What Caused the $1.6 Trillion Student Debt Crisis?

President Biden has made it his goal to relieve Americans of crippling student loan debt, delivering on promises made during his campaign.

Last year, his administration took a big swing at debt relief, but the Supreme Court deemed the plan unconstitutional.

Still, since taking office, Biden has canceled the debt of almost 4 million borrowers, wiping away more than $143 billion in loans. His latest plan would offer a measure of relief to an additional 30 million borrowers.

Yet these efforts to date account for less than 9% of the $1.6 trillion federal student debt.

The Biden administration calls the student loan situation a crisis. Some believe it’s another bubble waiting to burst, much like when the subprime mortgage market collapsed and ushered in the Great Recession in 2007.

But it hasn’t always been this way. Higher education has an almost 400-year history in this country, yet the student loan saga as we know it traces its roots to the 1960s.

Sharing the blame for this mess are a charismatic governor, a predatory lender, banks, and universities themselves.

Until the 1960s, public higher education in the U.S. remained essentially free, or close to it. Colleges charged nominal fees, and students paid for room and board, but tuition wasn’t the concern it is today. For the academic year 1963-64, students at four-year public universities on average paid $243 in annual tuition and fees. According to the Bureau of Labor Statistics, that’s about $2,400 in today’s dollars.

That’s because the prevailing wisdom of the day considered higher education a public good — an educated populace benefits society, not just the individual. As such, taxpayer support undergirded public universities. In 1965, state funds covered 76% of the University of Michigan’s operating budget.

But by 1983, that support had dwindled to 50%, and it’s now 13%.

What happened?

Reaganomics took hold.

As California’s governor in the 1960s, Ronald Reagan set his sights on the University of California system, particularly the Berkeley campus, which he believed to be overrun with beatniks, radicals, and filthy speech advocates. On what was to become known as Bloody Thursday, Reagan sent National Guard troops to Berkeley to suppress an anti-war rally, resulting in 13 injuries and one death.

In his skeptical view of higher education, taxpayers shouldn’t be subsidizing intellectual curiosity. He slashed funding to the UC system, charging tuition to get rid of undesirables … those who are there to carry signs and not to study …

Reagan’s 1967 statement on tuition addressed the hysterical charge that raising costs would deny educational opportunities to those of the most moderate means. His solution was to make it plain that tuition must be accompanied by adequate loans to be paid back after graduation …

Government officials in Florida and New York followed suit, initiating tuition hikes in their states. Nationwide, the perception of college gradually shifted. What was once a public good came to be seen as a commodity serving individual interests.

In retrospect, this period was the clear turning point in America’s policies toward higher education, John Schwarz wrote in The Intercept. For decades, there had been enthusiastic bipartisan agreement that states should fund high-quality public colleges so that their youth could receive higher education for free or nearly so.

As a result of this ideological swing, student loan debt began to mount. In 1966, American students took out $73 million in student loans. By 1981, when Reagan took office as president, that figure had mushroomed to $7.8 billion.

To be fair, student loans had existed long before the Reagan Revolution of the 1980s. The National Student Loan Program, launched in 1958 as part of the National Defense Education Act, provided low-cost federal loans largely for students studying science, math, and foreign languages — a direct response to the Russian Sputnik launch amid the ongoing Cold War.

Seeking to expand educational opportunity further, the Higher Education Act of 1965 introduced the Federal Family Education Loan Program (FFELP), loans issued through private lenders with the backing of government assurance in cases of default.

When the Higher Education Act was reauthorized in 1972 under President Richard Nixon, it gave birth to the Student Loan Marketing Association, known as Sallie Mae, a government-sponsored enterprise that used U.S. Treasury money to buy government-backed FFELP loans from banks.

Writing in Forbes, Preston Cooper explains that Sallie Mae flooded banks with cheap cash, purchasing student loans directly or lending to banks using student loans as collateral.

Thanks to taxpayer money flowing through Sallie Mae, banks were earning high rates of return on their student loans.

This new system, Cooper writes, gave banks the incentive — and the ability — to make as many student loans as possible.

Along the way, Sallie Mae became wildly profitable. Its assets grew from $1.6 billion in 1979 to $28.6 billion in 1988.

During the 1990s, two major federal initiatives spurred student borrowing, which rose from $16.4 billion to $37.5 billion over that decade. The 1992 reauthorization of the Higher Education Act enabled Congress to broaden eligibility for subsidized federal student loans, increase annual loan limits, and form a new unsubsidized student loan program available to anyone, regardless of income.

A year later, the Student Loan Reform Act introduced the William D. Ford Federal Direct Loan Program, the precursor of what would become Guaranteed Student Loans. Now the federal government could issue loans directly to students in addition to backing bank-issued loans.

With its role as middleman between the feds and student borrowers reduced, Sallie Mae saw its stock plummet, and it eventually severed ties with the government to become a private corporation in 2004. By then, student loan debt had grown to $364 billion.

In a 1987 New York Times op-ed, then Secretary of Education William Bennett accused universities of driving the student-loan gravy train.

Titled “Our Greedy Colleges,” Bennett’s screed claimed that increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.

Was he correct? Or were student loans increasing as universities were forced to raise tuition because of economic factors?

In a 2016 paper published by the National Bureau of Economic Research, economists Grey Gordon and Aaron Hedlund tested the “Bennett Hypothesis” to determine the cause of tuition increases between 1987 and 2010. They concluded that Bennett’s arguments held water and could fully account for the tuition increase on its own.

Similarly, a 2017 report from the Federal Reserve Bank of New York found that the expansion of student loans accounted for an average tuition increase of as much as 60 cents per dollar. The report’s conclusions were consistent with the Bennett Hypothesis.

To corroborate these findings, one need consult none other than Al Lord, the mastermind behind Sallie Mae’s rise (and fall). Lord joined the organization in 1981 and became CEO in 1997.

In a Wall Street Journal article, Lord admits he knew colleges were raising tuition because students had ready access to loans. They raise them because they can, he said, and the government facilitates it.

Not only were universities conspirators in this scheme but many also directly profited from Sallie Mae’s soaring stock prices. Early investors in Sallie Mae included Harvard, Yale, Princeton, MIT, Notre Dame, Stanford, and Wellesley College, among others. A 1980 Harvard Crimson article noted that Harvard and Brown University ranked among the five largest shareholders of Sallie Mae stock at the time.

These universities essentially became part of Sallie Mae’s sales force,notes the Wall Street Journal article. And for good reason: The more they raised tuition, the more loans students absorbed. More loans meant more fees, interest, and commissions for Sallie Mae, driving up the company’s stock and directly benefiting shareholders, including universities themselves.

Sallie Mae adopted aggressive tactics to ensure profitability. It paid colleges to make Sallie Mae the campus student loan provider, enlisted financial aid officers to serve on the company’s advisory boards, and installed Sallie Mae employees in university call centers to offer financial advice to students.

Our customer was almost every bit as much the college as it was the student,Lord said.

Today, Sallie Mae is no longer the company it once was. In 2010, Congress eliminated the FFELP, meaning the federal government was now solely in the direct loan business.

Sallie Mae continued servicing federal loans until 2014, but has since provided only private loans. That year, the company split its operations, with Navient becoming the new loan processing entity.

It’s easy to paint Sallie Mae as the villain in this saga, yet the history of student loan debt is far too complex to blame one entity. Still, the company earned billions of dollars on the backs of students, while Lord himself pocketed hundreds of millions as CEO.

And universities were accomplices early on, though many dumped their Sallie Mae stock following the 1992 introduction of direct loans.

What Reagan initiated in the 1960s has become a $1.78 trillion problem for Americans. The situation seems eerily reminiscent of the housing market bubble that burst in 2008. But student loans can’t be readily discharged through bankruptcy, so it’s not as easy to walk away from this form of debt.

As the Biden administration continues to pursue solutions following the Supreme Court’s decision, millions of borrowers still struggle under this burden.

Higher education, it seems, has come full circle in a peculiar way. What was once considered a public good morphed into a private good, and it has now become a public nightmare.