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- Former Sen. Samuel Nunn said three decades ago that the student-loan system might be broken.
- Josh Mitchell's new book "The Debt Trap" explains how student-loan companies continue to profit at the expense of borrowers.
- The student-debt crisis is even worse today, even as Democrats are enforcing stricter oversight.
- See more stories on Insider's business page.
In 1991, a senator called out the deep-rooted flaws in the student-loan system that caused borrowers to take out debt they could not repay. He said the loan programs might not be salvageable, and three decades later, the flaws he pointed to are even worse.
The new book by the The Wall Street Journal's Josh Mitchell, "The Debt Trap," details how in the early 1990s, former Democratic Sen. Samuel Nunn's liaison counsel compiled a report that detailed abuses of the student-loan system and for-profit schools.
That counsel, Eleanor Hill, found that the Education Dept. only had three staffers tasked with overseeing hundreds of for-profit schools and student lenders throughout the country, "leaving hundreds of thousands of students with little or no training, no jobs, and significant debts that they cannot repay," her report said.
These findings came less than two decades since the student-loan system was created. Mitchell explained how President Lyndon B. Johnson created the system to solve racial and income inequality as part of his "war on poverty," but the opposite of what he intended happened.
Sallie Mae – now known as Navient – for example, which services student loans, prioritized "enormous profits" off of lending to borrowers, "often leaving borrowers in the lurch," Mitchell wrote.
Nunn released the report's findings in 1991 and said in a related hearing that he hadn't seen evidence of "even a single part of the student-loan program that is working efficiently and effectively."
"The testimony has been so discouraging that one has to wonder if even immediate and concentrated reforms can, at this late date, salvage these programs," he said.
A conflict of interest and a 'vicious cycle'
Hill found a major conflict of interest in the way student loans were handled: schools were the biggest beneficiaries of the system they were regulating. Schools continued to recruit students, banks lent to those students and profited off of selling the loans to a servicer, and the servicer would get paid by the government. The borrowers were never prioritized.
This "vicious cycle," as Mitchell put it, has only gotten worse. The student debt load in the US currently stands at $1.7 trillion. In 1990, a borrower would graduate with an average debt load of about $6,700. Today, that average is close to $37,000. And with interest rates on student loans, along with college tuition, continuing to rise, total student debt is on track to increase absent of debt forgiveness.
For example, Massachusetts Sen. Elizabeth Warren has been a leading advocate in reforming the student debt system. Before she was even elected to the Senate, she cited Sallie Mae - a student-loan servicer now known as Navient - for its abuses of the student-loan system during a "60 Minutes" interview.
She held a hearing in April during which she told Navient's CEO that he should be fired for misleading borrowers, and she told Insider in an interview last month that "the world has changed for student-loan-debt servicers."
"They can't sign a contract, do a lousy job, cost borrowers tons of money, and still get their contracts renewed," she said.
Oversight of student loan companies has continued to grow over the years, but borrowers continue to be saddled with student debt they cannot pay back - a problem that lawmakers were made aware of 30 years ago.