In Student Loan Debate, Ghosts of 2008 Still Haunt Us
In the fall of 2008, the financial services industry was on the brink of collapse And, as a credit officer for JPMorgan Chase’s student lending business, I had a front-row seat as we watched bankrupt Lehman Brothers auction off its bonds, and scores of domestic banks fail. The collapse of U.S. housing markets—and the now infamous mortgage-backed securities—fueled a financial crisis that nearly brought down the world economy.
During the Great Recession that followed, millions of unemployed Americans, understandably, pinned their economic hopes on college completion. But even as student loan borrowing rose sharply, student outcomes remained stagnant and, in some cases, worsened. It’s a legacy that animates most of the major policy debates we see today around higher education finance, with proposals for blanket student loan forgiveness, doubling the maximum Pell Grant award, and creating new free-college programs.
Today, in the wake of a pandemic that caused the U.S. economy to shed 40 million jobs, the American labor market is in a period of disruption that may be even greater than the 2008 recession. This once again raises the prospect of a period of unrestrained borrowing—at a moment when most Americans can ill-afford it.
The economic and financial consequences are now manifest in the debate around broad-based student loan forgiveness and other measures intended to wipe away part of the student debt amassed over the past ten years. Since President Biden took office, the administration has used executive action to cancel $10 billion in student loan debt. With outstanding debt now climbing to a staggering $1.8 trillion, Biden’s historic efforts amount to forgiveness of less than one percent of the total amount owed by Americans—over 90% of which is through federal student loan programs.
It’s vital that we examine what lessons can be learned from the student loan debt bubble of the past ten years. This recent history of unrestrained student borrowing and rising college costs can help to inform the policy choices we make today. It should fuel a renewed sense of urgency to rethink the way that working learners finance pathways to career advancement and economic mobility.
Link borrowing to career outcomes.
Even as the economic recovery accelerates and job openings soar, there are still millions of American jobs lost during the pandemic that will never return. Impacted workers are being forced to up-and re-skill for roles in the new economy.
But this time around, events are unfolding quite differently: traditional four-year and community college enrollments tumbled during COVID-19 and well into the recovery—perhaps in part because student borrowers are already financially on the ropes or fearful of taking on additional student loan obligations.
But there is another reason, as well. Many displaced workers are looking to quickly gain new skills and get back to work, not spend four to six years in a classroom. Frankly, many students simply believe that they cannot afford to spend even two years in an associate’s program—as evidenced by declining community college enrollment.
In other words, they want a clearer and more immediate return on their investment. This is a lesson students and institutions have been learning the hard way. Colleges have long worried about issues around access and completion but have only recently begun to turn similar amounts of attention to outcomes beyond graduation.
The spike in borrowing after 2008 was, in part, an outgrowth of this lack of focus on the link between college and careers. Students took on debt believing the investment would be worth it when their college degree manifested into a good job with strong wages. Back then, there was a strong and widely-held belief that success was binary and that a college degree would automatically result in success.
For too many students, this was not the case. One survey conducted by Strada Education Network found that just one-quarter of working Americans with college experience strongly believe the education they received is relevant to their careers. Moving forward, students, schools, and funding providers must focus more heavily on the true ROI of higher education.
“Water Seeks Its Own Level.”
There is a principle in physics, reportedly first recorded by Aristotle, that states the surface level of water contained in two basins and connected by a pipe will always remain equal. Add some water to the surface of one basin, and the water in the other will rise as well.
There is evidence a similar principle has been playing out in higher education. As the availability of financing has increased, so have the costs of education. Over the years, higher education, policymakers, and funding providers have grown too cavalier in how they couple the ease of borrowing with the potential ROI of a student’s education.
Parent PLUS loans are one example of how dangerous this approach has proven to be. In 1993, the federal government eliminated both annual and lifetime borrowing limits on the loan, which features minimal credit checks. The popularity of the program grew throughout the Great Recession as more parents struggled to pay for their children’s education.
By last year, less than half of families who participated in a study about the program were successfully replaying their Parent PLUS loans. Just because we can make it easier for students—and their parents and family members, in this case—to borrow doesn’t mean those loans will serve as the foundation of a good investment in a student’s future or that of higher education on the whole.
Debt without a degree is toxic.
Of course, students who see the worst return on investment are those who never earn a degree. One-third of college students do not complete college within six years, with just 11 percent of students from the lowest-income quartile finishing their education. About 40 percent of students who take out loans do not earn a diploma in six years, and the default rate among those borrowers is three times as high as the rate for borrowers who did earn a degree. Their situation is akin to struggling to pay a mortgage on a house that does not exist.
As enrollment boomed following the 2008 crisis, completion rates actually declined. This was especially true among older, nontraditional learners -- the same kinds of learners now once again seeking training and learning opportunities amid an economic downturn. A decade ago, many of these students would have been better served by alternatives to a college degree that can help people navigate faster and more affordable pathways to economic mobility—particularly for those with few financial assets and limited credit histories.
As we work to get Americans the education they need to re-find their footing in an economy transformed by the pandemic, 2008 and its student loan aftermath should serve as a cautionary tale. Students also need more transparency and information on the ROI of programs they are investigating. We also must explore innovative and lower-risk ways of financing postsecondary learning and training beyond student loans, such as employer-sponsored education, as well as the growing number of short-term programs that can more quickly get workers the education they need at a lower cost.
Ultimately, the only way to reverse course is to learn from the public policy choices that led to the irresponsible lending of the past.