Student loans tying you down?

Congress’s latest fix won’t give you much help
By DEANNA ISAACS  |  September 12, 2012

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In late June DePaul University graduate student Marty Gleason went public about his mounting load of debt in an appeal to Congress to keep the interest rate on student loans at 3.4 percent.

His voice was one among many, some projecting a tsunami of defaults if the rates did what they were slated to do and doubled.

As June ended, Congress listened. The 3.4 percent interest rate on new student loans has beenextended for another year. Now the problem has been kicked down the road.

Gleason, who's 35 and works full-time as a Cook County (Illinois) juvenile probation officer, has more than $30,000 in debt from his undergraduate years at Beloit College. He expects to take on another $40,000 before he finishes the master's in information systems he's pursuing part-time at DePaul. He'll owe about $73,000 when he's done, and the one-year fix won't help him—it applies only to undergraduates.

His situation is hardly unusual. Student debt in this country has surpassed the trillion-dollar mark — exceeding even total credit-card debt — and is still climbing. And a lot of it is owed by English and philosophy majors now working as baristas, or not at all.

This "education bubble" was the subject of a paper cultural critic Brian Holmes of continentalcritic.com gave at a sparsely attended Open University of the Left lecture in late May. Though the original intention was benign, Holmes says, "the use of federally guaranteed loans to make college more accessible has ended up creating a monster."

Holmes's starting point is a cold war initiative, the National Defense Education Act of 1958, which provided for direct loans to students from the federal government. Tuition was modest, and the number of borrowers was relatively small. In 1965 the program got a Great Society expansion that added middlemen and private lenders (and layers of expense) to the mix. The motivation for that was a little bit of accounting magic: "Direct loans to students appeared as a loss on the federal budget. Loans made by private lenders, but guaranteed by the government, would not show up at all."

Then, in 1972, the government created the Student Loan Marketing Association, which grew into the financial services giant known as Sallie Mae.

Initially a government entity whose job was to keep the market liquid by buying up loans from smaller lenders, Sallie Mae underwent a significant transformation in the 90s. It became a private company, the SLM Corporation, and it got into the extremely profitable business of bundling and reselling government-backed student loan debt as SLABS (student loan asset-backed securities), investment packages similar to mortgage-backed securities.

By 2003, Holmes writes, SLM was enormously profitable. SLM's 2003 annual report shows net income of $1.53 billion. (Its CEO, Albert Lord, tried to buy the Washington Nationals and, tired of waiting for tee times, built a private 18-hole golf course.) But when the credit markets seized up in 2008, the federal government stepped in to save Sallie Mae and other private lenders "too big to fail" with multibillion-dollar bailouts.

Meanwhile, tuition soared, inflating faster than anything else in the economy, including health care. As universities and colleges became increasingly competitive, "corporate," and global, they invested in buildings, marketing, and multiple layers of administration, while handing off an ever-greater portion of instruction to adjuncts.

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