Debt 101: our system now saddles students with loans that make low-paying but meaningful work impossible. Here's how to fix it

Washington Monthly, March, 1993 by John Heilemann

There's no question that some who claim to lust for virtuous work are using their debt as an excuse to go off and get rich. But some are sincere: the law student or soon-to-be Wall Streeter who really does plan to quit after a few years of paying down debts and go teach high school. But even the most well-intentioned souls become acculturated. The fat paychecks come; all your friends are getting them, too. The career ladder beckons, then there's the new house and with it mortgage payments that dwarf the loan payments- and on and on.

Sallie mayhem

Although the fear of Student Loan Prison dramatically influences career choices, it has also scared some middle class families away from higher education altogether. Joseph Ham gan, an Ohio ironworker with a daughter who recently came out of Fordham Law School $40,000 in debt, told The Washington Post last year that "a lot of people think that you'd be ahead if you bought a house instead. You can come out of graduate school owing $35,000 and not get a job. I'm beginning to wonder if they're not right."

So are a lot of families less well-off than Harrigan's. According to a Carnegie Endowment study, huge loan debts are increasingly forcing many poorer students to forget about going to college. Financial worries have also led to a trend toward educational "buying down." Kenneth Green of the UCLA Higher Education Research Institute says, "Students who would have gone full time are going part time. Students who would have gone to four-year colleges are going to two-year colleges. And more students from poor homes go to vocational schools instead of colleges." Indeed, vocational schools--schools of cosmetology, drafting, barbering, air-conditioner repair and the like--have thrived on the flood of student-loan money that has poured out of Washington in the eighties and nineties.

And these trade schools--4,000 strong across the country--attract students who, because they are poorer, have a harder time paying back the loans. Students from such schools are about four times as likely to default on their loans as others, the Department of Education has found. In 1982, the government had to pay out $300 million to banks, which administer loans for the government for a fee, to cover students who had failed to pay up. By last year, the total had climbed to $2.9 billion--$700 million more than the program's other major cost, the interest subsidy.

Meanwhile, as students pile up debt and taxpayers shell out bigger and bigger sums to help them do so, one group is getting really rich: the country's banks, led by Citicorp and Chase, and the Student Loan Marketing Association (Sallie Mae). To them, student defaults matter not a bit. Their handsome profits are guaranteed. In fact, the Department of Education reports that student loans are more profitable for banks than almost every other kind of debt (except for that generated by credit cards and industrial loans). Last year they collectively made more than $1 billion from the student-loan racket. To the banks, defaults just mean they see this money sooner rather than later.