Indentured Studenthood: The Higher Education Act and the Burden of Student Debt

Promising to do something about student debt has become the means for politicians to pretend they are doing something for the 99 percent. That was true even before the 2016 election campaign really got underway. Obama, after all, promised two free years of community college in his 2015 State of the Union address. That idea, like so many others from Republicans and Democrats, did not go anywhere, even though the most recent re-authorization of the 1965 Higher Education Act (HEA) expired in 2013. However, inaction is not just a symptom of Washington gridlock. The reality is that paying for college is a confounding, sprawling sector of the economy involving loans, grants, scholarships, and tax credits.

This byzantine array of federal financial options was not accidental. No one in Congress or the Executive Branch was willing to give much direct aid to schools or students when they set out to draft HEA, the most important piece of legislation behind the current system of financial aid. Liberals and conservatives alike considered fully underwriting colleges and undergraduates to be a thoroughly un-American handout even at the height of LBJ’s War on Poverty and Great Society programs. So, instead, Congress offered a package of individually tailored options for affording escalating tuition costs. Lawmakers never intended these choices to be confusing. Nor did they realize this mix would spawn an entire student loan industry, a supposedly non-profit sector that came to include not only profitable but also predatory, private loans.

HEA has not, in retrospect, been a clear-cut hand up. It, instead, has guaranteed that lower, working, and middle-class students pay more than the increasingly small number of students whose parents can pay school expenses out of pocket. Borrowers, after all, not only owe full tuition and living expenses but also the interest accrued. The number of students ensnared in this financial aid system has risen alongside tuition costs and loan rates. All of these increases are partly a function of Congress’ periodic direct re-authorizations of the HEA or indirect modifications done by the estimated four thousand other lines in the federal law books pertaining to higher education. Also important were the choices made by the Department of Education staffers, school administrators, financial aid officers, state legislators, and higher-ups in the expansive financial aid industry, not just private lenders but intermediaries between federal appointees and the students and schools they supposedly serve.

Everyone involved in financial aid bears the responsibility of putting students in a millennial version of indentured servitude—a seventeenth-, eighteenth-, and nineteenth-century form of unfree labor. That comparison likely seems strange because it remains a privilege to attend a college or university, albeit an expensive one. Today’s schools are also luxurious by the standards of centuries past, whereas the world of indentured servants was shockingly brutal. Actual violence, or the threat of it, was often behind a person’s decision to sign and a part of what they experienced on the job. It was not slavery because people chose to become indebted, largely to travel to far-flung colonies. There they worked off their debt and eventually became free men and women with opportunities in what Europeans considered a New World.

Yet yesteryear’s indentured servitude and today’s indentured studenthood also have a lot in common with how these labor systems actually operated. Neither was truly voluntary. What choice did you actually have if you wanted the chance to either escape Europe’s class systems or be a contender for today’s well-paying jobs? Both indentured servitude and studenthood also depended on questionable proof of consent—either the simple “mark” of an illiterate person or an eighteen-year-old signing on a dotted line without any idea of the complicated world of law and private profit behind financial aid—including federal help. Parents often do not know the ins-and-outs either. But those signatures on binding agreements make abuses, then and now, hard to police. And that is true even though governments, employers, creditors, and now schools have made false assurances that more opportunities, choices, and freedoms would exist after a fixed, temporary state of indebtedness. True, no one could revoke your right to stay, nor your degree. Dropouts can also keep credit for the coursework done toward completion. Nevertheless, peonage, then and now, is not temporary. Centuries ago servants were constantly finding their indentures incrementally extended beyond their life expectancy (or even passed on to their children). Many quite simply never gained their freedom in the colonies where freed people struggled to escape the class system European settlers modified but nonetheless imported. Degree holders are likewise finding it impossible to pay off quickly, if ever, tens of thousands of dollars in debt, especially since recent unemployment rates for millennials have been abysmal. If anything, federal student aid has reified social inequality. Low-income families are more likely to send children to cheaper schools without the clout and connected alumni to help graduates find work or at the very least unpaid internships, a millennial version of wage theft masquerading as an apprenticeship that only an elite stratum of families can afford.

Coincidentally, indentured servitude fell into decline around the world in the early twentieth century, when the first loans for attending American colleges began appearing. Up until that time and for about three decades thereafter, financial aid actually meant direct business, philanthropic, or state support for schools. Some donors did earmark funds for scholarships to be awarded first on merit and then on the basis of need. Harder to find were loans, which a few lenders offered with short terms and high interest rates in the 1910s and 1920s.

The few options for student support reflected schools’ historic reliance on tuition, be an institution public or private. Small endowments, meager state funds, and episodic private gifts left many colleges and universities underfunded, even as the federal government indirectly increased aid for higher education in the 1930s, 1940s, and 1950s. Habit, custom, and law kept federal funding indirect. K-12 and post-secondary education had long been decreed a local, state, private, or religious matter. There would hence never be an attempt in these decades to directly and robustly fund post-secondary schooling as Western European countries did, a far more progressive and effective means of educating the citizenry, nurturing research, and meeting other civic needs.

The American approach also kept higher education’s expansion incremental. New Dealers offered students’ work-study that paid them for mostly on-campus jobs that improved or expanded colleges. Pay enabled students to afford tuition and prepared them for better opportunities but also kept them off relief and out of competition for work in the 1930s. And none went into debt to complete their coursework during the cataclysmic Great Depression. FDR also signed off on the most robust, progressive student aid program in American history: the 1944 GI Bill. The federal government paid tuition and living expenses (with maximums far more than it cost to attend Harvard in these years). Such provisions freed World War II veterans to focus on their studies or balance schoolwork with starting a family. Veterans’ groups embraced benefits offering a fully paid hand up into post-war prosperity. So did liberal Democrats, who had also found a way to indirectly send federal money into colleges and universities willing to accept service personnel. Those schools also proved themselves amenable to raising rates for all enrollees to receive the maximum federal benefit for making room for GIs. Cash-starved institutions also proved themselves eager to compete for the indirect school aid that the Cold War unleashed. Money could be found first through research grants that largely went to science, engineering, and health programs. More support became available after the Soviets launched Sputnik. Congress spent a year crafting the 1958 National Defense Education Act (NDEA), which not only earmarked funds to improve instruction in science, math, and foreign languages but also encouraged students to pursue a college degree, both through high school counseling and direct assistance. This aid took the form of fellowships as well as small short term loans for students promising to pursue a course of study important to the nation.

The 1960s seemed a moment when collegiate finances might be fundamentally overhauled. Many more young people, the so-called Baby Boomers, were poised to apply. Schools needed professors, classrooms, and dorms but NDEA simply had not done enough to expand campuses to accommodate them. JFK’s efforts died in Congress. Only his successor, the aging New Dealer LBJ, would be able to sign a small bill for campus improvements and then the historic 1965 HEA.

HEA was considered an extension of Johnson’s War on Poverty to complete the New Deal and build a Great Society. Its fifty-seven pages had just eight titles. The first promised direct support to underwrite programs that would turn schools into modern multi-versities that served a range of constituents, not just students and faculty. Such sprawling research institutions needed better repositories and librarians, which the second title funded. The third section provided direct aid to “developing institutions,” a polite way of saying historically black colleges and universities. Sandwiched between that title and the final four dedicated to teacher training, undergraduate instruction, and amendments to earlier legislation was “Student Assistance.”

HEA was considered an extension of Johnson’s War on Poverty.

It was hardly accidental that student aid was effectively buried within HEA. At the time, lawmakers considered direct assistance to schools far more important. Robust funding, after all, was a means to prevent the burden of paying for colleges and universities from falling on students and parents. In fact, one of the leading educators of this era, the University of California’s Clark Kerr, openly opposed the loans and tax credits discussed during the Congressional debate over HEA. He warned that continuing to put an emphasis on using tuition to fund higher education in effect muddied public and private colleges and universities’ status as a public good, threatening to keep education a private luxury when advanced learning was now a civic necessity. That principle was woven throughout the California Master Plan for Higher Education that he had helped draft to provide every resident with a tuition-free opportunity to attend community colleges, state colleges, and UC campuses.

Kerr’s warnings scuttled talk of providing students and families with mere tax breaks or nothing but loans. His concerns still did not stop Congress from passing a law that provided three basic forms of student assistance to make up an individually tailored “package”: grants, work-study opportunities, and low-interest loans brokered and insured by the federal government. That lending innovation dated back to the New Deal’s housing program structured around long-term, fixed-rate mortgages. This mix of options reflected a bipartisan conviction that students must pay something toward their education. In fact, liberals and conservatives both celebrated that HEA’s fourth title offered enrollees a range of options tailored to their individual needs while ensuring no one received a “free-ride” because grants were too small, even then, to cover tuition, books, and living expenses.

Even the most ardent critics of student assistance failed to predict that federal student loans would become the center of a massive, supposedly non-profit, industry. That unintended consequence lay in the law’s constant re-authorizations, annual allocation decisions by the budget committee and bureau, and laws seemingly unconnected to higher education, like the 1997 Taxpayer Relief Act and 2010 Health Care and Education Reconciliation Act.

The 1972 and 1986 re-authorizations included the most important changes for creating systematic indentured studenthood. The 1972 updates initially seemed progressive: liberal Rhode Island Senator Claiborne Pell created the need-based grants now named after him, which the federal government still awards. He did not trust schools because universities proved themselves eager to use HEA’s grant money as a means to compete for students via financial aid packages (often without concern for actual need). Pell grants were an additional part of the package to be offered to students to provide them with a basic right to higher education. It likely would have worked better had it ever been fully funded and not trimmed in subsequent re-authorizations.

In retrospect, the most important amendment made in 1972 was the creation of Sallie Mae, a clearing house for student loan debt modeled off of the New Deal’s Fannie Mae, which securitized and sold federally backed, long-term, fixed-rate mortgages. Recently privatized Sallie Mae was pivotal to creating a caste of indentured students because it encouraged more lenders to participate in the federal loan program and created a need for a sea of costly intermediaries between banks, the federal government, and campus financial aid officers. Lenders, clearing houses, guarantee agencies, and their Washington lobbyists added not just confusion but also additional costs to private and federal student loans.

Banks and politicians came to love Sallie Mae. Financers had easy access to an increasingly lucrative financial product, which the federal government guaranteed. National policymakers could also continue to indirectly aid higher education. All the state covered was the interest payments while the student was in school. That bill is far less than it would cost to underwrite colleges and universities so they would not need to continue to compete for private investors, research grants, and students.

Sallie Mae’s 1972 creation also inaugurated an era when steadily rising tuition rates finally outpaced families’ ability to afford these increases. That historic shift reflected workingand middle-class wage stagnation since the 1970s as well as the simultaneous, rapid decline in state support for schools. Neither federal research grants nor state expenditures has ever really come back to previous levels. Voters have proved, to be frank, far more supportive of tax cuts than funding critical parts of social welfare, such as health care, basic infrastructure, and education. As a result, most students and parents had to compensate for steadily rising tuition rates by taking out more private and federally guaranteed loans.

Subsequent HEA re-authorizations rarely confronted higher education’s regressive funding schemes. The 1986 revision, for example, did not prioritize underwriting institutions or their libraries, as Congress had done in 1965. Instead, the 1986 amendments emphasized increasing financial aid packages’ accessibility, especially for non-traditional students, the children of farmworkers, disabled students, students with children, and other undergraduates from disadvantaged backgrounds. Congress may have celebrated that they had given more residents the “right” to an education but the 1986 changes really just guaranteed and incentivized going into debt to pay for college. To be fair, lawmakers also introduced direct loans from the federal government. This program cut out the middlemen making a profit off of increasingly indentured students. That lending expanded under Clinton in the early 1990s but would not replace the guaranteed loan program until 2010, when Obama signed the Health Care and Education Reconciliation Act. That Obamacare amendment included a rider that cut out the middlemen between the education department and students. Nevertheless, past borrowers must still repay the federal loans offered through banks and most often securitized and then sold by Sallie Mae.

That 2010 proviso highlights just how much more complex and confusing student loans have become since the 1980s. Clinton, for example, signed off on a whole new array of loans for families and students, as well as a separate overhaul of the tax code. The 1997 Taxpayer Relief Act included the kind of higher education tax credits and deductions that conservative Republicans had been championing since the 1950s. These write-offs hardly eased parents’ and alumni’s financial burdens: only the wealthiest Americans earned enough to get the full benefit of a so-called reform that actually privileged attending the country’s most expensive schools because only high earners with large loans get the maximum benefit.

Now is the time to end this perverse financing; 2016 is an election year and HEA’s re-authorization is long overdue. Yet most presidential contenders seem all too eager to promise reforms without actually addressing the structural inequality behind the trillion dollars in student debt. Hillary Clinton has named it a top concern but demurred from proposing any solutions, which did not prevent Republicans from theorizing that spending cuts, accountability schemes, streamlined repayment systems, and employee income-share agreements might make a difference. Most of those ideas really just guarantee students do not default and none end indentured studenthood. Neither does debt forgiveness or re-financing. As Elizabeth Warren, Bernie Sanders, and Rolling Jubilee activists have pointed out, canceling obligations will only end alumni peonage if it is combined with direct federal and state funding for colleges and universities, whether public or private. Someone, after all, has to pay for these civic institutions and the instruction, research, and community support they provide.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.