no consistent channel through which borrowers could express their opinions and be heard. The National Student Loan Alliance is the only national organization whose mission is entirely and solely dedicated to the interests of the student borrower. As such, we are in a position to educate policymakers about the borrower side of the industry, by concentrating the elements diffused across many groups to give them laser focus and energy. Because we are financially independent of the lenders, our ability to do this is constrained by the donations that fund us. Social context of student borrowingThe number of student borrowers and the amount of borrowing is rising dramatically every year. The appearance of private educational lending further enhances this dynamic. These facts are well documented and the NSLA Library provides some sources. The purpose of this section is not to detail the trajectory of student lending, but to put it in context. Other social and economic trends are in motion that magnify the effect of student debt, beyond the impact obvious from the data. These trends include:
In short, Americans are under increasing pressure in many areas. These pressure points mean that an individual who must repay student loans operates in a very different environment than what existed when the student loan industry was created in the 1970s. Recent data show a new trend: college graduates are increasingly moving back in with their families due to housing and loan repayment costs. Given the time lag between student borrowing, we may be on the leading edge of a serious social and economic shift of national scale. Brief history of the student loan industryGovernment-provided student aid began with the Higher Education Act (HEA) of 1965. At that time, the idea was to provide direct government grants to make college possible for those who couldn't otherwise attend. Over time, however, grants have been overshadowed by government-guaranteed loans which are made by public lenders. There has always been tension over how to accomplish the goals of making college possible for the truly needy and making it less painful for everyone else. Lawmakers want a system that works, and that is also efficient, inexpensive, and easy to run. It seems likely that later Congresses simply did not share the vision that guided the 1965 Congress, when it passed the first HEA. Several times, a tuition tax credit has been proposed and Congress has refused to grant it. Instead, over thirty years, Congress has provided more and more bank loans, with higher borrowing limits -- without a parallel increase in grants. Each time loan limits were eased, borrowing and debt levels jumped dramatically. Today, the government's dominant approach to making education accessible is to encourage students to borrow against their future. Chronology of Student Loan LegislationAfter WWII. GI Bills. 1965. Need-based grants. Middle-class loans. Tuition tax credits
defeated. 1972. Pell Grants. SALLIEMAE. Postsecondary education. In this year, a change of terminology occurred: the phrase "post-secondary
education" appeared, replacing the term "higher education".
This change went along with changes in the HEA which expanded federal
support to students who attended so-called proprietary schools (career,
vocational, community colleges, trade schools, and part-time programs).
The 1972 HEA also created Basic Grants, the forerunner of today's
Pell Grants. Basic Grants were intended to be the foundation for
all forms of student aid, and the students would receive the grants
directly from the government. Assuring this minimum level of grant-based
support was supposed to result in greater access to education, esp.
for the needy. The 1972 HEA also created the Student Loan Marketing
Association (SALLIEMAE) - a publicly-chartered private corporation,
to provide capital and liquidity for the Guaranteed Student Loan
program. 1978. More Pell Grants. More loans. Tax credit defeated again. 1979. Government guarantees banks a favorable return on student
loans. 1980 Reagan reversal: Need re-appears. Origination fees appear.
More loans. In the first half of the 1980s, the growth in student aid slowed greatly. Grant funding fell. Rising inflation rates and flat student aid levels meant that student buying power fell too. GSLs continued to grow, although more slowly than before. In the mid-1980s, there was concern in Congress that students were relying too much on loans, as tuition grew even faster than inflation, but little was done to address the root causes. In the 1986 HEA reauthorization, the amount that students were allowed to borrow again increased. Again the number of loans issued jumped. In the late 1980s, there was a lot of negative press about students defaulting on their loans and abuses by the "proprietary" schools. Congress took steps to reduce the default rate and to save the government money. 1992. Pell Grant entitlement fails. Loans expand greatly. Alternatives
Explored. The 1992 HEA also created a demonstration program, to explore whether it would be better for the federal government to run the student loan programs through the schools, rather than through guarantees to banks. In 1993, the Student Loan Reform Act changed how student loans are financed, originated, serviced and repaid; it expanded the 1992 demonstration project, and aimed to convert 60% of federal student loans from the guarantee system to a system of direct lending within 5 years. It also created more flexibility in loan repayment, providing income-sensitive repayment options. In 1994, there were efforts to streamline the regulatory processes involved in the student loan programs. The Clinton Administration's Dept. of Education began a broad effort ("Phase Two") to hold hearings around the country on how the federal student aid system could be improved. In 1995, these efforts faded as the Republicans took control of Congress. After 1992. Huge jump in loans. |
