Photo: Francisco Sepulveda



Special Issue on Debt (August-September 2011)


A Framework for Student Debt

Mark Paschal




The purpose of this article is to provide a framework for understanding the meteoric rise of student loan debt over the last three decades. I will argue that this increase should be seen as part of a larger project of a bi-partisan neoliberal regime that has dominated the geopolitical landscape since the 1970s. Central to this movement has been the conversion of public wealth to private profit as a prop for dwindling profits and declining growth throughout the US and Europe. The backdrop for this is a US economy where narrow profit margins for manufacturing and traditional banking have forced capital to seek an acceptable return on investment in the debt of more and more Americans. Capital must return a
profit and, increasingly, finds it can only return this profit in complex private equity/real estate deals financed by student and consumer debt as well as massive government subsidies. This path has culminated in the current duality of exorbitant profits and high levels of unemployment whose weight falls disproportionately on the young, augmented by the added burden of student loan debt.

The Post-WWII period saw an unprecedented surge of students entering into higher education. This surge was met both by expanded admissions at existing institutions and the creation of several new higher education facilities. A period of crisis and innovation, the mid-century saw experiments around the Free Skool movement and the re-emergence of the for-profit university. As Roger Geiger has noted, this was also a time of intense standardization efforts as education was made to bend to the needs
of a growing informational sector job market that has used universities as candidate vetting sites (Geiger). Shifting costs of training and vetting job candidates to the university, and the massive expansion of the university that made it possible, would also introduce a new mechanism whereby
market criteria would dictate funding for higher education. The most profound of these was the passage of the Higher Education Acts (HEA) of 1965 and 1972 as they, in essence, privatized post-secondary education.

Ostensibly a means to provide financial support for students who would otherwise be unable to attend college, the Acts should be seen as a means whereby market logic was ushered in to speed the processes of standardization and to discipline institutions to adopt a market logic. It was through HEA that federal grants, loans and other financial instruments were created to ‘empower’ students to attend college. Opposition to these legislative initiatives seemed elitist and backward looking: as the Pell
Institute’s website notes, “[US] President Johnson articulated the need for more higher education opportunities for lower and middle income families, program assistance for small and less developed colleges, additional and improved library resources at higher education institutions, and utilization of college and university resources to help deal with national problems like poverty and community development” (The Pell Institute).

Helping the thousands of students who would normally be unable to attend university transform their economic futures should be an unqualified good, so how could it be that the nearly $1 trillion dollars in
US student loan debt stem from these acts? While the standardization of US higher education has been equally significant, it is Title IV of the 1965 Act that concerns us here. Through Title IV, undergraduate scholarships, low-cost loans and work-study were created as the means by which poor and working-class students might achieve an education. However, the original 1965 Act had a critical flaw for free-market ideologues: it gave financial control over aid to institutions of learning rather than the student-consumer.(1) This crucial oversight was corrected in 1972 when aid was diverted to students; universities would now need to compete for federal financial aid and student loan dollars, quietly sinking non-profit institutions of education even deeper into market machinations - it is no coincidence that this period saw the leading financial institutions on both coasts move away from traditional and no longer profitable banking methods to the collection of fees and the introduction of credit cards.(2)

Federal student loans originate in the National Defense Education Act of 1958. These loans were, on the advice of noted neoliberal architect Milton Friedman, direct federal loans to students that by-passed
institutional control: through this, Friedman intended to direct more federal dollars to private institutions as a means to discipline and eventually privatize public education (Federal Education Budget Project).
While a necessary first step, the design flaw in this program was that any direct federal loan showed up as a loss on government balance sheets even though the loan would no doubt be repaid in the future – with interest. To get around this, the government instead began guaranteeing loans to students by private financial houses: in essence privatizing an enormous chunk of federal largesse.(3) With the dramatic decrease in federal funding to institutions themselves in favor of loans and grants--as mandated by HEA--the stage was set for institutional competition and the explosive growth of college tuition as the market would now determine education’s worth. The larger point here is not that the federal government has been publicly funding private investment and banking firms--this comes a no surprise given the pattern of government intervention to shore up faltering markets over the last few years. It is, rather, that these federal acts have been the means by which neoliberal thinkers have locked educational institutions into market conditions. In order to receive federal dollars institutions have to compete for consumers (students) and the federal money they bring and, as the costs of academic capitalism continue to rise, they must continually raise tuition/fees to offset decreasing state funding.

As Bob Meister has elaborated over a series of articles, student fees at the University of California now exceed state funding of the UC.(4) This has been part of a project by the UC Regents to funnel government funds, originating as student loans, Pell Grants and private savings, into private equity and real estate deals. Meister shows that the UC is allowed to pledge student fees, but not state funding, to back its myriad private equity deals and its bond ratings. That means that the UC, unable to use state funding to play a very volatile stock market, launders federal and state money, transforming student loans and grants into capital through which to finance enormous leveraged buyouts.(5)

How, though, could these actions be justified? Mostly, it seems, through dissimulation. Over the last two decades, students and parents have grown weary of hearing the company line that tuition/fees have had to be remorselessly increased to offset declines in state funding. The claim is that things have gotten really bad in this recent recession and students need to pay for their education in order to value it correctly.(6) In reality, the percentage of student tuition/fees that have gone to instruction and student
services has been decreasing since the 1980s. As Slaughter and Rhoades write, “Academic capitalism involved turning away from students, ignoring them despite their tuition monies, which are undesignated and can be shifted for use in non-instructional areas… in the 1970s and 1980s. By contrast, academic capitalism in the new economy involves institutions turning toward students as targets for the extraction
of revenue, including but extending beyond tuition” (Slaughter and Rhoades, p. 279). When the student is a consumer the university becomes a capitalist enterprise; it is incumbent upon the capitalist to
extract as much profit as possible from both its laborers (from professors to the grounds department) and its consumers. Student loans have been the primary mechanism through which the student-consumer has enriched both university trustees and Wall Street.

With every tuition/fee increase, we are told that aid will rise to match for those who need it. This, claim our administrative benefactors, increases the load on those who can pay for it – one wonders that they are not accused of class warfare by the conservative press – and allows for more access to
those who are most disadvantaged. However, this is only partly true. A University of California Diversity chart from 2010 shows that over 30% of UC undergrads pay for their education with Pell Grants (Merced and Riverside are above 40%).(7) The rates for Latino/Chicano and African-American students receiving Pell Grants are over 50%, while only 34% of Asian students and 17% of White students have Pell Grants. Back in 2007/08, the average loan debt for students receiving federal aid was over
$24,500. Complicating the story that the increased fees/higher aid are beneficial to students are numbers showing that more Native American, African-American and Latino/Chicano students are unable to complete their education than White or Asian-American students. At the graduate and professional level, where loans are universally necessary, African-American students represent less than 2.5% of students while Chicano/Latino students make up only 7%. It should also be noted that loans for
graduate students at the federal level will no longer be subsidized: that is, the government will no longer pay for the interest on these loans.

Further, the percentage of education costs that these underrepresented groups – as well as all other groups – have to pay using federal and private money continues to rise. Recall that every student that pays for their education with their own or their parents’ money or other funding source – including UC initiated grants and scholarships - the UC can use all of that money to pledge on the bond market as well as use some of those funds to pay back the debt on past equity and real estate deals. For
every student using federal or state funds to pay for college, the UC can do exactly the same. The difference is that, as more and more students have to take out loans and make use of Pell Grants and other scholarships, it is federal and state tax money that is being used on private bond and stock
markets. It is, then, public money that UC students will be paying back for the rest of their lives that is being used to prop up the UC’s bond rating and to engage in private equity/real estate deals that have profited several Regents, several Wall Street companies and several more Silicon Valley venture capital firms (Byrne). It is high-interest student and parent loans that the UC – and other institutions, for the UC is not alone in this – uses as collateral to get loans with much lower rates of interest.

As the job market numbers and wealth gap figures show though, market competition and increased fees have benefited neither Californians nor US tax payers in general. Educational policy is, then, part of a larger shift in US policy that hews close to Milton Friedman’s neoliberal economic policy that bankrupted several Latin American countries in the 1980s and now several European countries in the last three years. At UCSC, the libraries are closed on Saturday and several tenure track positions have remained unfilled – and are likely to never be filled. As disastrous as turning universities into academic marketplaces has been for the institutions of post-secondary education, it has been a nightmare for a growing number of students who have been unable to pay back their student loans and for uncounted others who have been scraping by just to maintain their payments.

Danger haunts all those who finance their education with loans: as the website concisely puts it, “You are responsible for repaying your student loans even if you do not graduate, have trouble finding a job after graduation, or just don’t like your school” ( It is not possible to escape student loans through bankruptcy. They also note that ¾ of those who default on their loans do not finish school. Defaulting on loans most likely results in that loan being turned over to a collection agency; the former student having to pay all court costs for both parties; income garnishing even of Social Security checks as well as IRS refunds; a blight upon your credit record; and the loss of eligibility for deferments. Private student loans have shorter time-frames and are often much more punitive than federally backed loans – neither death or permanent disability, for instance, will discharge this debt (Kantrowitz, “Student Loan Defaults”).

In the year 2007-08, over 85% of graduating undergrads had taken out student loans. Mark Kantrowitz’s article, “The Horrors of Defaulting on Education Debt”, claims that every single grad and professional school student that applied for federal aid will graduate with student loan debt and that, therefore, student loans have become necessary for college level education (Kantrowitz). Since the recession began in 2008, student loan default rates have climbed to over 7%--an increase that registered at public
(6%), private (4%) and for-profit schools (11.6%). This data includes only numbers from 2009--the set of data from 2010 should be out mid-September (US Department of Education).

So, while the Regents, banks, venture capital firms and private equity managers have reaped tremendous profits from the liberation of academic institutions to ‘unfettered’ marketplace shenanigans, the effect on both institutions and individuals has been catastrophic. As markets continue to falter in Europe and the stock exchanges in the US fluctuate wildly, it will continue to cost more and more money to prop up the UC’s bond rating--lest it too fall to the extortionists at Standard & Poors and Moodys. As state funds are off limits for this, the UC will continue to ratchet up the price of attending an institution of higher education, driving students into deeper and more unsustainable debt and the institutions themselves into the degree-granting shells that thrive in the lower echelons of academic
capitalism. As it is, the business interests that lead nearly all universities and colleges are confronted with a situation in which they are thoroughly unaccountable to anyone while they use public institutions to appropriate public finances and what little money most of us have. So far, appeals to the Regents, Sacramento and DC have resulted in plenty of platitudes, but little in the way of reform. The question facing all those who have, or face the prospect of having, loans related to higher education, must echo that of the ancients: what is to be done? When even Moody’s warns that student loan debt is the next financial bubble, it is incumbent on those most affected to organize and chart courses of action; history teaches us that those who are most responsible for our plight are certainly plotting their survival.




Mark Paschal is a graduate student in History of Consciousness at UC Santa Cruz. He is working on a political economy of US higher education and can be reached at mark.paschal77[at]





1. In their seminal Academic Capitalism and the New Economy, Slaughter and Rhoades offer a devastating analysis of how this forced universities to enter into complicated marketing schemes in order to attract funding.

2. See Moira Johnson’s riveting history, Roller Coaster,The Bank of American and the Future of American Banking.

3. Under both Bush I and Clinton, there was much headway made against guaranteeing loans and instead switching back to direct loans. The 1994 Republican takeover of Congress curtailed these efforts, eliminating any requirement for colleges to engage in direct loans over guaranteed loans. The Department of Education was barred from even advertising or advocating for direct loans while the private lenders using guaranteed funds were under no such injunction. Both Bush II and Obama have made great strides in eliminating the Federal Family Education Loan program--with Obama officially ending it
in July of 2010.

4. Meister has written a series of articles on tuition that can be found here:

5. For a staggering account of the UC’s financial deals and the blatant cronyism on the part of UC Regents Blum, Wachter, and Lansing--among others--see a investigative report from 2010: “Investors Club: How the UC Regents Spin Public Funds into Private Profit,”

6. Jerome Judson, in Culture out of Anarchy, has persuasively argued that business and corporate culture benefit far more from higher education than do students, their parents or even society in general. Part of the corporate argument for higher education throughout the latter half of the 20th century was that businesses no longer needed to train their employees as the university would become the informational sector’s training grounds.

7. “Diversity Annual Accountability Sub-Report”, 09/2010. Pages 13-28. Advocates of the present systems will point to the large increase in the number of Latino/Chicano students attending the UC and a decline in the number of white students. While the purpose of the essay is not show that diversity is hurt by these processes, it should be pointed out that African-American students and Native American students are still massively underrepresented and that the increase in Latino/Chicano students at the expense of white students is a result more of those white students would have gone to the UC a decade ago realizing that the price difference for education at private schools is leveling off while the student services and educational opportunities are much better.




Byrne, Peter. “Investor’s Club: How the UC Regents Spin Public Funds into Private Profit,” September, 2010.

Federal Education Budget Project. “Federal Student Loan Programs – History”, New America Foundation. May, 2011.

Geiger, Robert. “Ten Generations of Higher Education,” American Higher Education in the Twenty-First Century. Ed. By Altbach, Philip G., Robert O. Berdahl, and Patricia J. Gumport. The John Hopkins University Press, Baltimore: 1999.

Glickman, Jane. “Student Loan Default Rates Increase,” US Department of Education. September, 2010.

Johnston, Moira. Roller Coaster. Bank of America and the Future of American Banking. Ticknor and Fields, New York, 1990.

Judson, Jerome. Culture out of Anarchy: The Reconstruction of American Higher Learning. Herder and Herder: New York, 1970.

Kantrowitz, Mark. “Defaulting on Student Loans,” .

Kantrowitz, Mark. “The Horrors of Defaulting on Education Debt,”, November, 2009.

National TRIO Clearinghouse and Council for Opportunity in Education. “Do You Know TRIO? The Early History of the Higher Education Act of 1965”. The Pell Institute. February, 2003.

Slaughter, Sheila and Gary Rhoades. Academic Capitalism and the New Economy. The Johns Hopkins University Press: Baltimore, 2004.

UC Accountability Sub-Report on Diversity. “Diversity Annual Accountability Sub-Report”, University of California. September, 2010.