November, 2023
Washington — Is the nation's long-running student loan imbroglio a failure of program implementation or are its causes more deeply rooted in decades-old structural contradictions and counterproductive incentives that doomed loan programs from the start?
It is a mistake to attribute too many of the failures to faulty implementation. Wrong turns in policy choices, especially in 1972 and 1996, created conditions that even the best implementation efforts cannot overcome.
The Higher Education Act of 1965 established federal student aid programs within a structure of cooperative federalism. College Work Study (CWS), Education Opportunity Grants (EOG), and National Defense Student Loans (Perkins Loans) required state and institutional participation through fiscal federalism mechanisms such as matching and maintenance-of-effort requirements (also known as "skin-in-the-game"). Guaranteed Student Loans (GSL) had no such requirements, but it was envisioned as a minor bridge program to fill gaps in other coverage.
The Nixon administration upset this approach by proposing two new programs in a unitary government structure, through which the federal government provided all funding and administration with no required state or institutional buy-ins. Basic Education Opportunity Grants (BEOG) were established in the Education Amendments of 1972, along with a national secondary market (Sallie Mae) to expand the GSL program.
Unsurprisingly, states and institutions began to prefer the programs that made no demands on them and lobbied Congress accordingly. However, the Reagan administration soon shifted the balance of student aid funding away from BEOG (renamed Pell Grants in 1980) toward GSL (renamed FFEL in 1992). By the mid-1990s, FFEL loans became far and away the major source of student financial aid.
In 1996, Sallie Mae and several state-established FFEL secondary markets proposed for-profit* status for themselves, touting market forces as good for student loan efficiencies. The Clinton administration and Congress acceded. The result, however, was to prioritize the interests of stockholders over the interests of borrowers.
In 2001, the Bush administration appointed lobbyists associated with for-profit secondary markets and for-profit colleges to high positions in the Department of Education. Lending again exploded in a wild-west atmosphere because both the program structures and incentives were aligned to facilitate it.
The Great Recession of 2008 required Congress to step in to save student loan secondary markets through ECASLA legislation and in 2010 Congress ended the scandal-plagued FFEL program by originating all new federal student loans through a Direct Loan program, which uses Treasury rather than private capital for the loans.
These changes, however, did not address underlying structural and incentive issues, nor did various efforts to ease repayment burdens on borrowers, which unfortunately have complicated student loan administration and become tangled in litigation. Attempts at increased regulation of the programs conceived in the unitary government model have, likewise, been mired in controversy for years.
Recent headlines suggest that student loan servicing issues — borrowers can't even get through to their servicers — are the result of a failure of the Department of Education and its contractors to apply digital age technology correctly. That may be true, and a better approach** must be sought. But even the best technology cannot repair programs structurally misaligned with their goals and riddled with perverse incentives.
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*Sallie Mae was already for-profit, but as a regulated Government Sponsored Enterprise (GSE).
**Jennifer Pahlka, in Recoding America: Why Government is Failing in the Digital Age and How We Can Do Better (2023), offers many compelling case studies and much good advice. Her focus, however, is on program implementation, not on program structures and incentives. She does not, unfortunately, offer analyses of federal student aid programs.
