The shocking origin story of the spiraling student debt crisis in the U.S.

An excerpt from 'The Debt Trap: How Student Loans Became a National Catastrophe'
August 14, 2021 1:00 PM UTC

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Today’s $1.6 trillion student debt crisis was built on a series of events and policy decisions made over six decades. Yet the crisis exploded in a short time frame—during the 2007–09 recession and subsequent recovery. By 2012, Americans’ collective student debt tab had crossed $1 trillion, surpassing credit card debt and auto debt.

This period coincided with the tenure of the nation’s first Black President, Barack Obama, who believed in the power of higher education to uplift families and the U.S. economy, even as he spoke of the burden that student debt placed on households.

The nation was undergoing a shift, not just politically and economically, but culturally, particularly when it came to higher education. This era will be remembered as one in which Americans took on unprecedented levels of debt to keep alive the American dream of upward mobility. By the end of Obama’s second term, Americans’ view of higher education as a pathway to financial prosperity had dimmed.

While student debt soared among all demographic groups, it grew the fastest this century among Black households, at least among households that borrowed for higher education. The excerpt to follow from my new book, The Debt Trap: How Student Loans Became a National Catastrophe (Simon & Schuster), highlights this phenomenon through the story of a young Black college student who attended Howard University, among the nation’s most prestigious historically Black universities.

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On a sunny Friday afternoon in August 2006, Brandon stared in awe at the brick gateposts of Howard University, a historically Black university in Washington, D.C. Since he was a boy, he’d seen this place as a distant sanctum he would never reach. Now he was about to step onto the campus as a student.

Brandon had come to Howard that day to pay a bill before starting his freshman year. As he stood relishing the moment before he passed through the gates, self-doubt shivered through him. Do I really belong here? he thought. He was standing on the same ground that Thurgood Marshall, Zora Neale Hurston, Toni Morrison, and Sean “Diddy” Combs once walked. And then he shook off the shadow.

I’m here, he told himself. I did it.

Brandon came from a modest background. He and his three siblings were raised in Petersburg, Va., and Augusta, Ga., by a single mother in the Army and their great-grandmother. His elders taught him the importance of God, family, and education. He grew up poor, but at the time he didn’t know it.

Socially awkward and with a speech impediment, he grew up to be polite and humble, seemingly without an ego. His great-grandmother taught him to appreciate what he had and to strive for stability in life. He went to church three days a week and got A’s and B’s in high school. When he graduated, he craved structure, so he joined the Navy. He was stationed in Oklahoma City and specialized in communications, working 12-hour shifts behind two combination-locked doors in a windowless control room.

His time in the Navy exacerbated his anxiety and feelings of isolation. Brandon suffered panic attacks over his worry that his speech difficulties would prevent him from speaking through a microphone in an emergency. After two years, he left with an honorable discharge and decided to try college. His great-grandmother, a retired hospital housekeeper who had dropped out of high school and later got her GED, had urged him throughout his childhood to go to college. “She was one of those people who thought if you went to college, then the doors were opened for you,” Brandon says.

For many Black families across the U.S., no school held as mystical a status as Howard. Founded by missionaries in 1867, the school was one of hundreds that opened across the U.S. after the Civil War to educate Black Americans, many of whom were denied entry to other colleges because of the color of their skin. In its first five years, Howard taught tens of thousands of freed slaves. By 2006, Howard was the most prestigious of the nation’s 100 or so historically Black colleges still in existence.

Despite his strong high school grades, Brandon knew the odds of his being admitted to Howard were slim. Of the thousands who applied each year, only about three in 10 got in. When he called the admissions office and a woman told him he’d been accepted, he was in such disbelief that he asked her to repeat herself.

Brandon entered college at the onset of a student debt boom. By the end of his first semester, student debt across the U.S. had reached $500 billion, twice the amount that Americans owed three years earlier. That sum was quickly approaching that which Americans owed on credit cards and auto loans. The media and policymakers were waking up to the problem. Author Anya Kamenetz helped put the issue on the map with her book Generation Debt, released during Brandon’s freshman year.

Student debt was soaring in part because a greater share of Americans were going to college. The college-wage premium had reached an all-time high by the time Brandon enrolled, as employers increasingly demanded that job applicants hold a bachelor’s degree for jobs that several years earlier didn’t require one. Brandon was one of 15 million undergraduates across the U.S. in 2006.

The rise in college enrollment was driven by students like Brandon. They were disproportionately poor, Black, Hispanic, and the first in their families to go to college. They mostly attended schools with low or no admissions standards—community colleges, for-profit schools, and a number of historically Black colleges—schools that opened their doors to students who lacked the grades or test scores to get into more selective universities. The schools provided students a huge opportunity to move up on America’s economic ladder.

Most of those students relied on debt. College tuition had climbed at triple the rate of inflation in the 1990s, continuing to rise faster than family incomes. The increase fell hardest on the poorest families, such as Brandon’s, who had little to no savings. Poor students who could get into the most elite universities, such as Ivy League schools, often got free rides, because those schools had the resources—such as large endowments and alumni donations—to waive tuition for them. But most colleges lacked such resources and relied heavily on tuition dollars, including from poor students, to pay the bills.

For Brandon, Howard was a steal compared with Washington’s other schools, like George Washington University and Georgetown University. But it still cost a fortune—$28,000 a year after living costs were factored in. Brandon qualified for Pell Grants and partial benefits under the G.I. Bill. But neither program provided enough money to cover tuition at many state schools, let alone a prestigious private school like Howard. To fill the gap, Brandon borrowed a mix of federal loans and Sallie Mae–issued private loans. His total student debt tab: nearly $40,000 in federal loans and $60,000 in private loans. Interest pushed it thousands of dollars higher by the time he graduated.

During his sophomore year, in late September 2007, a professor gave Brandon and his classmates an assignment to attend a speech on campus. When the speaker stepped to the podium, the crowd rose to its feet. Quick to smile and at ease behind the podium, Barack Obama delivered a speech polished to a gleam, and Brandon could feel the waves of admiration washing over the crowd.

Brandon had heard of this senator from Illinois who was running for President. Like Brandon, Obama was a Black man raised by a single mother and had taken out loan after loan to attend college and law school. Obama had come to Howard on his campaign tour with a vision for revitalizing America’s economy, which was in distress as the housing market crumbled. He talked about criminal justice reform, and about making society more equal. Above all, he wanted to create opportunity for society’s most disadvantaged, particularly the Brandons of the world.

The Debt Trap-Book Excerpt
“The Debt Trap: How Student Loans Became a National Catastrophe,” by Josh Mitchell
Courtesy of Simon & Schuster

Just over a year after that speech, Obama stepped to a lectern outside the U.S. Capitol on a frigid day on Jan. 20, 2009, to be sworn in as the nation’s 44th President. America’s economy was in tatters. The housing bubble—and the illusory era of inflated real estate that defined it—had burst, bringing financial markets to a halt and sending the economy into a tailspin. Voters had elected Obama to steer the country out of the worst crisis since the Great Depression.

The housing crisis was created by loose credit, lax regulation, and a reach for the American dream. Mortgage lenders, believing the value of homes would only go up, had spent years lending bigger and bigger sums to borrowers whose credit histories or incomes indicated they had little hope of repaying. One in five loans in 2007 and 2008 was to borrowers with subprime credit. Federal regulators looked the other way. Government-sponsored enterprises Fannie Mae and Freddie Mac bought up many of those mortgages, fueling banks with cheap cash. Lenders sold home loans to investors as securities, using intricate financial instruments that obscured the loans’ risk. Undergirding this boom was the belief that homeownership was a sound investment for the poor and middle class.

Home prices did rise, and borrowers for a while could afford their monthly payments—until they couldn’t. In 2006, a wave of homeowners fell behind on payments, and banks realized they had a pile of debt on their books that wouldn’t be repaid. Home prices had risen too high, too fast. Ultimately Congress came to the rescue, spending hundreds of billions of dollars to bail out financial institutions and steady the economy.

When the bubble burst, the human consequences were devastating. Ten million people lost their homes, most to foreclosure. Nearly 9 million lost their jobs over the recession. Entire cities and towns were decimated. Big banks, car companies, and small businesses failed. The stock market crashed.

The hardest-hit families tended to be Black, Hispanic, and headed by someone without a college degree. The very people who were meant to be helped by homeownership were harmed. Instead of reducing inequality, the aggressive push by elected leaders and the private sector to get Americans into homes increased it.

Obama viewed the crisis not just as an economic disaster but as a moral one. As a state senator in Illinois in the late 1990s and early 2000s, he’d been an early critic of predatory lending, which broadly refers to banks extending risky loans to unwitting borrowers who are unlikely to repay them, given their incomes or the size of the monthly payments. Sen. Elizabeth Warren (D-Mass.) recalled meeting Obama at a political fundraiser in 2003 when he was running for the U.S. Senate and she was a Harvard professor specializing in consumer finance. He greeted her with the words predatory lending. “On and on and on, and I never got a word in,” Warren told U.S. News & World Report.

A month after his inauguration, in February 2009, Obama delivered his first address to a joint session of Congress, in which he laid out his plan to pull the nation out of the severe downturn and return it to prosperity. The country would educate its way out of the recession, he said. “In a global economy where the most valuable skill you can sell is your knowledge, a good education is no longer just a pathway to opportunity—it is a prerequisite,” he noted.

He asked every American to spend at least one year in college—whether it be a four-year liberal arts school or a community college—to meet a bold goal: for the U.S. to have the world’s most educated workforce. The country had the world’s most college graduates as a share of its workforce in the early 1990s, but in the new century other countries had surpassed the U.S. Just as Lyndon Johnson had worried about Russia overtaking the U.S. in education and global leadership, Obama worried about countries like South Korea doing the same in the new millennium. “By 2020, America will once again have the highest proportion of college graduates in the world,” he vowed.

Obama framed his goal as a way to help keep alive the U.S. ideal of upward mobility, echoing the goal of Clinton’s 1995 drive to increase homeownership. Under the nation’s first Black President, one who’d inspired millions of followers with a message of hope and change during the 2008 campaign, the country was turning away from one cornerstone of the American dream, homeownership, while doubling down on another, higher education, that also relied on debt.

A few weeks after Obama’s speech, Obama’s top economic adviser, Larry Summers, settled into his seat at Boston’s Fenway Park under a gray afternoon sky. It was late April, and the Red Sox were playing the New York Yankees. Summers, a former Treasury secretary under President Clinton, was spearheading the administration’s efforts to dig out of the recession.

He turned to his friend sitting next to him, Harvard economist Larry Katz, and asked if he had any ideas on how to get more Americans into college. Katz thought of the 13 million unemployed workers, many from blue-collar industries like construction, manufacturing, and mining. “You need to go where the money is,” Katz told Summers.

“The money” was unemployment insurance. Most of those jobless workers drew checks from state unemployment offices. Find a way to nudge them into college, Katz said. Summers was so excited by the idea he called Rahm Emanuel, Obama’s chief of staff, during a rain delay. Days later, the government embarked on one of the biggest pushes ever to get Americans to go to college.

The administration urged state unemployment officials to send a letter to every person receiving jobless benefits, telling them they could get financial aid, such as Pell Grants, if they enrolled in their local college. “While the economy recovers, this is a great time to improve skills and lay the foundation for a stronger economy in the future,” one of the state letters read. “Studies have shown that workers with more education and training have more secure jobs and higher wages.”

Obama’s advisers believed getting people into college would help not only workers but the economy, in the short and long run. The U.S. economy relies heavily on consumer spending—Americans going out to buy stuff, from cars and groceries to medical checkups and education—to fuel economic activity, and Obama’s economic team envisioned college students’ spending on tuition as one way to get the economy growing again.

“The top priority was fixing the economic crisis,” says James Kvaal, Obama’s top adviser on higher education at the White House. “If we gave low-income students scholarship dollars, they would spend, and that would ripple through the economy. We were looking for projects where the dollars would be spent quickly, not saved, and the dollars could get in the hands of people quickly.”

This massive push would require huge sums of money. The stock market crash and recession had wiped out trillions of dollars in Americans’ wealth, leaving most families with little savings to pay tuition. While Obama wanted to increase scholarship money for the poor, his plan inherently relied on a surge in student debt.

The sweeping economic stimulus law that Obama championed and Congress passed in 2009 increased the maximum Pell Grant award that a modest-income student could receive over a year from $4,700 to about $5,600. But that sum wasn’t enough to cover a fraction of expenses even at public community colleges, the cheapest of higher education institutions. On average, attending a public two-year college—after grants were factored in—cost $12,000 a year in tuition and living expenses in 2010, or about a fifth of the typical household income.

Obama himself had relied on student loans to get through law school, as he had mentioned frequently on the campaign trail. He and Michelle Obama each owed $40,000 from their time at Harvard Law School, debt they had paid off only a few years earlier with the advance from a book deal.

Obama, like other Presidents before him, found himself hemmed in by the federal deficit. Spending had soared under George W. Bush as the nation fought two wars. The taxpayer-funded bailouts of Wall Street and auto companies had stirred a populist uprising known as the Tea Party movement, which opposed big government spending. Obama himself had raised concerns about rising entitlement program spending.

And he had other priorities. While his Democratic Party controlled both chambers of Congress, Obama spent his early political capital on other initiatives—an economic recovery bill and a sweeping health care law—instead of pushing for a big increase in scholarship money to ease Americans’ reliance on student debt.

Obama continued a bipartisan tradition of relying on student loans as a way to finance other initiatives. In 2010, he attached a provision to the Affordable Care Act, his signature health care law, to eliminate the Guaranteed Student Loan program, which since 1965 had insured student loans originated by private lenders. Ending the program would save taxpayers $60 billion over 10 years since the government would no longer have to pay banks a spread over their own borrowing costs. All federal loans from 2010 onward would be originated by the Treasury Department, using Bill Clinton’s Direct Loan program.

“We can’t afford to waste billions of dollars on giveaways to banks,” Obama said as he signed the bill in March 2010. “We need to invest that money in our students.” Not all the savings went to students, though; some financed Obama’s national health care law. Republicans accused Obama of “nationalizing” the student loan program. Some suggested the move encouraged reckless lending to students by removing “underwriting”—the process of banks screening borrowers’ credit histories, incomes, and other details to determine whether they were likely to default. It was a misleading claim. It didn’t matter whether the loans were originated by the Treasury Department or banks. The eligibility criteria were identical, and minimal. Obama’s move merely cut out the middlemen. But his move had a fundamental flaw: It kept in place a structure that required nothing of colleges to gain access to tens of billions of dollars in taxpayer money each year. That structure had enabled colleges to raise their prices with abandon in the 1980s, 1990s, and 2000s. By encouraging all Americans to go to college, through debt if they needed to, he had opened the spigot up further.

Author Josh Mitchell
Courtesy of Simon & Schuster

That spigot created both opportunity and hardship. It enabled tens of millions of students to attend college. In Brandon’s case, it opened the doors to Howard, whose graduates—many of whom had grown up poor—tended to land high-paying jobs. But for Brandon, as well as for millions of other students, it also meant an unconscionably high debt burden.

Brandon continued to suffer from anxiety at Howard. His biggest source of worry was his student loan debt. He borrowed tens of thousands of dollars each year—a mix of federal loans and private loans from Sallie Mae—watching anxiously as the interest accrued.

Brandon hadn’t realized when he matriculated that he would have to borrow so much. Students accepted early each year are more likely to get financial aid from schools. Students like Brandon who come in late in the admissions process—after most of the school’s scholarship money has been doled out—are often left to pay most or all of the sticker price, despite their families’ lack of wealth. The only option for those students and their parents is to take on debt. They are in the worst position to repay debt but the ones most reliant on it.

While G.I. Bill funds and Pell Grants went toward Brandon’s tuition, much of Brandon’s debt went toward living expenses. Howard had overbooked its on-campus dorms, and Brandon didn’t get a room. Instead he rented an apartment for $980 a month in Prince George’s County, Md., a half-hour drive from the school. He needed a car, and money for gas, parking, and maintenance.

Brandon could only pay for school if other family members took out debt as well. His great-grandmother cosigned his private loans from Sallie Mae. By the time he graduated in the summer of 2011, Brandon and his great-grandmother owed $148,000 in student debt, including interest. At the graduation ceremony, his great-grandmother was so proud she wept.

Brandon was part of one of the biggest graduating classes nationwide in history—and also one of the most indebted. Higher education enrollment—college and graduate school—had just hit a peak of 21 million students. Two in three graduating seniors owed debt—$27,000, on average. A small but fast-growing share, like Brandon, owed large balances—$50,000 and up.

Numerous factors collided to make this happen, some economic, some policy-related. One was a change the government made in the 1990s to begin charging interest on many student loans while borrowers were in school, driving up their balances by as much as 20% by graduation. Decades of lax regulation had enabled colleges to raise tuition to excessive levels. The recession also had wiped out household wealth. At a time when college was most important, it seemed, Americans were least able to pay for it. So they borrowed.

Brandon and his peers were graduating at one of the worst possible times. Even though the recession had ended two years earlier, unemployment remained exceptionally high. For most of 2011, it was above 9%, among the highest levels since the Great Depression. Many young college graduates lucky enough to find work were “underemployed,” stuck in jobs that traditionally didn’t require a college degree and paid modest wages.

Millions of young Americans had taken out debt with the belief that it was the ticket to a secure middle-class job. They were falling behind on their bills in droves. Student debt—which had for years been seen as an investment—stirred resentment among the hordes of new grads, fueling a populist movement. In September 2011, protesters crowded Zuccotti Park in New York, launching the Occupy Wall Street movement. Protesters criticized the greed of Wall Street and universities and demanded that their student debt be forgiven.

“I think this is a movement about economic justice,” a woman named Stacey Patton told USA Today in October 2011. “I think it’s pretty obvious what people are protesting. They are protesting greed, recklessness, illegal behavior, home foreclosures, and rising student debt. We can’t get jobs, but we have mounting student debt.”

Student debt was rising fastest among Blacks, and particularly students at historically Black colleges. Black families had the least amount of wealth of any racial group in U.S. society. Black students tended to enroll at universities that had smaller endowments than flagship universities and selective private colleges. The schools relied on tuition for a greater share of funding than many of their peers. Roughly three in four students at private historically Black colleges had to borrow for tuition.

During college, Brandon had worked on the side at the Thurgood Marshall College Fund, a nonprofit group that lobbies for historically Black colleges and universities. After he got his diploma in 2011, he told his mentor and the head of the fund, Johnny Taylor, how much he owed. Taylor sighed. He told Brandon he was going to give him a job to help him pay it off. Brandon started out earning $55,000 a year answering phones, organizing events, and assisting Taylor, working out of the group’s office just a few blocks from the Howard campus.

A few months into his new job, Brandon started getting phone calls from frantic students at Howard and other Black colleges. They said their parents had unexpectedly been rejected for federal parent PLUS loans. Congress had created the program in 1980 to shift costs onto parents rather than students, who had been defaulting at high rates. The idea was that parents—with their well-established jobs—would be better positioned to repay debt than their children. By the 2000s, the loan program had become a lifeline for many Black college students.

The Education Department in 2011 had discovered that, under the old Guaranteed Student Loan program, banks mistakenly approved loans for parents who didn’t meet federal eligibility criteria. Now, with banks out of the program, the department enforced the criteria, which, among other rules, blocked loans from going to parents who had declared bankruptcy within the prior five years. Hundreds of thousands of students—many at historically Black colleges—were now being denied access to the program because of the change.

The students needed the parent PLUS loans on top of their own federal student loans to cover the schools’ tuition. Financial aid officers at their schools told them that unless they found another way to pay, they would have to drop out. Brandon had no idea what to tell them.

Even with the new criteria for parent PLUS loans, the government continued to give loans to parents at a high risk of default. Many had little or no savings; some were unemployed; others were close to retirement and thus would be out of work. This was part of a broader phenomenon. The risky lending wasn’t just at historically Black colleges, and it wasn’t just to parents.

From The Debt Trap: How Student Loans Became a National Catastrophe by Josh Mitchell. Copyright © 2021 by Josh Mitchell. Reprinted by permission of Simon & Schuster, Inc.