It takes decades to make a convoluted, entrenched, and immovable mess in Washington. Earlier this year, I addressed one example of this with my review of Judge Glock’s book The Dead Pledge, tracing the history of the U.S. mortgage market since Woodrow Wilson’s administration. (“Assessing a Century of Mortgage Market Interventions,” Fall 2021.)

In her new book Indentured Students, Elizabeth Tandy Shermer provides a blow-by-blow history of another market that has been thoroughly upended by Washington interventions and incremental tinkering since the 1950s: the educational lending market. If anything, this market is more challenging to address than the mortgage market because of the lack of any underlying loan collateral, the questionable capacity of early-career borrowers to repay what they owe (which totals some $1.7 trillion), and the recent government takeover of much of the student lending market. Shermer is an associate professor of history at Loyola University in Chicago and the author of the 2013 book Sunbelt Capitalism: Phoenix and the Transformation of American Politics.

From land-grant universities to student loans / Shermer’s subtitle references government-guaranteed loans, but this gives a misleading sense of the contents. The book provides a broad description of federal involvement in higher education, beginning with the development of the land-grant universities in the 19th century. They were the product of the 1862 Land-Grant College Act, which was “designed to establish at least one college in every State upon a sure and perpetual foundation, accessible to all, but especially the sons of toil.”

Indentured Students also gives a history of how students typically paid for that education, whether at a land-grant or other university. Shermer tells of the traditions brought from Europe “of offering scholarships, discounts, jobs, and loans to the talented poor.” She also tells of Stanford University, which “was tuition-free for more than thirty years” after its establishment in 1885, but it and many such universities that were tuition-free “levied fees as they began to attract wealthier applicants and needed to pay for expansions.” Funding was done through what Shermer calls “working one’s way through college.” She offers the example of “University of Chicago students … [who] spent their time clerking, lighting streetlamps, minding children, reading to the elderly, working in railroad stations, staffing newspaper offices, and even collecting debts.”

Students did not begin to borrow for their educations until what she labels the “speculative Roaring Twenties.” The universities themselves did not undertake much of this lending, but many “clubs, business associations, churches, individuals, and philanthropies” did.

All the way with LBJ / Shermer’s history is a long and winding road, beginning with the government getting involved in college financing with the New Deal’s National Youth Administration (NYA) “work study” program. This was at a time when some of the country’s universities were on the edge of bankruptcy and took such desperate measures as accepting IOUs or engaging in barter in lieu of payment. The NYA was created under the oversight of the Works Progress Administration and funded with $50 million on the basis of a 1935 executive order. It was part of Franklin D. Roosevelt’s effort to “do something for young people” — those between the ages of 16 and 25 — by helping “a lot of impoverished students enroll and stay in school.”

Shermer notes that a report after the demise of the NYA foreshadowed an issue that haunts educational spending to this day:

One analysis suggests that NYA unintentionally drove much of the 60 percent hike in state school tuition rates that occurred between 1932 and 1940. Schools could charge more as portions of the student body earned additional money to afford fees, books, and living expenses.

One historical figure who appears throughout Indentured Students is Lyndon Johnson. Shermer leverages his decades-long involvement in the issues of financing education: First, as a student at the Southwest Texas State Teachers College during the 1920s, he paid for his education in part by working “a dozen different jobs.” He also borrowed, completing school with $220 of debt ($3,400 in today’s dollars). Next, he was the Texas state director of the NYA. Then, as Senate majority leader, he worked with the Eisenhower administration on the first federal loan program in the late 1950s. Finally, as president, he signed the Higher Education Act of 1965 (HEA), which will be discussed below.

GI Bill and student loans / The next historical milestone was the passage of the Servicemen’s Readjustment Act of 1944, better known as the GI Bill, which has in different forms continued to this day as a work benefit for veterans. Without it, supporters “feared massive unemployment and political instability, the ingredients for another calamitous depression,” following service members’ return home from World War II. The most heralded of its benefits included university tuition and housing reimbursement, combined with a stipend, for returning veterans. By 1948, more than a million GIs had matriculated, equal to half of that year’s graduating class.

Shermer notes the GI Bill’s effect on non-GIs: “Many Americans found themselves priced out of higher education after administrators across the country raised fees to take advantage of tuition reimbursements.” She cites a few universities that increased fees by one-third.

It was not until the 1950s, in the wake of the Soviet Sputnik launch, that a broad-based student loan program like what we know today was set in motion under the National Defense Education Act of 1958. That law had its genesis in the 1948 Zook Commission report, which warned that as the first of the baby-boom generation would be entering high school, college would become “a prerequisite to occupational and social advance at a time when the ladder of educational opportunity rises high at the door of some youth and scarcely rises at the door of others.”

To that end, Title II of the act provided for “campus loan funds for a limited, self-perpetuating program. Campuses had to annually apply for their share.” Loans were approved for up to $1,000 a year and $5,000 over the course of undergraduate study, with no interest accruing during enrollment. Repayment started one year after graduation and borrowers had 10 years to pay back the loan, with deferments available for those returning to school or joining the military. Public school teachers could take advantage of forgiveness provisions.

Sen. Barry Goldwater (R–AZ), in commenting on early versions of the act, presciently noted that “the legislation will mark the inception of aid, supervision, and ultimately control of education in this country by Federal authorities.” The response from universities and students alike was “overwhelming” and “astonishing,” but Shermer makes clear that the program “largely aided white, middle-class, male students.” Most of the recipient schools “had never made or collected a loan before, had had no experience with need analysis, and indeed had no person, trained or untrained, vested with the responsibility to administer student aid.”

Government-guaranteed loans and beyond / By the 1960s, “borrowing [for college] became more commonplace and accepted.” President John F. Kennedy, in a 1962 Message to Congress on Education, lamented that “the average cost of higher education … was up nearly 90 percent since 1950 and still rising.” Leveraging a bank-centric model that had been applied to federal mortgage lending, the federal-guarantee aspect of student lending was integrated into the HEA. Like other Great Society programs, what Shermer calls “fiscal jujitsu” and “creative bookkeeping” were applied to “hide spending increases.”

The 1972 reauthorization of the HEA included the creation of a government-sponsored enterprise, Sallie Mae, that supported the loan market like its mortgage siblings, Fannie Mae and Freddie Mac. After this legislation, the industry “exploded”:

By the millennium’s turn, many citizens, including those from the shrinking middle class, proclaimed themselves trapped by the debt they owed for their educations. The most indentured were low-income enrollees, women, and borrowers of color.

Average tuition rates again rose faster than the Consumer Price Index, leaping over 40% between the 1993–1994 and 2003–2004 school years. Student loan defaults soared.

The next milestone was the introduction of direct lending by the government as Shermer recounts the demise of bank-centric guaranteed student loans that “had been part of the country’s public–private social safety net for decades.” The direct lending movement began amid scandals during the early 1990s involving “unscrupulous schools” that applied high-pressure tactics to get students to borrow heavily for educations that were often of dubious value. President George H.W. Bush’s budget head called the idea of direct lending “insane,” but arguments that direct lending would somehow lead to “deficit reduction” held sway and legislation Bush signed included “$500 million to be spent on a direct lending tester.”

Direct lending was a plank in Bill Clinton’s 1992 presidential campaign and was implemented on a limited scale early in his presidency, until the subsequent Republican Revolution shut down progress for a time. The tug-of-war was resolved with President Barack Obama’s signing of the Health Care and Education Reconciliation Act of 2010, which ended what Shermer labels the “once revered Guaranteed Student Loan Program LBJ had signed into law” and replaced it with direct lending by the government. In Obama’s words, with guaranteed student loans, “lenders get a big government subsidy with every loan they make.” This “sweetheart deal … essentially gave billions of dollars to banks.”

In a brief epilogue (compared to the book’s other chapters), Shermer argues that college should be “free.” She cites the promise by Sen. Bernie Sanders (I–VT) of “free college,” cites the activist group Strike Debt’s desire to “make all public higher education completely free,” and cites “other experts [who] have outlined ways to make public colleges and universities tuition free.” The history ends with the student debt moratorium under Presidents Donald Trump and Joe Biden for millions of borrowers who claimed the COVID pandemic left them unable to repay their student debts, as well as the ongoing discussion of wiping out $10,000 to $50,000 per student of those debts. Shermer closes the book with the very clear statement that the “American Dream will remain elusive unless education and other basic necessities are finally recognized and treated as rights critical to forming a more perfect union.”

A logical conclusion? / General statements that college should be free or is a fundamental right, given the history of government failure on education finance, are not a satisfying way to close the book. Shermer’s arguments are notable for what they don’t say, as opposed to what they do: They don’t make clear whether the government should always pay for a student’s advanced education. They don’t make clear why students and parents should avoid being first in line to contribute to funding an education, given that the obvious beneficiary of that education is the student. They don’t say whether a student should be able to get a free undergraduate degree, followed by a free master’s degree and a law degree. They don’t say whether a student should be entitled to just free tuition, or whether room, board, and a stipend should be included. Whenever the government provides a massive pot of money, there is always going to be abuse, as evident in the increasing tuition and questions of value not only for fly-by-night, low–quality colleges but also the most elite of universities.

What is entirely ignored in Shermer’s analysis is that school systems are not fully preparing students for the college experience. As a result, students flunk out or otherwise quit college with a load of debt, and even those who complete school have little comprehension of the financial commitments they have made.

Indentured Students provides a thorough history of education financing, and for that alone it is worth a read. However, in my opinion, it will be too detailed for most readers (40 to 50 pages per topical chapter), including an exhaustive discussion of the legislative process. Another criticism: Shermer often writes of “cuts” to the educational budget, but she offers few charts, and they provide little data to assess whether she means actual spending decreases or just that increases weren’t as large as initially planned.

Like the mortgage market, the educational finance market is entirely removed from a free market and is riddled with distortions and imbalances. Shermer lays out 60 years of government-backed programs and somehow concludes that more intervention is the answer. These programs are a mess and the “sons of toil” — and daughters and descendants — have been truly ill-served throughout that history.