This document discusses the rising issue of student debt in the United States. It notes that student debt has surpassed $1 trillion and is negatively impacting recent college graduates. It analyzes how the assumption that everyone needs to attend college has contributed to rising enrollment numbers and increased borrowing. It also examines how the federal government and private companies like Sallie Mae have profited from student loans through lobbying and special deals, creating a system of "crony capitalism." The document argues this system has concentrated power in few hands and made it difficult for other private lenders to compete.

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Student Debt, Crony Capitalism
And
The Middle Class
By Anonymous
5-10-15

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There has been a reoccurring economic and social dilemma making its way
throughout America over the past couple years. This problem has to do with public College
education costs and the ability to pay back these costs; the problem is student debt, and the
rising of this debt. With student debt surpassing 1 Trillion dollars in late 2012, College
students throughout the United States are either unable too pay for school up front, parents
don’t have the funds and must receive a loan, or are simply unaware of rising College
tuition costs. It has become a common trend to take out student loans and pay them back
later. Well the problem arises in the last half of that statement, “pay them back later”,
because “student loans are now, after mortgages, the largest source of household debt,
outstripping credit card and auto loans”1. In this paper, I will analyze how student debt
came into existence, who is responsible, and what stresses it brings upon College graduates
after they’re casted out into the abyss of reality realizing their in debt $20,000 to
sometimes over $100,000 dollars. Entering society after gradating College with mounds of
debt can be very stressful on young folks who find themselves not making money, but
instead compensating debt, in turn holding them down in an economy that’s experiencing
problems like inequality and slow growth. Like a panic stricken person drowning in the
vastness of the deep blue ocean using all their strength to ascend to the surface only to be
pushed down again by the pressure of debt. This cycle of being held down continues for the
Graduate after College and relief from student debt seems all but out of reach. So, who’s
shoulders does this debt fall on? How does the Middle Class fall into the situation? These
are questions to be addressed within this paper, as I look to find how this massive student
1 Dynarski, Susan. “An Economist’s Perspective on Student Loans in the United States” p1.

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loan debt came at hand, as well as who’s profiting off student debt, and the effects student
debt has upon the rising generation and Middle Income families.
As of now there are more College students than ever before in the United States.
Borrowing money for College has doubled “between 2001 and 2011, from 56 billion to 113
billion”2. This increase, which has now passed 1 trillion dollars is shared with an increase of
College enrollment that “rose 32 percent in the decade between 2001 and 2011”3. We can
see a trend involving the rise of enrollment. Undoubtedly, resulting in more money being
borrowed for this increase of enrollment. By analyzing the increase of College enrollment
in the decade between 2001 and 2011, one can say it’s had a tremendous effect on rising
student loan debt. Culture throughout America assumes everyone must go to College.
During my senior year at High School, I was asked an uncountable amount of times the
question, “where are you going to college next year?” or “what are your plans for school?”
These questions were asked by peers and more so by elders. When being asked such
questions, I confidently answered by saying, “I’m going to Virginia Tech”. Something
occurred to me though, I noticed how every time I was asked these questions, the
assumption of going to College after High School was already made, these people didn’t
even consider the option of not going to College. By reevaluating my transition from High
School to College, I’ve come to realize that American culture assumes everyone must go to
College and if you don’t then you won’t be successful; this is the impression I got from my
interactions. I believe this assumption by American culture has contributed tremendously
2 Dynarski, Susan. “An Economist’s Perspective on Student Loans in the United States”, p5.
3 Dynarski, Susan. “An Economist’s Perspective on Student Loans in the United States”, p5.

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to the increasing enrollment of students nationwide, which has led to an increase of
student loans.
There are two types of student loans in the United States, Federal loans and Private
loans. Federal loans can be made to students directly and the student doesn’t have to pay
back these loans while being enrolled within a half time status, but if they drop below this
status then payment must begin. Federal loans made directly to the parents have higher
limits but payment of these loans must start immediately. Private loans can be made to
students or parents, which involve higher limits and don’t have to be paid back until after
graduation. Federal loans started in the 1950s after the passing of the National Defense
Education Act, which then was extended under the Higher Education Act in the 1960s. Most
student loans are handed out by the Federal Government, which proceeds at about “90
percent”4. Receiving Federal loans seems like the more popular way to go when paying for
College in America.
However, after an exceeding increase of student debt over the past decade, the
question arises, who is making money off this student debt? Many say the government has
been making profit and others reveal how institutions such as Sallie Mae capitalize off
student debt. Sallie Mae is a corporation, which offers financial products to help families
plan and save for college tuition. On top of that, Sallie Mae lends money to these families.
Sallie Mae works with the government to provide loans to students. There isn’t much
competition in the field for Sallie Mae, this might have something to do with the enormous
amount of profit they receive from interest on student loans, which amounted to “321
4 Gibson, Carl. “Student Debt: A Penalty the Poor Pay for Not Being Wealthy” Occupy.com

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million in 2010”5. The Federal Government backs Sallie Mae. Shareholders of Sallie Mae
capitalize considerably from this alliance, these Shareholder’s “profits are boosted by
special deals and breaks from the Federal Government”6. Sallie Mae started off in 1972 by
receiving government-conferred benefits from the Federal Financing Bank; this allowed the
corporation to surpass any of its competitors by having close ties with the Federal
Government. So much so that in “1991 Sallie Mae held 27% of federally guaranteed student
loans”7, subsequently Sallie Mae became a Lobbying presence in Washington from which it
pushed for Independence from the Federal Government and got it after the passing of the
Student Loan Marketing Association Reorganization Act in 1996. Passing this Act resulted
in Sallie Mea becoming an all-Private corporation. But ties between monopolist Sallie Mea
and the Feds didn’t break off just yet; Sallie Mae continued to have an alliance with
Congress through lobbying power, which led to avoidance of various business fees such as
the exit fee. One of the biggest benefits of going fully private was “its ability to acquire new
sources of volume without first needing to seek the approval of external entities like the
federal bureaucracy”8. Sallie Mae through its lobbying power was able to get the best of
both worlds after the passing of the Bankruptcy Abuse Prevention and Consumer
Protection Act in 2005. This made “federally guaranteed student loans non-dispensable in
bankruptcy to privately originated student loans”9. Now private loans were just as difficult
5 Ward, Kenric. “Sallie Mae: Fueling $1 trillion federal student loan crisis”
6 Ward, Kenric. “Sallie Mae: Fueling $1 trillion federal student loan crisis”
7 Scott Piazza, Victor Nava. “Sallie Mae and Uncle Sam: Cronyism in Higher Education Finance.” p2.
8 Scott Piazza, Victor Nava. “Sallie Mae and Uncle Sam: Cronyism in Higher Education Finance.” p3.
9 Scott Piazza, Victor Nava. “Sallie Mae and Uncle Sam: Cronyism in Higher Education Finance.” p3.

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to pardon as federal loans. Through the lobbying power Sallie Mae had on Congress, they
were able to get the Bankruptcy Abuse Prevention and Consumer Protection Act passed
and to add on, “Sallie Mae has spent over 40 million on lobbying and campaign donations
since 1997”10. Sallie Mae’s influence in congress also helped pass the Student Loans Act of
2008, this allowed Sallie Mae to by pass the recession by allowing the Department of
Education to open up a second market for issuing student loans, which would be sought
through by private lenders. Sallie Mae again capitalized once it was integrated into United
States department of Education’s Direct Loan Program. This entanglement between private
corporations and the Federal Government can be dangerous and leads to the disallowing of
other private lending companies to flourish through competition. Sallie Mae has remained
on top in this economic sector through its alliance with the Federal Government because
Politicians have found it useful to allow Crony Capitalism within our economy. The
embroilment of big business and government officials who both privately benefit off each
other is essentially “Crony Capitalism”.
Crony Capitalism is both benefitting the Feds as well as the monopoly corporation of
Sallie Mae, they benefit through interest rates charged on subsidized and unsubsidized
loans. According to Russell-Sluchansky, these interest rates are set to rise throughout the
next ten years, leading to the increase of Federal Government income as a result. Russell-
Sluchansky states, “the Congressional Budget Office expects the profit to increase, with the
government raking in as much as 127 billion over the next ten years”11. These are
10 Scott Piazza, Victor Nava. “Sallie Mae and Uncle Sam: Cronyism in Higher Education Finance.” (P4)
11 Russell-Sluchansky, Carmen. “How the Government Profits From Student Loans, To the Tune of $40 Billion
A Year”

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interesting claims and since this statement deals with the future, we’ll have to wait to see
the outcome. Interest rates on federally-subsidized loans have remained at 3.4 percent in
2015 according to Russell-Slcuhansky, he goes onto say “the expiration of the law that set
the cap meant the interest rate would jump to 6.8 percent”12 in the future. Determining the
Federal Government’s profit increase off future student debt depends on many outcomes of
approaching Congressional policies, which unfortunately we can’t accurately conjure yet.
However, its important to realize that because the government’s increase of subsidies over
the past decade through the Direct Loan Program, (and now can go through a private
corporation such as Sallie Mae) has led to an increase of College enrollment as well as a
higher demand in College education, for which I believe is accompanied to higher tuition
costs due to Universities inadequate ability to compensate with these subsidy handouts.
Therefore Universities have to raise the cost of tuition in order to compensate with the
demand of higher education, like a domino effect, where now we can see student debt
exceeding 1 trillion dollars.
With corporations like Sallie Mae and the Federal Government carelessly handing
out student loans, a drastic effect is in store for students, leading him or her to become a
debt slave for the next ten years or more. Life after college has proved very hard for
students who now face the burden of paying off their student debt. According to a study
done at Dartmouth College, Middle Class families are at risk and have proved to suffer the
most from student loan handouts. The study found that “young adults from middle-income
families may have greater student loan debt than peers whose parents have lower and
12 Russell-Sluchansky, Carmen. “How the Government Profits From Student Loans, To the Tune of $40 Billion
A Year”

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higher incomes”13. The study done here is focused on the parent’s income, which correlates
with Financial Aid, because Financial Aid gives grants according to family income. Houle
found that, “grant based Financial Aid is largely need-based and more generous to low-
income families than to middle income families”14. Houle’s research found, “90 percent of
Pell Grants are awarded to young adults from families with an income of less than
40,000”15. These grants are mainly given to low-income families rather than middle-income
families, resulting in lower-income families not owing as much debt as middle-income
families. Houle’s study takes a more mathematical approach which he says, “young adults
from the lower-middle-income bracket ($40,000 to $59,999) reported 59 percent more
debt than did young adults from the lowest income category: and young adults from the
higher-middle-income bracket ($60,000 to $99,000) reported 30 percent more debt than
did those from the lowest income bracket ($40,000 and below). Young adults from the two
highest income brackets ($100,000 to $149,999 and $150,000+), however, have
significantly less student loan debt than do young adults from the lowest income
category”16. Houle’s findings shows that lower middle-income families ($40,000 to
$59,000) suffer the most from student loan debt, with higher middle-income families
($60,000 to $99,000) not far behind.
There has been debate around the US retaining to a suffering of the Middle Class. So
with a study exposing numbers and distinguishing who aches most from student debt,
which presumably concludes are Middle-Income families, the debate of a shrinking Middle
13 Houle, Jason. (“Disparities in Debt”. Sec: Middle Income Squeeze) Sociology of Education.
14 Houle, Jason. (“Disparities in Debt” Section: Middle Income Squeeze) Sociology of Education.
15 Houle, Jason. (“Disparities in Debt” Section: Middle Income Squeeze) Sociology of Education.
16 Houle, Jason. (“Disparities in Debt” Section: Results) Sociology of Education.

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Class will linger on. So if student loan debt puts more pressure upon the Middle Class, it
sure isn’t looking good for middle-income families after referring to an economist by the
name of Thomas Piketty, as he states in his book Capital in the 21st Century, “this middle
group has four times as many members as the top decile yet only one-half to one-third as
much wealth”17. With the top decile (the Upper Class) owning “more than 70 percent”18 of
wealth in the United States and with Student loan debt being a burden of the Middle Class,
one can say it doesn’t look good down the road for middle-income families. Also, if “wealth
is so concentrated that a large segment of society is virtually unaware of its existence”19,
presumably half of the population doesn’t even know what real wealth is and with this half
of the population largely coming from the Middle Class, the burden of Student Loan debt is
going to make it thoroughly tougher for middle-income families economically. Considering
“the top decile own 72 percent of America’s wealth, while the bottom half claim just 2
percent”20, the lower Middle Class family is already in a position of distraught before they
even send their kid to College. Too own real wealth one must own real capital, which
accumulates by itself and this retains to nonhuman assets that can be owned and
exchanged on some market. Capital includes all forms of real property, financial, and
professional capital such as (machinery, plants, infrastructure, and patents).
Predominantly, the Middle Class doesn’t retain to the top decile of the population, for if
they did they wouldn’t be in the Middle Class and we would refer to them as belonging to
17 Piketty. Capital In The Twenty-First Century, p261.
18 Piketty. Capital In The Twenty-First Century, p261.
19 Piketty. Capital In The Twenty-First Century, p259.
20 Piketty. Capital In The Twenty-First Century, p257.

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the Upper Class or top decile. So when considering, half the population (which includes the
lower Middle Class) doesn’t know what real wealth is, with the “top decile owning 72
percent of America’s wealth”, (because they own real capital) one can realize a huge
majority of the Middle Class including all of the lower middle class, makes it’s living off
labor income rather than capital income. Now once we take into consideration the
economic position of the Middle Class and include Piketty’s prediction that “the global
capital/income ratio will quite logically continue to rise and could approach 700 percent
before the end of the twenty first century”21, the quest for a wealthier lifestyle from the
labor income class seems nearly impossible. With capital owners getting more rich rising
higher amongst the pedestal, along with the United States at the moment exceeding “a
record level of Inequality of income from labor”22, the lower Middle Class seems worse off
than all, especially after you tack on the burden of student debt.
In this paper I have analyzed how student debt came to existence in the United
States and now surpasses 1 trillion dollars. My research has concluded that Institutions
such as Sallie Mea, working together with the Federal Government, operate through Crony
Capitalism and has helped contribute tremendously to student debt from which they reap
the benefits. The lobbying power of Sallie Mae has succeeded in passing numerous bills
through congress benefitting tremendously in upholding their monopoly. The recklessly
handing out of higher education subsidies by the Federal Government through the Direct
Loan Program, (for which Sallie Mae’s entangled in as well) has led to as increase of College
enrollment along with a higher demand for College education. This higher demand of
21 Piketty. Capital In The Twenty-First Century, p195.
22 Piketty. Capital In The Twenty-First Century, p265.

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education has led to a rising tuition costs because Universities cant compensate with these
subsidy handouts. Therefore, having to raise the costs of tuition in order to answer the
demand of higher education, resulting a student debt exceeding 1 trillion dollars. Students
are finding it hard to pay back their student loans because of how expensive College is
these days. With students becoming debt slaves for years after they graduate, institutions
like the Federal Government and Sallie Mae are reaping benefits and profiting off student
debt through interest. As the “Congressional Budget Office expects the profit to increase,
with the government raking in as much as 127 billion over the next ten years”23. With
Institutions are getting rich off student debt, someone has to be suffering and that someone
is lower middle-income ($40,000 to $59,999), and middle-income ($60,000 to $99,000)
families, whom carry the burden of student debt the heaviest out of any other social group
in the United States. Because of how Financial Aid works and how one determines
qualifications for a family to receive student loans, lower middle-income families have
found themselves on the sharp end of the knife. To make matters worse, as the American
Economy looks stagnate, with middle-income families just scraping to get by, obtaining real
wealth seems out of reach and the burden of student debt doesn’t help the situation. With
levels of inequality going through the roof, a capital to labor income ratio nearing “700
percent”, it doesn’t look pleasant for middle-income families, especially after tacking on the
burden of Student debt. Hopefully all of the evidence I’ve put forth in this paper will bring
to light the topic of a shrinking Middle Class in the United States; inevitably this will
become a major problem in the future. A problem that contradicts everything America’s
23 Russell-Sluchansky, Carmen. (October 2014) “How the Government Profits From Student Loans, To The
Tune of $40 BillionA Year”

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been brought up on. In exposing issues of student debt retaining to the Middle Class as well
as the impact this rising debt has upon middle-Income families, I hope to spread light upon
these topics that must be addressed by Congress and our Society if we are to see our
economic system progress, as well as the lively hoods of Middle Class families throughout
the United States.

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Bibliography
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First Century. Belknap Press
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