Student loan crisis arose from “giving families a blank check,” says author
According to a journalist and author of a new book, the student loan debt crisis arose after legislative changes over the years that created a system of largely unchecked loans to millions of students.
“If you keep issuing student debt the same way, which is basically giving families a blank check, you’re just going to have more and more families who are going to be left with non-repayable debt over time. years, and that doesn’t really solve the underlying problem, “Josh Mitchell, Wall Street Journal report and author of”The Debt Trap: How Student Loans Became a National Disaster“said on Yahoo Finance Live (video above).
The growth of the student loan program, from the Lyndon B. Johnson administration in the mid-1960s, was the result of a growing desire to see the American population obtain college degrees in order to become more competitive internationally. and promote social mobility.
Therefore, according to Mitchell, the intentions to create the student loan mechanism were lofty in that they were designed “to reduce inequality, to help the poor enter the middle class.”
The data shows that college degrees generally offer a good return on investment (depending on the college). Moreover, according to a New York Fed study in July 2020, taking a year off before going to college “cuts back to college by a quarter and can cost tens of thousands of dollars in lost income for life.”
Considering the benefits, Mitchell said, “Congress was very reluctant to deny anyone access to college. And it has become the path of least resistance to give loans to people.
At the same time, he added, “it became very easy to ignore the fact that a lot of people were defaulting on their loans and a lot of people were lying to each other that people would pay off this debt.”
Congress “just applied rose-colored glasses to this program over the years and said, ‘Listen, we need to give our constituents access to student loans,'” Mitchell said, and individual lawmakers were reluctant to cut back. “Access to that golden ticket for the middle class.”
Fast forward to 2021: With an estimated 44 million student loan borrowers with $ 1.7 trillion in debt, prominent Democrats have repeatedly urged President Joe Biden to use executive power to enact a large forgiveness of student loans.
Mitchell noted that waiving interest on federally guaranteed student loans is one way to resolve the issue given the amount of bad debts on the US government’s books. Based on Mitchell’s report, the federal government is expected to lose over $ 400 billion from the student loan program.
“If you look at how much debt is what I would call toxic debt, which means it will never be paid off, anywhere that one-third or more of the debt will not be paid off, according to a published report. under the Trump administration, ”Mitchell explained.“ This approaches the amount of toxic debt that was on the books of private lenders during the real estate crash: Private lenders lost $ 535 billion on subprime mortgages during the 2008 financial crisis. “