Does Student Debt Matter?

In Game of Loans: The Rhetoric and Reality of Student Debt:, the Brookings Institution and the Urban Institute team up to debunk the entire idea of a student loan crisis. Rejecting media and activist “rhetoric” about a generation of indebted college grads, Akers and Chingos argue straightforwardly that “there is no systemic student loan crisis.” The contention, if correct, undercuts some of the main narratives surrounding student debt. One should therefore take it seriously, especially since parts of it may even be correct.

The argument here is that we tend to be misled about the general trend by focusing too much on unrepresentative cases. News stories about student loans almost exclusively feature borrowers with very high debt levels. But these borrowers are atypical. In fact, say Akers and Chingos, not that many students actually take out loans (one third of dependent undergrads leave school with no debt, along with one quarter of independent undergrads), and loan balances are not that high (58% of dependent undergrads leave with less than $20,000 in debt, the number for independent undergrads is around 20%). Graduate students tend to push up overall averages because there are no limits on federal borrowing toward graduate degrees, but those with high grad school debt loads tend to have the highest incomes. Lawyers pay a lot to go to law school, but lawyers are still filthy rich compared to everyone else and can generally afford their loan payments.

Akers and Chingos’ strongest argument for the no-crisis theory is this: for most people, going to college is still a good investment. Most student loan borrowers reap a sufficiently large financial benefit from going to college to make up for their loan burdens. In the terminology of the housing crisis, most students are not “underwater” on their student loans, since the income gains of a college degree more than cover the debt payments. Because most students will pay back their loans, say Akers and Chingos, there is no such thing as a “crisis.” And that is reassuring. For anyone fretting about student loans leading to a sudden economy-wide catastrophe on the order of 2008, a read of this book can put their worries to bed. (At least, for the moment: even if college remains a good deal right now, this could change at any moment, and given data gathering and reporting practices by the Department of Education, we might not realize things have changed until it’s too late.)

But when it comes to student loans, economic collapse was never what people should have been fretting about in the first place. The problem with the system is not that it’s unsustainable, but that it causes enormous suffering to the most vulnerable student borrowers, and is racially biased. Crises can come in many forms, and one can be urgently concerned about student debt without fearing that it is about to send the economy tumbling.

In fact, Akers and Chingos do recognize the existence of problems beyond collapse. Their last two chapters are dedicated to “The Real Problems in Student Lending” and “Solving the Real Problems.” But the issues are given an economist’s birds-eye treatment, and treated as wrinkles rather than, well, crises. Their modest solutions aim at making the student lending system “fairer, better targeted, less risky, and more efficient.” (If that framing makes you want to stop reading this article, by all means do not read the book.)

As presented by Akers and Chingos, the actual problems with student loans are as follows: while debt remains great for most people, lots of students (and their parents) are making bad investments in education and ending up underwater on their student loans. Lots of those students end up in default, usually unnecessarily since they could be on income-driven repayment plans. Many of the students in default have comparatively small loan balances, but have very few economic prospects to dig their way out from even these small debts. They largely attended for-profit colleges or community colleges and either didn’t complete their degrees, or completed them only to find they are essentially worthless.

Those are indeed some real problems. Akers and Chingos rightly turn attention away from the NYU graduate student with $200,000 in debt and toward the first generation college student ITT Tech grad in default on less than $10,000 of federal debt. It’s natural that elite media outlets might focus their human interest stories on the travails and misfortunes of elites, but the deepest economic pain is elsewhere.

But an even more important aspect, one Akers and Chingos barely pay attention to, is that student loan hardship varies disproportionately by race. Compared to white students, students of color are verifiably more likely to take out student loans, more likely to take out more student loans, more likely to attend for-profit schools, and more likely to drop out before getting a degree. They also have less family wealth and resources to draw on for help and struggle more in the labor market. Though you wouldn’t know it from this book, student loan issues are racial justice issues. That makes it inexcusable to conclude that there is “no crisis.”

We can see this clearly if we apply the same logic to the housing crisis. Imagine for a moment that the housing collapse had remained (as it was in the beginning) confined solely to subprime mortgages, and it turned out that only the very riskiest of the loans were a problem. Imagine that the defaults, the unemployment, and the foreclosures were geographically contained in the areas with the most subprime loans, neighborhoods with primarily Black and Latino residents. (Areas, remember, where lenders and brokers pushed the worst loans on borrowers who qualified for better, driven by investment bank demand for risk and profit.) In the midst of this hypothetical subprime housing crisis, Brookings Institute economists might release books analyzing whether we were dealing with a “systemic” problem, and whether there was a “crisis.” They might fret about whether the problem would spread to the rest of the economy. And were those economists to find that most people have safe, affordable mortgages, and that most homes are not underwater, they might conclude, like Akers and Chingos, that there’s no “systemic” problem. By this, they would mean that the misery created by the system will likely be geographically and demographically contained to the intended victims. It won’t creep through those bold red lines on the lenders’ maps. Note, then, what the logic deployed by Game of Loans does: it views the question “Is there a crisis?” as synonymous with “Are people suffering who are not poor and/or Black and Latino?” Something becomes a crisis when it affects people other than those at the margins; until then, the problems are “unrepresentative” and atypical. And so long as it remains that way, then no matter how bad it may be for those affected, it remains a mere “problem,” one that should be dealt with through moderate incremental policy reforms.

This kind of reasoning ought to be morally unacceptable. The fact that only the people pushed into predatory loans are suffering the consequences shouldn’t let anyone sleep easy. Taken seriously, this approach would allow any problem affecting Black people to be treated as non-systemic, and therefore relatively non-problematic.

What do Akers and Chingos think the problems with student loans are? Their main concern is that some (but not most) students are making bad investments in their education. They end up in debt trying to get degrees that aren’t worth as much as they cost. This is because they unwisely choose bad schools, and end up underwater. Or they do choose schools wisely, but simply get unlucky in the economy and end up underwater nevertheless. Impossible debt burdens, then, do exist. But they come about through a mixture of bad decision-making and bad luck.

The bad luck component is unfixable, but Akers and Chingos believe that bad decision-making can be discouraged. Students could make better decisions about their education if the federal government gave them more information about the returns they can expect on their investments by choosing different schools and programs. One can imagine something like the information boxes on credit card or loan applications required by the Truth In Lending Act (TILA). In your college application packet would be some numbers representing the graduation rate, average income, and perhaps the loan repayment rate of graduates of that school or program. Those numbers could even be bold and in really big font. All of which is good. Telling students more about what to expect is obviously better than telling them nothing.

Imagining, however, that it will make a difference in student outcomes is an economist’s pipe dream (in fact, the sort of solution that only an economist could ever think would be helpful). The problem is the same as with all consumer disclosures: they don’t really work. People don’t read them. Or people read them and don’t understand them. Or people read them and do understand them, but still have an unrealistically rosy picture of how the future will go for them (everyone thinks they’re the exception, nobody imagines they’re average). People routinely sign contracts for auto loans with big, clear, bold disclosures indicating that they will end up paying more than the price of the car in interest and finance charges alone. In fact, probably everyone reading this article has signed several contracts with big, bold, clear TILA disclosures on them. Anyone remember spending a lot of time thinking about them? Anyone use them to shop around? People see the warnings, they sign on the dotted line anyway.

The informational solution also ignores the effect of marketing. The schools with the worst statistics already spend enormous amounts of money on extremely effective advertising campaigns, which draw prospective students’ attention away from their well-known abysmal records (or from the fact that they’re under investigation by the federal government). The ad dollars are well-spent. Until the feds shut down the the Corinthian college network in 2015, any student at one of the member Heald Colleges could tell you their slogan: “Get in. Get out. Get ahead.” The Art Institutes uses “The hardest thing you’ll ever love.” The University of Phoenix broadcasts truly inspiring commercials showing extremely dedicated students working late to do school work on top of their family and job responsibilities, fading to black with their new catchphrase: “We rise.” It’s legitimately powerful—much more so than some dry graduate income statistics slipped into a registration folder could ever be.

Akers and Chingos’ other solutions suffer from the same basic defect—they see the problem as market imbalance and resulting inefficiency. Because economists fixate on information, the proposals frequently focus on making the system less confusing rather than less vicious. They want to streamline federal lending to make it less complicated, and make repayment options clearer so that it’s easier for borrowers to enroll in income-driven repayment.

One of their suggestions is to automatically enroll graduates in income-driven repayment plans. But heinously, and bafflingly, they suggest getting rid of the government loan forgiveness programs on the grounds that colleges might be incentivized to raise prices if borrowers will be less worried about affording monthly payments. In doing so, they accept (but do not acknowledge that they accept) a world in which a lot of people die with massive student debt balances that have started small and grown from interest over decades, with no possibility of their ever being forgiven. (They do discuss making public college free or enacting income-sharing plans, but conclude that there’s not enough evidence to know what the consequences would be. For the economists, it’s fine to speculate without evidence on the positive effects of eliminating loan forgiveness, but not on the effects of free college.)

But enough critique. How could one better approach the student debt question? Well, any actual attempt to address the fact that hundreds of thousands of people are suffering over student loans should start by talking to people who are suffering, in order to identify what they are most seriously concerned with. Akers and Chingos criticize the media for focusing on the unlikely high-debt-load borrowers, but they don’t spend any time on the actual experiences of more representative borrowers.

Over the last several years, as an attorney working on debt issues, I have had the opportunity to speak with a number of borrowers suffering with student debt. Let me present a few snapshots and observations, and suggest what they might tell us about the nature of the “crisis” and its solutions.

People only find out certain things about student loans when they first fall into default. First, many are surprised to discover that the federal government can take money out of their paycheck. When private lenders do this, they usually have to take you to court first. Not so for federal student loans. One day you can get a Notice of Administrative Wage Garnishment in the mail, and a few weeks later 25% of your check will be going to your student loans whether you like it or not. No judicial review, no time to figure out what to do, just a siphon placed directly into the your paycheck.

The psychological effects of this can be extreme. I have talked to several borrowers who were completely caught off guard by the garnishment. They had stopped making student loan payments because they couldn’t afford them on their meager wages, only to suddenly be garnished and discover that they now couldn’t afford rent. One woman told me she quit her job and moved back in with her parents because she couldn’t handle the garnishment, which was stressful and humiliating. She was driving for a rideshare company in an attempt to keep as much of her wages as possible. (Although she still needs to worry about the federal government taking money out of her bank account.)

Second, people are also surprised when they learn that the federal government can take money out of your federal benefits. Private lenders are prohibited by law from taking your Social Security money, your disability money, or your veterans benefits. This makes sense, since federal benefits are meant to help people maintain a minimum standard of living, and many would be repulsed at the sight of a debt collector depriving a disabled veteran of her VA benefits over an old credit card debt. Yet the Department of Education has no problem taking from that disabled veteran’s benefit. Again, no court order required. You get a letter, and then a chunk of your benefit is gone.

Once again, the effects are devastating. A friend of mine received federal disability benefits for mental health issues that made her unable to work. When a debt collector called threatening to garnish her benefits if she did not make (impossibly high) payments on her federal student loans, she had a meltdown and had to call a suicide helpline. Her benefits were garnished anyway.

Third, collection of federal student debts has no statute of limitations. Most debt can only be collected for so long. In California, for example, most debt can only be collected for four years after your last payment. If your lender (or subsequent debt collector) doesn’t sue you within four years, you are no longer legally obligated to pay. Not so with federal student debt, for which you can be pursued for eternity. I once spoke to a student borrower who had attended a for-profit school in the 1980s for less than two years. He spent a long time homeless and didn’t hear a word about his student debt for more than a decade. But as soon as he had gotten back on his feet, gotten stable housing and found a job, the wage garnishments started right up.

Fourth, the federal government doesn’t really monitor whether schools are scams or not before giving out loans, and will sign off on loans to attend schools offering essentially Trump University-caliber educations. Even if the federal government later shuts down a school for defrauding students, they will continue to pursue the ex-attendees of the defunct school. That’s what happened in the case of Corinthian Colleges. After closing the program for being transparently fraudulent, the Department of Education promised former students some kind of forgiveness program. Yet the program still hasn’t been set up, and the Department is sitting on thousands of applications for relief. More than a year and a half after the schools were shut down, the Department is still pursuing the victims of the colleges’ fraud.

It’s important to realize that “victims” is precisely how we should view people who are defrauded out of money. It shouldn’t matter whether we’re talking about a Nigerian email scam or an online diploma mill. Once you meet people who have been swindled by these institutions, the “bad decisions” label becomes more difficult to apply. Many of the students have had little contact with the U.S. education system, and have limited context for evaluating it and determining which schools are good. They also often assume that the federal government wouldn’t give out loans to go to bad schools. I have heard this from a number of students, especially those who immigrated from other countries. They see federal loans as vouching for the legitimacy of a school. In fact, that’s hardly an unreasonable conclusion. After all, they think, why would the federal government affirmatively help students go into debt to go to sham schools? Why indeed.

The schools themselves take full advantage of this impression. You may not see many posters advertising the easy availability of federal student aid at Harvard, but you’ll see a lot at for-profits. Walk past any storefront cosmetology school or culinary school and you’ll find FAFSA posters filling the windows and walls. It’s infuriating that people like Akers and Chingos aren’t really talking about these issues, and are instead reducing their seriousness. The student loan problems noted in Game of Loans—those of borrowers being duped into going into debt to attend terrible for-profit schools and then not being able to afford to pay back their relatively small loan balances—are not minor. They affect large numbers of people, and are the result of some vicious economic actors targeting vulnerable students. Students who could go to decent, affordable colleges are being lied to and enrolled in terrible schools that saddle them with lifetimes of debt. The federal government is watching and doing little about it. Yet Akers and Chingos spend their energy insisting that this isn’t a “systemic” crisis, because plenty of other people are fine and the economy isn’t threatened.

It’s even more frustrating because these issues are so easy to solve. Many of the worst practices are directly perpetrated or enabled by the federal government itself, and the Department of Education could easily cease to do many harmful things. It could stop garnishing wages. (Or, even if it didn’t stop altogether, it could stop garnishing wages below a certain threshold.) It could stop garnishing federal benefits. It could stop collection on debt past a certain age. It could more actively monitor schools and pull support from the scammy ones. It could offer group forgiveness to students with debt from the particular schools that defrauded students. It could automatically enroll students in income-driven repayment plans so no one is in default (credit where due—Akers and Chingos do endorse this).

Most of these ideas wouldn’t even require new legislation or rules. The Department of Education could just start doing them, if it so chose. The student loan system as it currently exists is a regressive tax: those who can’t afford college up front end up paying more over time to the federal government. Most people who go to college may benefit from it. But the people who don’t benefit are disproportionately Black and Latino students preyed upon by terrible for-profit schools that offer worthless degrees and saddle their students with unmanageable debt. Akers and Chingos, after minimizing the issue for the first 110 pages out of 144, begin to get at these facts. But because they are convinced it doesn’t constitute a crisis, they offer only minor band-aids. People are suffering, though. They are suffering as a result of a racist system that ensnares them in lifelong debt traps. The Department of Education could do a lot about this but chooses not to. Calling this state of affairs anything other than a systemic crisis is perverse. We should be very, very angry.