How universities, banks and the government turned student debt into America’s next financial black hole
On a wind-swept, frigid night in February 2009, a 37-year-old schoolteacher named Scott Nailor parked his rusted ’92 Toyota Tercel in the parking lot of a Fireside Inn in Auburn, Maine. He picked this spot to have a final reckoning with himself. He was going to end his life.
The federal government has made it easier than ever to borrow money for higher education – saddling a generation with crushing debts and inflating a bubble that could bring down the economy
Beaten down after more than a decade of struggle with student debt, after years of taking false doors and slipping into various puddles of bureaucratic quicksand, he was giving up the fight. “This is it, I’m done,” he remembers thinking. “I sat there and just sort of felt like I’m going to take my life. I’m going to find a way to park this car in the garage, with it running or whatever.”
Nailor’s problems began at 19 years old, when he borrowed for tuition so that he could pursue a bachelor’s degree at the University of Southern Maine. He graduated summa cum laude four years later and immediately got a job in his field, as an English teacher.
But he graduated with $35,000 in debt, a big hill to climb on a part-time teacher’s $18,000 salary. He struggled with payments, and he and his wife then consolidated their student debt, which soon totaled more than $50,000. They declared bankruptcy and defaulted on the loans. From there he found himself in a loan “rehabilitation” program that added to his overall balance. “That’s when the noose began to tighten,” he says.
The collectors called day and night, at work and at home. “In the middle of class too, while I was teaching,” he says. He ended up in another rehabilitation program that put him on a road toward an essentially endless cycle of rising payments. Today, he pays $471 a month toward “rehabilitation,” and, like countless other borrowers, he pays nothing at all toward his real debt, which he now calculates would cost more than $100,000 to extinguish. “Not one dollar of it goes to principal,” says Nailor. “I will never be able to pay it off. My only hope to escape from this crushing debt is to die.”
After repeated phone calls with lending agencies about his ever-rising interest payments, Nailor now believes things will only get worse with time. “At this rate, I may easily break $1 million in debt before I retire from teaching,” he says.
Nailor had more than once reached the stage in his thoughts where he was thinking about how to physically pull off his suicide. “I’d been there before, that just was the worst of it,” he says. “It scared me, bad.”
He had a young son and a younger daughter, but Nailor had been so broken by the experience of financial failure that he managed to convince himself they would be better off without him. What saved him is that he called his wife to say goodbye. “I don’t know why I called my wife. I’m glad I did,” he says. “I just wanted her or someone to tell me to pick it up, keep fighting, it’s going to be all right. And she did.”
From that moment, Nailor managed to focus on his family. Still, the core problem – the spiraling debt that has taken over his life, as it has for millions of other Americans – remains.
Horror stories about student debt are nothing new. But this school year marks a considerable worsening of a tale that ought to have been a national emergency years ago. The government in charge of regulating this mess is now filled with predatory monsters who have extensive ties to the exploitative for-profit education industry – from Donald Trump himself to Education Secretary Betsy DeVos, who sets much of the federal loan policy, to Julian Schmoke, onetime dean of the infamous DeVry University, whom Trump appointed to police fraud in education.
Americans don’t understand the student-loan crisis because they’ve been trained to view the issue in terms of a series of separate, unrelated problems. They will read in one place that as of the summer of 2017, a record 8.5 million Americans are in default on their student debt, with about $1.3 trillion in loans still outstanding.
In another place, voters will read that the cost of higher education is skyrocketing, soaring in a seemingly market-defying arc that for nearly a decade now has run almost double the rate of inflation. Tuition for a halfway decent school now frequently surpasses $50,000 a year. How, the average newsreader wonders, can any child not born in a yacht afford to go to school these days?
In a third place, that same reader will see some heartless monster, usually a Republican, threatening to cut federal student lending. The current bogeyman is Trump, who is threatening to slash the Pell Grant program by $3.9 billion, which would seem to put higher education even further out of reach for poor and middle-income families. This too seems appalling, and triggers a different kind of response, encouraging progressive voters to lobby for increased availability for educational lending.
But the separateness of these stories clouds the unifying issue underneath: The education industry as a whole is a con. In fact, since the mortgage business blew up in 2008, education and student debt is probably our reigning unexposed nation-wide scam.
It’s a multiparty affair, what shakedown artists call a “big store scheme,” like in the movie The Sting: a complex deception requiring a big cast to string the mark along every step of the way. In higher education, every party you meet, from the moment you first set foot on campus, is in on the game.
America as a country has evolved in recent decades into a confederacy of widescale industrial scams. The biggest slices of our economic pie – sectors like health care, military production, banking, even commercial and residential real estate – have become crude income-redistribution schemes, often untethered from the market by subsidies or bailouts, with the richest companies benefiting from gamed or denuded regulatory systems that make profits almost as assured as taxes. Guaranteed-profit scams – that’s the last thing America makes with any level of consistent competence. In that light, Trump, among other things, the former head of a schlock diploma mill called Trump University, is a perfect president for these times. He’s the scammer-in-chief in the Great American Ripoff Age, a time in which fleecing students is one of our signature achievements.
Office of Management and Budget Director Mick Mulvaney arrives for a news conference to discuss the Trump Administration’s proposed FY2017 federal budget in the Brady Press Briefing Room at the White House May 23, 2017 in Washington, DC. Calling it a ‘New Foundation for American Greatness,’ the $4.1 trillion budget for would cut programs for the poor, including health care, food stamps, student loans and disability payments while offering big tax cuts for the wealthy.
It starts with the sales pitch colleges make to kids. The thrust of it is usually that people who go to college make lots more money than the unfortunate dunces who don’t. “A bachelor’s degree is worth $2.8 million on average over a lifetime” is how Georgetown University put it. The Census Bureau tells us similarly that a master’s degree is worth on average about $1.3 million more than a high school diploma.
But these stats say more about the increasing uselessness of a high school degree than they do about the value of a college diploma. Moreover, since virtually everyone at the very highest strata of society has a college degree, the stats are skewed by a handful of financial titans. A college degree has become a minimal status marker as much as anything else. “I’m sure people who take polo lessons or sailing lessons earn a lot more on average too,” says Alan Collinge of Student Loan Justice, which advocates for debt forgiveness and other reforms. “Does that mean you should send your kids to sailing school?”
But the pitch works on everyone these days, especially since good jobs for Trump’s beloved “poorly educated” are scarce to nonexistent. Going to college doesn’t guarantee a good job, far from it, but the data show that not going dooms most young people to an increasingly shallow pool of the very crappiest, lowest-paying jobs. There’s a lot of stick, but not much carrot, in the education game.
It’s a vicious cycle. Since everyone feels obligated to go to college, most everyone who can go, does, creating a glut of graduates. And as that glut of degree recipients grows, the squeeze on the un-degreed grows tighter, increasing further that original negative incentive: Don’t go to college, and you’ll be standing on soup lines by age 25.
With that inducement in place, colleges can charge almost any amount, and kids will pay – so long as they can get the money. And here we run into problem number two: It’s too easy to find that money.
Parents, not wanting their kids to fall behind, will pay every dollar they have. But if they don’t have the cash, there is a virtually unlimited amount of credit available to young people. Proposed cuts to Pell Grants aside, the landscape is filled with public and private lending, and students gobble it up. Kids who walk into financial-aid offices are often not told what signing their names on the various aid forms will mean down the line. A lot of kids don’t even understand the concept of interest or amortization tables – they think if they’re borrowing $8,000, they’re paying back $8,000.
Nailor certainly was unaware of what he was getting into when he was 19. “I had no idea [about interest],” he says. “I just remember thinking, ‘I don’t have to worry about it right now. I want to go to school.’ ” He pauses in disgust. “It’s unsettling to remember how it was like, ‘Here, just sign this and you’re all set.’ I wish I could take the time machine back and slap myself in the face.”
The average amount of debt for a student leaving school is skyrocketing even faster than the rate of tuition increase. In 2016, for instance, the average amount of debt for an exiting college graduate was a staggering $37,172. That’s a rise of six percent over just the previous year. With the average undergraduate interest rate at about 3.7 percent, the interest alone costs around $115 per month, meaning anyone who can’t afford to pay into the principal faces the prospect of $69,000 in payments over 50 years.
So here’s the con so far. You must go to college because you’re screwed if you don’t. Costs are outrageously high, but you pay them because you have to, and because the system makes it easy to borrow massive amounts of money. The third part of the con is the worst: You can’t get out of the debt. Since government lenders in particular have virtually unlimited power to collect on student debt – preying on everything from salary to income-tax returns – even running is not an option. And since most young people find themselves unable to make their full payments early on, they often find themselves perpetually paying down interest only, never touching the principal. Our billionaire president can declare bankruptcy four times, but students are the one class of citizen that may not do it even once.
October 2017 was supposed to represent the first glimmer of light at the end of this tunnel. This month marks the 10th anniversary of the Public Service Loan Forgiveness program, one of the few avenues for wiping out student debt. The idea, launched by George W. Bush, was pretty simple: Students could pledge to work 10 years for the government or a nonprofit and have their debt forgiven. In order to qualify, borrowers had to make payments for 10 years using a complex formula. This month, then, was to start the first mass wipeouts of debt in the history of American student lending. But more than half of the 700,000 enrollees have already been expunged from the program for, among other things, failing to certify their incomes on time, one of many bureaucratic tricks employed to limit forgiveness eligibility. To date, fewer than 500 participants are scheduled to receive loan forgiveness in this first round.
Moreover, Trump has called for the program’s elimination by 2018, meaning that any relief that begins this month is likely only temporary. The only thing that is guaranteed to remain real for the immediate future are the massive profits being generated on the backs of young people, who before long become old people who, all too often, remain ensnared until their last days in one of the country’s most brilliant and devious moneymaking schemes.
Everybody wins in this madness, except students. Even though many of the loans are originated by the state, most of them are serviced by private or quasi-private companies like Navient – which until 2014 was the student-loan arm of Sallie Mae – or Nelnet, companies that reported a combined profit of around $1 billion last year (the U.S. government made a profit of $1.6 billion in 2016!). Debt-collector companies like Performant (which generated $141.4 million in revenues; the family of Betsy DeVos is a major investor), and most particularly the colleges and universities, get to prey on the desperation and terror of parents and young people, and in the process rake in vast sums virtually without fear of market consequence.
About that: Universities, especially public institutions, have successfully defended rising tuition in recent years by blaming the hikes on reduced support from states. But this explanation was blown to bits in large part due to a bizarre slip-up in the middle of a controversy over state support of the University of Wisconsin system a few years ago.
In that incident, UW raised tuition by 5.5 percent six years in a row after 2007. The school blamed stresses from the financial crisis and decreased state aid. But when pressed during a state committee hearing in 2013 about the university’s finances, UW system president Kevin Reilly admitted they held $648 million in reserve, including $414 million in tuition payments. This was excess hidey-hole cash the school was sitting on, separate and distinct from, say, an endowment fund.
After the university was showered with criticism for hoarding cash at a time when it was gouging students with huge price increases every year, the school responded by saying, essentially, it only did what all the other kids were doing. UW released data showing that other major state-school systems across the country were similarly stashing huge amounts of cash. While Wisconsin’s surplus was only 25 percent of its operating budget, for instance, Minnesota’s was 29 percent, and Illinois maintained a whopping 34 percent reserve.
When Collinge, of Student Loan Justice, looked into it, he found that the phenomenon wasn’t confined to state schools. Private schools, too, have been hoarding cash even as they plead poverty and jack up tuition fees. “They’re all doing it,” he says.
While universities sit on their stockpiles of cash and the loan industry generates record profits, the pain of living in debilitating debt for many lasts into retirement. Take Veronica Martish. She’s a 68-year-old veteran, having served in the armed forces in the Vietnam era. She’s also a grandmother who’s never been in trouble and consid ers herself a patriot. “The thing is, I tried to do everything right in my life,” she says. “But this ruined my life.”
This is an $8,000 student loan she took out in 1989, through Sallie Mae. She borrowed the money so she could take courses at Quinebaug Valley Community College in Connecticut. Five years later, after deaths in her family, she fell behind on her payments and entered a loan-rehabilitation program. “That’s when my nightmare began,” she says.
In rehabilitation, Martish’s $8,000 loan, with fees and interest, ballooned into a $27,000 debt, which she has been carrying ever since. She says she’s paid more than $63,000 to date and is nowhere near discharging the principal. “By the time I die,” she says, “I will probably pay more than $200,000 toward an $8,000 loan.” She pauses. “It’s a scam, you see. Nothing ever comes off the loan. It’s all interest and fees. And they chase you until you’re old, like me. They never stop. Ever.”
And that’s the other thing about lending to students: It’s the safest grift around.
There’s probably no better symbol of the bankruptcy of the education industry than Trump University. The half-literate president’s effort at higher learning drew in suckers with pathetic promises of great real-estate insights (for instance, that Trump “hand-picked” the instructors) and then charged them truckfuls of cash for get-rich-quick tutorials that students and faculty later described as “almost completely worthless” and a “total lie.” That Trump got to settle a lawsuit on this matter for $25 million and still managed to be elected president is, ironically, a remarkable testament to the failure of our education system. About the only example that might be worse is DeVry University, which told students that 90 percent of graduates seeking jobs found them in their fields within six months of graduation. The FTC found those claims “false and unsubstantiated,” and ordered $100 million in refunds and debt relief, but that was in 2016 – before Trump put DeVry chief Schmoke, of all people, in charge of rooting out education fraud. Like a lot of things connected to politics lately, it would be funny if it weren’t somehow actually happening. ”Yeah, it’s the fox guarding the henhouse,” says Collinge. “You could probably find a worse analogy.”
But the real problem with the student-loan story is that it’s so poorly understood by people not living the nightmare. There’s so much propaganda that blames the borrowers for taking on the debt in the first place that there’s often little sympathy for people in hopeless situations. To make matters worse, band-aid programs that supposedly offer help hypnotize the public into thinking there are ways out, when the “help” is usually just another trick to add to the balance.
“That’s part of the problem with the narrative,” says Nailor, the schoolteacher. “People think that there’s help, so what are you complaining about? All you got to do is apply for help.”
But the help, he says, coming from a for-profit predatory system, often just makes things worse. “It did for me,” he says. “It does for a lot of people.”
Written by Matt Taibbi and published by Rolling Stone ~ November 3, 2017.
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