This original article was written by KEVIN CAREY and can be read at The Upshot.
The American student loan crisis is often seen as a problem of profligacy and predation. Wasteful colleges raise tuition every year, we are told, even as middle-class wages stagnate and unscrupulous for-profit colleges bilk the unwary. The result is mounting unmanageable debt.
There is much truth in this diagnosis. But it does not explain the plight of Liz Kelley, a Missouri high school teacher and mother of four who made a series of unremarkable decisions about college and borrowing. She now owes the federal government $410,000, and counting.
This is a staggering and unusual sum. The average undergraduate who borrows leaves school with about $30,000 in debt. But Ms. Kelley’s circumstances are not unique. Of the 43.3 million borrowers with outstanding federal student loans, 1.8 percent, or 779,000 people, owe $150,000 or more. And 346,000 owe more than $200,000.
Ms. Kelley’s debt woes are also mostly a matter of interest, not principal, a growing problem for the nation’s student debtors. According to the Federal Reserve Bank of New York, the number of active borrowers enrolled in college has declined to roughly nine million today from about 12 million in 2010. Yet the total amount of outstanding debt continues to increase, because many borrowers are not paying back their older loans.
This is partly a function of continuing economic hardship. But it also reflects how the federal government has become the biggest, nicest and meanest student lender in the world.
Ms. Kelley, 48, first enrolled in college in 1990 at Maryville University, a private school near St. Louis. She was a nontraditional student, already married with children. She took out loans to help pay tuition, and by the time she graduated with a degree in English in 1994, the total was $26,278, which is the inflation-adjusted equivalent of about $42,000 in 2015. This is not an unusual sum. The typical private college graduate who borrows holds $32,600 in debt.
Then as now, the job market was not clamoring for English majors. Practicing law and teaching seemed like the best options, and Ms. Kelley chose the former. Entering law school also allowed her to delay repaying her undergraduate student loans. She again borrowed for tuition, $37,000 for the first three semesters, which is also a fairly typical amount. Law school graduates today often have six-figure loans.
Adding Up to $68,518
But then Ms. Kelley experienced her first real piece of bad luck. She became ill with a life-threatening autoimmune disease, requiring a lengthy hospitalization. She dropped out of law school and ultimately chose not to return. But she still owed the money, in addition to her undergraduate loans, which had been accumulating interest. She rolled the two loans together, which now added up to $68,518, at an annual interest rate of 8.25 percent.
Ms. Kelley decided to go into teaching, which meant graduate school back at Maryville. She had four children and a husband who worked, so in addition to borrowing for tuition, she took out extra loans to pay for child care. This is a legal and common practice. Students can take out federal loans to pay for the full cost of attending graduate school, including both tuition and living expenses such as food, rent, transportation and child care. Ms. Kelley’s husband was also a borrowing student at the time, but she took out all the child care loans.
Ms. Kelley found work as a teacher at a public school. To be eligible for the highest possible salary, she needed additional graduate work, which she borrowed to complete. By staying enrolled in graduate school from 1999 to 2004, she was able to again put off repaying her older loans. But the interest charges continued, compounding every year. Graduate school and child care added $60,700 to the principal.
For those keeping track, the loans totaled $194,603 by April 2005.
Ms. Kelley’s husband worked in the construction industry. In 2005, the family moved to Laredo, Tex., following the great American housing boom. The Great Recession was devastating. Facing home foreclosure, Ms. Kelley cashed out her public teacher retirement funds, despite the stiff penalty. But it wasn’t enough. In 2008, she and her husband lost their home, and they divorced.
Ms. Kelley was now several years out of graduate school, and the loans were due. But the federal government allows a borrower to defer payments for up to three years in the case of an economic hardship, which Ms. Kelley certainly had. She consolidated her loan balance, which had grown to $260,000, at slightly more than 7 percent interest.
By this time, Ms. Kelley’s children were reaching college age. One received a financial aid package that included $12,000 in Parent PLUS loans, a federal program that allows parents to borrow money for their children’s college education after the children have reached the maximum on loans of their own. She agreed, hoping to minimize her children’s debt. She briefly enrolled in an education Ph.D. program at Texas A&M before withdrawing, but not fast enough to avoid an additional $7,458 in loans.
Eventually, Ms. Kelley moved back to Missouri, where she found work as a high school teacher in a parochial school. After resolving a long, contentious child care fight with her ex-husband, she finally felt financially stable enough to tackle the pile of student loan documents that had been accumulating. After her loan deferment ended, she enrolled in another, similar federal program called forbearance, also because of an economic hardship. The hardship this time was the loans themselves.
A representative from Ms. Kelley’s loan servicer called this September, explaining that her final forbearance would expire in 16 months. After that, Ms. Kelley said, they told her they would “come after her,” garnishing her wages and eventually her Social Security. She had taken out her first student loan 25 years earlier and had yet to make a single payment.
She also had not come to grips with how much it had added up to in the end.
A Stunning $410,000
The $410,000 total shocked her. The accumulated interest was more than twice the original principal. She was in a new relationship, but remarriage was impossible — who would attach themselves to that much debt? Because she had stayed home with her children for many years, she had contributed relatively little to Social Security. Her public teacher retirement fund was gone, along with the equity in her lost home. She, not her ex-husband, had borrowed for child care.
At age 48, she wanted to begin saving for retirement. But the monthly loan payments of $2,750 stretched for 30 years, far more than she could afford and long past retirement age.
Over the next 11 months, Ms. Kelley will accumulate more in interest charges than she borrowed for her entire undergraduate degree. She would like to go bankrupt, but federal law all but precludes that method of discharging student loans.
“I am not a victim,” said Ms. Kelley, who shared her loan documents with me. “I made choices.”
But her story is more complicated than that. It reveals the deep contradictions in the federal government’s approach to student loans.
People have always had a difficult relationship with debt. Access to capital is the fuel of a modern economy. Borrowing for college is often a good idea, because it represents an investment in human potential in a time when brainpower is the most valuable asset most people own. But there’s a reason debt is often grouped with sins and frailties in ancient moral codes. Borrowing is risky, financial decisions are not always rational, and people often do a poor job of properly weighing the interests of their present and future selves.
The private enterprise system is built to limit overborrowing by sharing risk between lenders and borrowers. Lenders examine credit and income histories and ask for collateral that can be repossessed in case of default. They charge more interest when they take on more risk. Because most loans can be discharged in bankruptcy, lenders share the cost of default. It’s likely that Ms. Kelley’s mortgage lender lost money on her 2008 foreclosure, for example.
But the federal student loan program doesn’t work that way. Those ads that run on bus stop signs and on late-night television — “No Cash? No Credit? No Problem!” — are essentially the Department of Education’s official policy on student loans.
On the front end, the department is the world’s nicest, most accommodating lender. Interest rates are set by Congress and are lower than banks charge in the private market. Borrowing for college is essentially an entitlement — as long as you’re enrolled in an accredited college and aren’t in arrears on a previous student loan, it doesn’t matter how much debt you have or how little money you make. Undergraduate loans are capped to contain borrowing and college costs, but graduate loans are bound only by the vague limits of “living expenses.”
Private lenders also don’t let people defer making payments for years or decades at a time.
A private sector lender approached by a potential borrower with no assets, a modest income and $350,000 in debt who had never made a payment on that loan in over 20 years would not, presumably, lend that person an additional $7,800. But that’s exactly what the Department of Education did for Ms. Kelley in 2011. Legally, it could do nothing else.
Our culture also encourages a great deal of trust in colleges. When people walk onto a used-car lot, they generally understand that promises of easy credit are just another tool for a slick salesman to close a deal. The local university and the Department of Education, by contrast, are assumed to have students’ best interests in mind.
Pro-student organizations support low interest rates, no credit checks and lengthy deferment options, as do colleges that can’t stay solvent without debt-financed tuition. Individually, these policies have merit, just as not repaying a student loan is often a perfectly rational choice in the short term, right up until the point when the short term becomes long. For some people, it hardly seems like debt at all.
When the loan bill finally comes due, the federal government transforms into a heartless loan collector. You don’t need burly men with brass knuckles to enforce debts when you have the Internal Revenue Service. It is both difficult and illegal to hide money from the federal government, which can and will follow you as long as you live.
The government acts this way because the federal student loan program has been removed from the norms and values of prudent lending. Because the Department of Education doesn’t consider risk, it takes no responsibility. If life, luck and bad choices leave you $410,000 in the hole, it’s all on you.
Ms. Kelley has one possible escape route: a federal loan forgiveness program that caps her payments as a percentage of her income and erases her debts if she logs 10 years of service in the public or nonprofit sector. (For today’s students, income-based repayment systems are helping lift the burden of debt.) But that would still mean a decade of what she describes as “futile” payments that won’t even cover her monthly interest expenses, leaving nothing to put away for retirement. President Obama has proposed capping the amount of debt that can be forgiven at an amount far below Ms. Kelley’s outstanding balance, which would cut off future debtors in her situation from full relief.
Most college students don’t end up like Ms. Kelley. They pay back their loans and enjoy the fruits of their degrees. But most pack-a-day smokers don’t die of lung cancer. And most people who bought cars with Takata airbags from 2002 to 2008 weren’t killed by shrapnel from explosions. Nevertheless, we still regard small risks of catastrophic outcomes as problems to be solved.
In the meantime, Ms. Kelley feels hopeless. She understands how she got here. But, she says, “there ought to be a way out.”