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How Loans Turned American Students Into Indentured Servants

3 | By Shah Gilani

It doesn’t matter if you’re liberal, conservative or libertarian. We all know that the student loan crisis forcing Americans into indentured servitude is wrong.

Student loan debt in the U.S. is at more than $1.4 trillion and counting. That debt…

  • Can’t be paid off without tens of millions of better-paying jobs.
  • Can’t be discharged in bankruptcy.
  • Can’t be stopped from growing because it serves the for-profit universities and the so-called non-profit universities’ egregious profitability.

President Obama addressed America’s massive student loan problem with legislation and an executive order, but nothing really changed.

President Trump is proposing changes to income contingency repayment plans and forgiveness programs in his 2018 budget.

Those proposals would be a help, but they won’t stop students of all ages from remaining or becoming indentured servants to the false hopes and profiteering schemes of greedy universities.

Here’s how it got this bad, and why these fixes are only Band-Aids on a plague…

How the Government Got Involved

The problem starts with easy access, government-guaranteed student loans.

The U.S. government got into the student loan business in a big way with the signing of the Higher Education Act of 1965. Undergraduate students from low-income families got access to government-subsidized loans and didn’t have to pay any interest while they were enrolled.

The two basic categories of loan-types are Subsidized Stafford loans and Unsubsidized Stafford loans, renamed in 1988 in honor of U.S. Senator Robert Stafford for his work on higher education.

Subsidized Stafford loan qualifying students aren’t charged any interest while they’re in school. Borrowers with Unsubsidized Stafford loans have interest accrue while they’re attending classes, which is rolled into outstanding balances when they leave school.

Eligibility for Subsidized Stafford loans isn’t based just on income, but also on how many children in a student’s family are currently in college… as well as the cost of the college. Students from middle or even high-income families that attend expensive colleges often qualify for Subsidized Stafford loans.

Most students who take out Subsidized Stafford loans simultaneously borrow under Unsubsidized Stafford loan programs.

Dependent and independent undergraduates (a borrower is dependent if they rely on family income or co-signers) are subject to lifetime borrowing limits for both loan types. The lifetime limit for Subsidized Stafford loans is $23,000. For dependent undergraduates, the lifetime limit for both loan types combined is $31,000. The limit is $57,500 for independent undergraduates.

The burden of repaying direct government loans and government guaranteed student loans was eased in 1990 when some federal loan program borrowers got options to make Income-Contingent Repayments (ICR). Changes in 2007 opened-up income-contingent repayment options to all borrowers when Congress replaced ICR with the Income-Based Repayment (IBR) program. IBR capped monthly payments at 15% of income above 150% of the then exempt poverty guidelines and provided for loan forgiveness after 25 years.

To be clear, these loans and repayment programs pertain to undergraduate borrowers. Graduate school borrowers’ loan programs and repayment programs are different.

Graduate school borrowers, prior to school year 2006-2007, could borrow a maximum of $20,500 a year under federal loan guarantee programs. However, in 2006 Congress lifted loan amount eligibility up to the “cost to attend set by the university” (cost meaning tuition and living expenses) under the new PLUS loan program.

With aggregate outstanding student loan debt reaching $1 trillion in 2014 – exceeding for the first time all outstanding credit card debt in the country – President Obama pushed Congress to ease repayment burdens for millions of student loan borrowers.

For undergraduates, monthly repayment amounts were capped at 10% of discretionary income and loan forgiveness was to be granted after 20 years, as opposed to 25 years.

Additionally, the Obama administration’s changes provided loan forgiveness to borrowers with graduate school debt, even if they’re middle income or high income earners, if they have large enough debts.

It sounds nice, but that change ended up creating more issues than it solved.

The Current System Sets Students Up to Fail

The knock against President Obama’s IBR program for graduates is that graduate students have four-year college degrees, and providing subsidies for graduate education skews benefits to upper middle-class families. Meanwhile, low-income families struggle to finance an undergraduate education.

Given the generous loan amounts available to graduate students, there’s no doubt the current IBR program pushes prices for graduate schools higher and, of course, impacts decisions students make about how much to borrow.

The Trump administration’s student loan proposal rolls back the large subsidies the Obama administration’s changes to IBR provide to graduate students. According to the Brookings Institution, Trump’s proposals will remove “the perverse incentive graduate students currently have under IBR to borrow more rather than less.”

Brookings recent report on education says, “Such incentives are also likely to have a significant effect on the graduate education market, indemnifying students for taking on more debt than their future incomes can support and taking pressure off universities to offer only programs that have value in the labor market at prices in line with that value.”

Changes must be made, because the system of financing higher education is raising tuition charges, enriching universities and colleges, and essentially enslaving millions of students. Moreover, those students aren’t any better off in the job market, for a host of reasons having to do with education costs.

It’s impossible for any politician to admit the truth. The easy availability of government-backed loans for undergraduates and graduates has inflated tuition charges and the profitability of for-profit and non-profit public and private institutions, without accountability to students.

The business of higher education has just become another greed-mongering scheme in the U.S.

Those so-called non-profits aren’t an exception.

Josh Freedman, a Forbes contributor who writes extensively on the political economics of higher education says, “The idea that nonprofits do not make profits is only true in the narrowest understanding of the term. Nonprofits can and do make profits, but they cannot give them to owners or shareholders like a for-profit corporation can.”

According to Bloomberg, from 1978 (since records began to be collected) to 2012, the cost of undergraduate tuition in the U.S. rose 1,120%.

In the five years from 2012 to the school year beginning in 2016, tuition at non-profit 4-year schools rose another 13% and at public 4-year schools rose 9%, based on the CollegeBoard’s Trends in Higher Education.

The increases in tuition over the past three decades dwarfs the rate of inflation, the increase in the cost of medical services, increases in insurance premiums… In fact, it dwarfs everything we pay for.

Higher education non-profit institutions are so profitable that they’re paying executives, administrators, team coaches, professors and teachers triple-digit salaries, providing extraordinary benefits, and lavishing campuses with everything from new sports stadiums and plush dining halls to free psychiatry services.

For-profit colleges are another story altogether. With billions of dollars of student’s borrowed money, some have gone public, enriching initial investors, managers, boards and shareholders. While, for the most part, they are grossly underserving their student populations, almost half of whom don’t graduate and account for 70% of defaults.

It all seems pretty bleak, but all hope is not lost.

On Friday I’ll tell you how all this can be turned around in no time flat.

Sincerely,

Shah

3 Responses to How Loans Turned American Students Into Indentured Servants

  1. TPS says:

    They took the loan they should pay it back. Is every person who takes a loan a servant? Car loans hose mortgages no one forces people to take loans they take them because they want something and don’t want to wait or work for it ahead of time. Credit card debt out of control but you want it you should pay for it. It’s called accountability.

  2. ELLIOTT says:

    Sir, You left out a critical component. Our so-called “Greatest President” set
    the trend line while governor: Start charging students for tuition. You see, tuition back then for in-state was $50 in the sixties, and $75 in the seventies per semester. You read that correctly! Read it again! So the great orator, who hated anything and everything about unions and social programs was the gauntlet. This little fact is NEVER mentioned in media, including the progressive side (Thom Hartmann, Amy Goodman). As you know California set the trend for the rest of the country in many arenas; education certainly led the way. And no can can refute the state of California and the Nation, for that matter, was not paid back by these students entering the workplace, paying taxes, and making a better world. You may want to research, verify/refute and write an article on this stinging issue for kids of this generation. Indentured? Try enslaved!

  3. Steve says:

    Some of these arguments extend to high-school level education as well, with the exception of student loans. The aggrandizement and cost of college athletics/facilities has spilled down to high schools where a new high school football stadium will cost in the many tens of millions and can dwarf the average college stadium of decades ago. Of course, the university that I attended and used to support annually felt a need to spend something like 50 Million dollars renovating a perfectly functional football stadium. Then, they moved on to planning for a new $100 Million basketball stadium and for a $200 million “general purpose” stadium. What these have to do with “higher education” baffles me. They will argue that high-level sports are needed to attract good students and donations from alums However, The University of Chicago and other world-class educational institutions have been quite adept at finding funds, recruiting top-notch students and producing a cadre of Nobel Prize winners without the huge costs and organizational complexity and risks of today’s NCAA sports programs (the number of college sports programs with student athletes, and sometimes coaches, facing criminal charges these days is astounding to me). I concur with your thesis that higher education, whether for-profit or non-profit, has become just another out-of-control business/industry fueled by cheap government loans and naive student/parent borrowers, many of whom appear clueless about how these loans can strangle their financial futures.

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