The Degree, the Debt, and the Blame

The student loan crisis has three villains. Everyone agrees on that. They disagree, loudly, on which one to blame.

The federal government lent the money. The universities spent it. The students borrowed it. Each party points at the other two. The result is a $1.7 trillion debt load, a generation of graduates who feel cheated, and a political argument that generates far more heat than understanding.

The Franklin Process requires us to follow the incentives before assigning the blame. So let us do that.

Begin with the government. In 1965, Congress passed the Higher Education Act, creating the first federal student loan program. The logic was sound: a college degree raised lifetime earnings, and many families could not afford the upfront cost. A loan bridged the gap. The degree paid it back.

The problem is what happened next. Congress expanded the program repeatedly — raising limits, loosening eligibility, adding new categories of borrowers. In 2010, the government eliminated private lenders from the federal program entirely, becoming the direct lender for nearly all student debt. The result was a system with almost no underwriting. Underwriting is the process of evaluating whether a borrower can repay a loan. Banks do it for mortgages. The federal government largely stopped doing it for student loans.

A student could borrow $200,000 to study a field with a median starting salary of $35,000. The government would lend it. No one asked whether the math worked.

Now follow the universities.

When the government guarantees loans regardless of the borrower's prospects, the institution receiving the tuition faces no risk. The university gets paid whether the student graduates or not, whether the degree leads to employment or not, whether the loan is ever repaid or not. This is called moral hazard: when one party takes on risk while another party bears the consequences.

The predictable result: tuition rose. Between 1980 and 2020, the inflation-adjusted cost of a four-year degree at a public university roughly tripled. At private universities, it more than doubled. Administrative staff grew faster than faculty. Campus amenities expanded. New buildings went up. The money had to go somewhere, and it went into the institution.

This is not a conspiracy. It is an incentive structure. When someone else is paying, prices rise. This is as true of universities as it is of hospitals.

Now follow the students — and be honest about what you find.

Eighteen-year-olds were told, consistently and by nearly every authority in their lives, that a college degree was the ticket to a middle-class life. Parents said it. High school counselors said it. The data, for decades, supported it: college graduates earned substantially more than non-graduates over a lifetime. The college wage premium — the earnings advantage of a degree — was real and large.

What the data did not always show clearly was the distribution. The premium was real for graduates of selective institutions in high-demand fields. It was much smaller — sometimes negative, after debt service — for graduates of less selective schools in low-demand fields. A degree in computer science from a state flagship is not the same asset as a degree in communications from a for-profit college. The credential looked the same on the form. The outcomes were not.

Students who borrowed heavily for degrees that did not deliver were not stupid. They were acting on the information they had, in a system that gave them no reliable way to evaluate the return on their investment before making it.

That is the structural failure. Not greed. Not ignorance. A system that separated the decision from the consequence at every level.

Who wins in this system?

Universities, clearly. They collected tuition regardless of outcomes. Administrators whose salaries grew with institutional budgets. Bondholders who financed campus construction. The financial services industry that serviced the loans before 2010 — and, in the form of the federal government, still does.

Who loses?

Borrowers whose degrees did not deliver the promised return. Taxpayers who will absorb the losses when loans are forgiven or defaulted. Future students, who face the same broken price signals. Workers without degrees, who were told for decades that their path was inferior — and who watched the credential inflate while the underlying skills it was supposed to certify became harder to verify.

And the institutions themselves, eventually. A system that prices itself out of the market it serves does not survive indefinitely.

The political debate has produced two camps, each with a preferred villain and a preferred remedy.

The left argues that the debt should be cancelled — that borrowers were misled, that the system was rigged, and that relief is justice. The right argues that cancellation rewards bad decisions and punishes those who did not borrow — that it is a transfer from plumbers and electricians to lawyers and consultants.

Both arguments contain truth. Neither addresses the structure that produced the problem.

Cancellation without reform is a subsidy to the institutions that caused the inflation. It relieves the borrower today and refills the pipeline tomorrow. The universities have no reason to change their pricing if the government absorbs the consequences of that pricing.

Refusing cancellation without reform leaves a generation holding debt for a promise the system made and did not keep. That is also a choice — and it has political and economic consequences of its own.

The honest answer is that both things are true simultaneously, and that the argument about blame is partly a way of avoiding the harder question: what do we do about the structure?