Student loans are federal credit for higher education. In the excerpts, Bob Zadek and his guests treat the loan program as a creature of legislation whose design distorts the price of college and shifts the consequences of borrowing away from the people who borrow.
Origins and growth of federal lending
Preston Cooper traced the federal role to the Soviet launch of Sputnik in 1957, which he said caused a freakout in the United States and led to a student loan program for national defense. That program began with 40,000 loans in its first year, dedicated to math and science education, against about 45 million student loan borrowers today. Cooper said the program expanded in 1965 to all low-income students and kept expanding in the ’70s, ’80s and ’90s until it was opened to all students. By 2021, he said, over $100 billion in student loans go out every year, $1.2 trillion will be made over the next decade, and the program has grown into a $1.7 trillion behemoth. He attributed the growth to discretionary expansions every five or ten years, and to the principle that there is nothing so permanent as a temporary government program. The Truth About the Student Loan Crisis (2021)
In a 2012 episode, Zadek described the federal government as having forced out all the private lenders in the student loan market and become the primary student lender, making loans to basically anybody who wants one to cover most or all tuition. He said the statutory interest rate was 6.8% per annum on graduation, temporarily reduced to 3.4% by legislation in 2007, with that temporary reduction about to expire. He added that student loan debt does not go away in bankruptcy unless the borrower can show real hardship, and that the pending change applied to new loans, not existing ones. America’s Student Loan Problem (2012)
A 2013 episode gave a different account of the sequence: student loans were once all made by banks, which applied criteria and denied or accepted loans; government then guaranteed loans to students the banks had rejected; banks made loans with a federal guarantee, charged market interest and in effect took no risk; and Washington then nationalized the process and became the lender itself, competing with unguaranteed private bank loans. Zadek said the federal government makes loans irrespective of credit quality. War – A Rationale For Extra-Constitutional Power? (2013)
Price distortion and the free market
Arvin Vora framed the underlying question as whether the price of college is reasonable or ridiculous. He argued that with universal forgiveness of all student loans forever, colleges would raise rates because they would be getting free money and the students and families deciding were not held responsible for the price; with no student loans of any kind, colleges would be forced to charge tuitions a normal person could afford. He said a private college in America charges about $100 an hour for a lecture, so a lecture class of 200 students brings the college $20,000 an hour, and called the tuition artificially inflated, hurting the rich, the poor and the middle class, and helping colleges. America’s Student Loan Problem (2012)
Zadek described this as a fake free market: students go through the gesture of picking a college, but when they can borrow at very low interest rates and repay over a very long time they treat the money as somebody else’s, which distorts the market and invites colleges to raise tuition. He said college tuition over the past 10 years increased at a rate more than 5% more than the inflation rate; Vora said it had been around three times as high as inflation and was increasing faster than medical costs. Zadek said the increase comes because colleges can charge it, not because costs rise, and called students who attend college on somebody else’s money the free riders of the country. America’s Student Loan Problem (2012)
In 2013, Zadek said students focused on the short run tend not to care what tuition costs because it is invisible to them and they write no checks, so the seller can charge whatever he wants; he called the program ridiculously generous and said tuition has gone through the roof because there is no resistance. He said it is common for students to owe two and three hundred thousand dollars on graduation, that student loan debt is bigger than credit card debt, and that with graduates holding big debts and no jobs the country faces huge defaults and the next bailout. War – A Rationale For Extra-Constitutional Power? (2013)
Interest rates, forgiveness and accountability
Zadek said a bill in Congress would forgive student loans outright, and that President Obama was promoting a bill, supported by candidate Romney, to keep student loans at an artificially low 3.4% rather than the statutory 6.8%, in order to get the student vote. America’s Student Loan Problem (2012)
On Senator Elizabeth Warren’s proposal, Zadek asked why banks are not charged 6%, or something more than 0.5%, for money, and said she acts as if a student loan is special when it is no different from a student borrowing to buy a car. He asked where the accountability is: the student decided to borrow to buy a college education, and if the student did not calculate whether what was bought was worth the money, the student should suffer the consequences. He compared the student to one who buys an expensive luxury car on credit and suffers repossession, suit, judgment and possibly bankruptcy. He cited a study finding that Generation Y, the Millennials, have six times the entitlement mentality of people in their 60s, more than any other generational gap. War – A Rationale For Extra-Constitutional Power? (2013)
Zadek quoted a New York Times article saying student debt makes it even harder for many of them, delaying purchases of things like homes, cars, and other big-ticket items and acting as a drag on growth, and called the argument that forgiving debt would free students to buy big-ticket items absurd. He named Shane Gill, described in the article as a 33-year-old high school teacher in New York who does not have a car, owes $45,000 in student loans plus $40,000 to her parents, and cannot get married and have kids because of the debt, and asked why she did not think of that when she incurred the debt. He described an Obama administration plan limiting monthly payments to 10% of income after taxes and living expenses, with the balance forgiven after 20 years, and after 10 years for a public service job, and questioned why a public service job should earn a special break. War – A Rationale For Extra-Constitutional Power? (2013)
Zadek asked what is special about student loan debt, noting that people waste money on cars and mortgages and that being behind on debt is not normally a headline-grabbing event. Cooper agreed that the average bachelor’s degree holder has about $30,000 in debt, about the price of a new car, but said federal student loans are different because the federal government is so deeply involved, making about 90% of new loans. The Truth About the Student Loan Crisis (2021)
The value of the degree
Zadek asked whether there is a national benefit in students going to college irrespective of what they study or whether they contribute more to society, or whether it is four years of an intellectual vacation before entering the real world. America’s Student Loan Problem (2012) In 2013 he cited statistics that there are 80,000 bartenders in the US with a bachelor’s degree, 17% of baggage porters and bellhops have a college degree, and 15% of taxi and limo drivers have college degrees, and asked whether those workers would have spent the money on college only for the privilege of being a bartender. War – A Rationale For Extra-Constitutional Power? (2013)
He imagined what would happen with no federal guaranteed student loans, if students paid out of pocket or borrowed at market rates: the fast reaction is that students could not afford college, but colleges would not close; reacting for the first time to something resembling a free market, they would lower costs to get more customers, delivering services more efficiently and with fewer frills, like Southwest Airlines, which he said prospered in a basically free market environment thanks to Alfred Kahn’s deregulation of airlines. War – A Rationale For Extra-Constitutional Power? (2013)
Across episodes: the same argument, restated
The topic is argued in the 2012 episode with Arvin Vora, the 2013 episode, and the 2021 episode with Preston Cooper. The excerpts show no development in the argument: the 2012 and 2013 episodes both treat federal lending as the cause of inflated tuition and misplaced responsibility, and the 2021 episode adds the Sputnik origin and the scale of federal lending without changing the critique. America’s Student Loan Problem (2012) War – A Rationale For Extra-Constitutional Power? (2013) The Truth About the Student Loan Crisis (2021)
What the sources do not cover
The excerpts do not state the name or number of any bill, the outcome of any legislation, or the terms of any case on student loan discharge. They do not give the current interest rate, the size of the federal portfolio beyond the figures quoted, or the identity of the officials who designed the programs. Several excerpts break off mid-sentence, and nothing beyond those points is reported here.