By Lambert Strether of Corrente
This is my first foray into the topic of college debt, so I’m necessarily going to be taking a high-level view. However, the 30,000-foot view has its advantages, since from that level the enormous flaws in the proposals made by both Democrat candidates appear. (I’m not going to consider Trump’s proposals, because I’m not certain they’re serious; his stance on “debt-free” college is “unequivocally no.”) We’ll get to the flaws in the Sanders and Clinton proposals — they have to do both with future college debt, and past or legacy debt — but first I’ll give a brief overview of the college debt market. And in the course of the exposition, I’ll explain the differences between “tuition-free” (Sanders) and “debt-free” (Warren, and then Clinton). I’m working from the candidate’s websites, not the news, so if I get any details wrong, readers please correct me!
The (Insane) Market in College Debt
Fix firmly in your mind the fact that college has been tuition-free in the United States in the past, and is tuition-free today, in other civilized countries, if “other” is the word I want. For example, California. From the Daily Californian:
At the [University of California] system’s inception, tuition was free for California residents. Over the years, student fees increased, and by the 1970s, the university moved away from free tuition for residents.
(Note the lack of agency in “increased” and “moved away”; although as governor Reagan was unable to destroy free college for California citizens, by the mid-70s the neoliberal infestation had begun to bite in policy-making circles nationally.)
Hence, Senator Sanders is correct to claim that tuition was free in the United States, and is still free elsewhere:
Was college once free in United States, as Bernie Sanders says?
Sanders said, “Making public colleges and universities tuition free, that exists in countries all over the world, used to exist in the United States.”
There are at least nine advanced countries that offer free college, including the recent addition of Germany.
There was a time in the United States when some public colleges and universities charged no tuition. However, tuition has never been set as a national policy — it is a decision for each school or state government officials. And some colleges charged tuition dating back to the 1800s.
So you can also fix a corollary in your mind: The entire college debt system is useless, parasitical, and could (should?) be done away with. (The parallel between our tapeworm-like college debt system and our tapeworm-like health insurance system is exact.)
Be that as it may, the college debt tapeworm has swollen to enormous size. MarketWatch:
The total outstanding student loan debt in the U.S. is $1.2 trillion, that’s the second-highest level of consumer debt behind only mortgages. Most of that is loans held by the federal government.
About 40 million Americans hold student loans and about 70% of bachelor’s degree recipients graduate with debt.
The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website, the most in history.
One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau.
And about those delinquencies and defaults:
Student loans surpassed credit cards in 2012 as having the worst delinquency rates in consumer credit. More than one in 10 student loans were more than 90 days overdue as of November, according to credit analysts Equifax Inc. Adding to the concerns is research that suggests the biggest financial problems are faced by students who can least afford it: poorer Americans who took out smaller loans to pay for courses at less prestigious institutions.
Federal laws stop student debt from being discharged via bankruptcy in most cases, meaning the debts can drag on personal finances for years. [T]he level of student debt, [has] averaged just under $29,000 per borrower in 2014, up from $18,550 a decade earlier.
Remind you of anything? That’s right! Subprime! From Dollars and Sense:
The basic premise driving [Student Loan Asset Backed Securities (SLABS)] is that powerful financial actors and institutions are able, through regulatory and legal sanctioning by the government, to transform a debt obligation (student loan) into a financial asset (SLABS) that can be traded on the secondary markets. This can be understood as the “commodification of debt.” SLABS has proven to be a lucrative device to hedge risk for investors, raise capital, and even to generate income when student loan debtors default (through derivative contracts such as credit default swaps, which pay off in the event of default).
What could go wrong?
Once we peel away the complexities of SLABS, we are left with the basic problem: the success of the “investment” ultimately depends on the ability of the debtor to earn enough money to pay the principal of the loan, plus interest and fees. The alchemy of finance cannot erase the risk of how hard it may be for the student to ever repay the loan because the student will struggle to find gainful employment after graduation. From this angle, SLABS—like all forms of credit—rests on the ability of the state to ensure that debtors (students) will repay the loan—no matter what their incomes may be. … Like the sub-prime housing industry, however, SLABS ultimately depends on the ability of borrowers to meet their debt obligations. Herein lies the rub. Since as far back as the recession of 2001, the majority of student debtors have not been able to get decent paying jobs upon leaving college.
But let’s assume this time it’s different. Suffice to say for now that the present college debt system produces manifestly absurd results. College debtor Samual Garner:
My current payment is about $1,500 a month—that’s almost 40 percent of my take-home pay—and despite having paid more than $75,000 toward my loans, I still owe about $190,000. Remember, I started with $200,000 in debt. With more than eight years of some of my private loans at 8 and 9 percent interest, and my federal loans at more than 6 percent, Sallie Mae and the federal government have made it very hard to make progress.
My debt may take decades to pay off and ultimately cost more than twice my original balance. Depending on my income, my payments could peak at almost $2,000 a month. Without a substantial boost in salary, there’s no way to get ahead of my debt.
Garner’s a bio-ethicist, but who needs that when we’ve got Monsanto? (For those looking to blame Garner, read the whole piece to understand his situation.) Anyhow, he’s trying to work within the system — he’s not defaulting, exiting the credit system entirely and/or emigrating, and praying that sanity returns before it comes time for Social Security to garnish his retirement check — and after paying $75,000, he owes almost as much as he did when he started, with no end in sight. I don’t care what any policy wonk says. How is that anything other than insane?
Plans for the Future: “Tuition-Free” vs. “Debt-Free”
Now let’s look at the Democrat plans to get Garner out of his hole. The road to Clinton’s proposal leads through Elizabeth Warren, so I’ll start with her. Warren’s thinking — and mainstream Democrat thinking — is embodied in this speech she gave to the Shanker Institute and the American Federation of Teachers, June 8, 2015 (PDF). I’m not going to go through it in detail, since Warren isn’t running. Instead, I’m going to pull out bits of her language for display.
- “Here’s the truth–both sides are right.”
- “It starts with courage–the courage of both Democrats and Republicans to admit how much is wrong and that the other side has a real point.”
- “It’s time for the federal government to realign incentives. “
- “Skin in the game.”
- “Shared savings.”
- “The form should be simple.”
- “Consider many options. “
- “Conservatives at the American Enterprise Institute have endorsed similar ideas”
Does Warren’s (market-centric, neoliberal, free tuition-crippling) language remind you of anything? Does it raise any red flags? That’s right. ObamaCare! And the language used to frame the policy justifications for ObamaCare’s (market-centric, neoliberal, single-payer crippling) architecture. Hold that thought. For now, the important data point is that Warren’s thinking drove Clinton’s proposals. Politico:
To the great relief of restive progressives [ha], Clinton’s campaign has sought out policy experts with strong ties to Warren, who has crusaded on the issues of making college more affordable and refinancing student loans so that students get the same interest rates on federal loans as banks do on theirs.
Clinton’s “College Compact” “debt free” proposal, from her campaign website:
- Students should never have to borrow to pay for tuition, books, and fees to attend a 4-year public college in their state under the New College Compact. The additional support they receive will reduce all costs, including living expenses, by thousands of dollars. Students at community college will receive free tuition. Students will have to do their part by contributing their earnings from working 10 hours a week.
- Families will do their part by making an affordable and realistic family contribution.
- States will have to step up and meet their obligation to invest in higher education by maintaining current levels of higher education funding and reinvesting over time.
- The Federal government will make a major new investment in the New College Compact and will never again profit off student loans for college students.
- Colleges and universities will be accountable to improve their outcomes and control their costs to make sure their tuition is affordable and that students who invest in college leave with a degree.
- And we will encourage innovators who design imaginative new ways of providing a valuable college education to students – while cracking down on abusive practices that burden students with debt without value.
(Note in passing that “do their part” and “step up” map directly to ObamaCare’s concept of “shared responsibility” between citizens, the health insurance companies, and the government, which presupposes that the tapeworm-like health insurance “industry” should exist in the first place. Note also “innovators,” which probably means for-profit colleges and squillionaires with bright ideas.)
And here is Sanders’ “tuition-free” proposal, from his campaign website:
- Make tuition free at public colleges and universities.
- Stop the federal government from making a profit on student loans.
- Substantially cut student loan interest rates.
- Allow Americans to refinance student loans at today’s low interest rates.
- Allow students to use need-based financial aid and work study programs to make college debt free.
(Here’s a handy chart comparing the two.) The conventional wisdom is that there is “virtually no difference” or “few key differences” between the plans (although since Clinton’s plan does not cover all costs, calling it “debt-free” is overselling it). Matt Yglesias, however, disagrees, writing:
Thanks to Sanders — and specifically thanks to his campaign — I’ve come around to the idea that the correct tuition for qualified students at public colleges and universities is $0.
Wealthy elites have formal and informal means of influence wherever you look. When they are invested in actually using public services, the odds that the services will actually be decent go way up. Trying to save money by keeping rich kids out of public school or refusing to build libraries in affluent neighborhoods or having police departments charge a finder’s fee when they investigate crimes committed against rich people would be penny wise and pound foolish.
If Sanders were to actually become president, the idea would need a lot more work. But Clinton’s plan seems like it was written by higher education wonks for an audience of higher education wonks. Some of my best friends are higher education wonks, and obviously you need some wonks to seal the deal on any kind of workable legislation. But it’s useful to start with some kind of clear big-picture goal that means something to normal people.
The greatest legislative success of the Obama years — the Affordable Care Act — suffers greatly in its political sustainability from the fact that people have such a poor grasp of what it encompasses, how it works, and whom it is supposed to be helping.
The contrast with a program like Social Security, which is worse targeted but much better understood, is stark and instructive. The narrow-targeting way is designed to minimize opposition to new initiatives by reducing their headline costs [as in the CBO estimates during the ObamaCare debate]. But there’s something to be said for taking the opposite approach and trying to maximize support by framing your objectives in a way that ensures the people to whom your policy is supposed to appeal actually understand what it is.
(Clinton, of course, obscures the idea that college education is a public good with demogoguery: “I don’t think taxpayers should be paying to send Donald Trump’s kids to college.” Or, following Yglesias, paying to send Donald Trump’s kids in grade school, Donald Trump’s buildings with the fire department, Donald Trump’s wife and daughters with women’s shelters… I mean, come on.)
I think Yglesias gets this right, and wrong. Right: College education is a public good, hence demands public finance not private debt. Wrong: Yglesias argues for free tuition — seemingly and unconsciously adopting the Obama administration’s mentality — as a public relations problem: “[P]eople have such a poor grasp” of ObamaCare’s complexity. In fact, ObamaCare is genuinely hard to grasp, because it’s a neoliberal Rube Goldberg device designed to support the tapeworm-like for-profit health insurance model; it can’t be anything other than hard to grasp. (And the presence of phishing equilibria isn’t a bug. It’s a feature.)
That is — and this is the 30,000-foot view that I promised — Clinton’s proposal and ObamaCare have a similar program architecture and a similar hidden assumption. The program architecture is complex eligibility determination (what Warren calls “many options”). To calculate the square inches of “skin in the game,” Clinton must consider colleges vs. universities, family income, student income (from work), and student expenses, as well as any other State and Federal assistance programs, and in addition whatever bright ideas the “innovators” come up with. Sanders, by contract, simply says $0.00. The hidden assumption is that (using Yglesias’s term) “targeting” is low- to no-cost (at least to the government. As we see from ObamaCare, the costs are shifted to
consumers citizens, as a tax on time). In fact, complex eligibility systems involve cadres of trained and credentialed professionals whose job is to separate the deserving from the undeserving, and allocate the “financial assistance” accordingly, and produce the marketing collateral, and training materials, and brochures, and websites that explain all the ins and outs to those targeted by the programs. And to descend to cynicism for one moment, I don’t think it’s a coincidence that such credentialed professionals form a big part of Clinton’s base.
So from a purely ethical perspective, Clinton’s plan will have all the defects that ObamaCare has, due to its requirements for complex eligibility determination: Some people will go to Happyville, and others to Pain City, randomly, depending at the very least on jurisdiction, income, and the colleges selected by the student. (We might also note that the ability to navigate bureaucratic systems, taken for granted by Clinton, Warren, and their ilk, is in itself a function of class privilege.) Of course, Sanders-style free tuition makes Clinton’s entire cluster go away, since all citizens are equally deserving.
That is our future college debt system, as conceived by Clinton and Sanders. But what of the legacy of college debt, held by existing students? Prepare yourselves for disappointment.
Redressing the Past: Repayment and Forgiveness
Let’s start by stipulating that Obama’s repayment and forgiveness programs are of the HAMP-like clusterf*ck nature:
The various repayment programs that promise forgiveness are cruel jokes, administered in bad faith by a Department of Education that has zero desire or intentions of forgiving any loans. I estimate that fewer than 15% of those signing up for these programs will actually make it through. The rest will be expelled owing far more than when they entered.
What the Obama administration did do was great for the federal government, not the students. Obama federalized the system to where the government now profitsimmensely from both interest on loans it makes directly to students, and defaults. To say that the federal government now sits atop the most predatory lending system in our nation’s history is not an understatement.
Obama’s Consumer Financial Protection Bureau (CFPB) was designed so as to give it essentially no jurisdiction over federal student loans. The CFPB busies itself only with private student loans, which at least have statutes of limitations, and are covered under Fair Debt Collection Practices, and Truth in Lending laws (federal loans are not). So the CFPB is no help. Meanwhile, Obama’s lawyers fight furiously behind the scenes to keep bankruptcy protections gone from student loans in order to protect their cash cow.
We would expect nothing less. Here is what Clinton proposes:
- If you have student debt, you will be able to refinance your loans at current rates, with an estimated 25 million borrowers receiving debt relief. Typical borrowers could save $2,000 over the life of their loans.
- For future undergraduates, the plan will significantly cut interest rates so they reflect the government’s low cost of debt. This can save students hundreds or thousands of dollars over the life of their loans.
- Everyone will be able to enroll in a simplified income based repayment program so that borrowers never have to pay more than 10 percent of what they make.
And here is what Sanders proposes (from his plan, above):
- Allow Americans to refinance student loans at today’s low interest rates.
Let’s just skip Clinton’s $2,000 bullet point. If I were on the hook for $100K, that would just be a slap in the face.
More centrally, neither Clinton nor Sanders even discuss — thanks for this, Joe Biden, you loveable Amtrak-ridin’ goof and all-around good guy — making college debt dischargeable in bankruptcy once more. That’s appalling. The Los Angeles Times:
We are now halfway through the presidential election campaign, however, and we have yet to hear from either Democratic or Republican candidates (except Jeb Bush, who is now out of the race) on the question of bankruptcy and student loans. The solutions some have offered to the student debt crisis, including Sen. Bernie Sanders’ proposal for tuition-free college, will do almost nothing for the 44 million people who have already been through school, have the debt to show for it, and vote.
In fact, Sanders has the power to propose this reform immediately and has not exercised it. The Hill:
Sanders could easily vow to fight for the repeal of 11 USC 523(a)(8), the tiny piece of federal code that has caused this problem. Tomorrow, he could sponsor a Senate companion bill for any one of 3 good bills currently in the house that would do just that. But he had better be quick about it if he is serious about fighting for the citizens — and winning the nomination.
Worse, both the Clinton and Sanders refinancing plans are a form of contingent debt, defined as follows by NASDAQ:
A contingent debt is an unusual kind of debt that is dependent on uncertain future developments. A contingent debt is not a definitive liability as it is based on the outcome of a future event (for example, such as a court verdict).
In the case of college debt, the “uncertain future development” is the debtor’s future income. (And I’m being optimistic here, given the new crapified normal.) Clinton’s gimmick to limit the contingent debt to 10% of income sounds more attractive superficially — there’s a number to get one’s head around — but it adds yet another layer of complexity to her proposal. For example, will ObamaCare subsidies need to take it into account? Worse, it’s regressive: 10% cuts into the bone if you’re poor, but not, if you’re not. Both refinancing proposals are fixed obligations that cannot be reduced by other claims. People can drown in an inch of water. It doesn’t take fathoms! And the Sanders proposal is especially appalling given Sanders’ appeal to youth. The Hill:
Sanders is pledging to make public college tuition-free for future college students. This sounds great, and may even work for those who have yet to attend college, and don’t vote. However, he is proposing almost nothing that would significantly affect those who have already been through school, have the debt to show for it, and do vote. What he is proposing for these people is an extremely underwhelming refinancing plan (like Hillary Clinton’s) that would lower interest rates slightly for existing borrowers. Whatever nominal savings might be realized under these plans at today’s low interest rates will be reduced further still- perhaps to nothing- by the time such plans were implemented.
Taking the 30,000-foot view, let’s assume that either Clinton’s plan or Sanders’ plan is passed in 2017. What we will then see will be (like the unconscionable compromise on Social Security between Tip O’Neill and Ronald Reagan) a two-tier system where those who took on college debt before 2017, some large fraction of whom are condemned to decades of debt slavery, albeit ameliorated, and those who went to college after 2017, most of whom will have no debt at all. How is a policy with such a grotesque disparity in life chances in any way sustainable? I don’t think it is; imagine a 26-year-old loaded with debt at the same job, side by side, with a 22-year-old who has no debt, when both have the same degree. How does that work? Now, to be fair, I don’t have a policy solution, here. However, I’d note that student debt is mostly owed to the Federal Government, and if somebody like the Archdruid gained a real following, some might see some possible decay paths for the resulting legitimacy crisis as a form of debt discharge. I mean, would the Lakeland Republic really keep all those Student Loan Asset-Backed Securities in play? Why? Just a thought…
Both the Sanders and the Warren-inspired Clinton proposals have deep flaws, and (dare I say it) expose the limits of Democrat Party thinking. Clinton’s debt-free proposal is not really debt-free, and, like ObamaCare and for the same reasons, is bound to produce unjust, disparate outcomes due to its system architecture. Sanders’ tuition-free proposal is cleaner, simpler, and more fair, like single payer and for the same reasons, but both proposals share appalling refinancing schemes hardly adequate even as palliatives. The problem with college debt is the debt itself. And in fact, we don’t need college debt at all.
 I’m going to try to say “college debt,” instead of “student debt” or “student loans,” because the latter two locutions imply that college education is not a public good, and it’s all on the student to finance their career based on the expectation of future returns, as if higher education were a sort of collective trade school — as indeed our corporate masters would like it to be. Here’s a bit of classic NeoliberalSplaining:
“What a lot of students don’t understand is that student debt is an investment in your future,” John Petellier, the head of the Center for Financial Literacy and one of the panelists, said in a separate interview. “A perfect example of what I think is missing at a lot of high schools is one of the key topics in financial literacy, understanding the connection between career and income.” A better sense of that relationship could help students make more informed decisions about whether a college or career path is worth the debt, he said.
No, a college education is not “an investment in your future.” In large part, it’s a public good. Whenever you hear the phrase “financial literacy,” your default assumption should be that the speaker is bullshitting. And back into note mode: I’m also not making a distinction between colleges and universities; in this piece, it’s all “college debt.”
 One might take the view that a vote for Trump is a vote for volatility, regardless of his policy proposals, and whatever concrete material benefits, if any, they bring.
 Harvard, Historically Black Colleges and Universities (HBCUs), exceptions, blah blah blah. Some are advocating that Harvard, with its $36 billion endowment, should go tuition-free. Why not hand a chunk of that to the HCBUs, as reparations, and then go tuition-free?
 See e.g., and following.
 That’s not to say that there aren’t some good details in what Warren says: Eliminating Joe Biden’s horrid work, and once again allowing student debts to be discharged in bankruptcy, for example. But the central tendency is very clear.
 Here’s another one. Warren: “Listen to the debate on the Democratic side — we’re talking about, ‘Should it be free college or debt-free college?'” Warren said. “That’s where we’re going back and forth and trying to have a — how are we going to pay for it, how do the pieces work to make that happen?” Democrats love that word “conversation,” because it obscures power relations (and enables sycophancy).
 See the delightful Yes, Minister episode “Jobs for the Boys” (and, of course, girls, these days. So that’s alright then).
 OK, OK. Race and gender disparities are another discussion.
 It’s especially appalling given Clinton and Warren’s past differences on this topic.