Seth Frotman *Broken Promises: How Debt-Financed Higher Eduction Rewrote America's Social Contract and Fueled a Quiet Crisis

Seth Frotman: *Broken Promises: How Debt-Financed Higher Education Rewrote America's Social Contract and Fueled a Quiet Crisis

Editor's Note: Seth Frotman has resigned his post at the Consumer Financial Protection Bureau; this is part of an article he wrote for the Utah Law Review: https://dc.law.utah.edu/cgi/viewcontent.cgi?article=1172&context=ulr, dated May 8, 2018

APNewsBreak: Nation’s top student loan official resigns; photo of Frotman, CFPB

Seth Frotman Abstract

The U.S. student loan market stands at $1.5 trillion—the second largest consumer debt market in the country. Despite the vast size of this market and the far-reaching spillover effects of student loan debt on individuals and communities, the American higher education system increasingly relies on debt financing as the predominant mechanism by which American families pay for college. Furthermore, student loans still lack a comprehensive twenty-first century consumer protection infrastructure. Researchers and policymakers are only now beginning to acknowledge the threat runaway student debt poses to the American social contract—even as millions of borrowers across the country struggle with the consequences of this quiet crisis.

I. INTRODUCTION Student loan debt has fundamentally changed the lives and livelihoods of tens of millions of people. This notion is both obvious and intuitive to the forty-four million Americans who currently owe more than $1.5 trillion in student loan debt, yet remains surprisingly controversial in Washington.1 America’s embrace of a debt-financed higher education model has broken the basic tenets of the social contract between the U.S. government and its citizens—the contract that relies on the supposed notion that higher education is the nation’s great equalizer; and that attending college always provides a clear pathway to the middle class.2 An honest assessment of the situation shows this to no longer be true. This student debt crisis did not happen by accident. A $1.5 trillion market is never an accident.3 This quiet crisis is the consequence of incremental policy decisions that drove up college costs and shifted the burden for shouldering these costs to individual students—a shift financed by consumer debt. It is imperative to understand the array of decisions that led to this place for two reasons. First, because the people whose lives have been so severely impacted by student debt deserve an accurate accounting of why they have been uniquely asked to bear this burden. And second, so that policymakers and the higher education community—from universities, to researchers, to foundations—can shape a response that recognizes and effectively addresses the real problems that student loan borrowers face across their financial lives.

In 2008, the worst economic recession since the Great Depression crippled the nation and destroyed trillions of dollars in household wealth. 4 Millions of Americans stood by, powerless to intervene in their own financial lives.5 The financial crisis exposed deep rooted systemic problems underlying the most basic functions of consumer credit markets. 6 The economy failed consumers at every turn. Millions of people needlessly lost their homes.7 The most vulnerable people in the country were hit the hardest. 8 Nearly a decade later, many families and communities have yet to recover.9 As is often the case, researchers and policymakers engaged in a familiar cycle of study and reaction—diagnosing the causes, learning the lessons, and enacting the “right” reforms. 10 In response, America’s leaders made three promises. First, they promised that the public and private spheres would install a framework to stop many of the practices that led to the financial crisis.11 Second, they promised that this framework would protect individual consumers accessing and repaying the financial products that underpin a twenty-first century economy.12 And finally, they promised that by learning from the practices that ignited the last crisis, America’s financial system could prevent the next one. 13 In effect, leaders promised the country that they would never let something like this happen again.14 The current student loan market is the first real test of this proposition. For nearly a decade, the federal government has attempted to get a handle on the country’s growing student debt problem. 15 And yet, as policymakers across the government have supposedly worked to prevent another crisis, it remains clear—it is too late. Those promises were broken and, yet again, America finds itself facing a crisis. Today, more than eight million federal student loan borrowers are in default.16 Another three million borrowers are at least two payments behind.17 In 2017 alone, 1.1 million federal student loan borrowers defaulted—that is one default every twenty-eight seconds.

To put these numbers into context, in 2016, three times as many people defaulted on a student loan than lost their home due to foreclosure.19 In fact, the rate of student loan defaults in 2016 is comparable to the foreclosure rate following the mortgage meltdown.20 However, this is only one part of the crisis. Ballooning, unaffordable student loan debt does not end with the millions of borrowers who are behind or in default on a student loan. Some people have tried to explain away the student loan crisis by relying on an overly narrow definition of what it means for a borrower to be “struggling.”21 However, by limiting the definition of the student debt problem to those borrowers who are behind or in default, the literature assumes that the remaining thirty-three million borrowers are doing just fine.22 This perspective is deeply flawed. 23 First, it is certainly not acceptable to write off the financial futures of eleven million people. Second, by defining down what it means to “struggle” to include only those in immediate, documented financial distress, these commentators are ignoring the broader reality of debt-financed higher education. For every borrower who misses a student loan payment or defaults on a debt, there is another borrower who is struggling to buy a home, start a business, or save for retirement due to the burden of their student loans.

Read the rest of the article at the Utah Law Review, Utah Law Review Volume 2018 | Number 4 Article 1: Broken Promises: How Debt-financed Higher Education Rewrote America ’s Social Contract and Fueled a Quiet Crisis by Seth Frotman

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Seth Frotman: *Broken Promises: How Debt-Financed Higher Education Rewrote America's Social Contract and Fueled a Quiet Crisis

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