How Washington tries to strangle even the best ideas.

• Author: Waldman, Steven
• Position: Student loan reform

In September 1991, Bill Clinton unveiled what would become one of the most consistently popular applause lines of his presidential campaign. "Opportunity for all," he told the Democratic National Committee, "means giving every young American the chance to borrow the money necessary to go to college and pay it back...." Before he could get to the next part, the audience interrupted him with applause. "Pay it back as a percentage of income over several years, or with years of national service here at home--a domestic GI Bill." Again Clinton was interrupted by the Democratic activists. "A domestic GI Bill that would ask young Americans to go to the streets of our cities and be teachers, to be policemen where we need community policemen, to be nurses where there's a nursing shortage, to be family service workers where families are breaking down and children are abused and neglected, to rebuild America from the people point of view. We can do that with a national service."

Just two years later, Clinton signed the law that created AmeriCorps, which will in its first year put more young people into service than the Peace Corps had at its peak. But what of the other part of that stump-speech line, the cryptic mention of college loans that could be paid back "as a percentage of income over time"? This, too, became law--and may end up being one of Clinton's most important social policy legacies. While national service will touch tens of thousands of people, student loan reform will touch millions.

Yet the Washington press corps paid almost no attention to the legislative fight over college loan reform. That's a shame, because it provided a memorable case study of how and why the bureaucratic, interest group, and political forces of the capital so often sabotage even the best ideas.

The cost of a college education increased faster in the eighties than that of cars, food, or houses--and far faster than family income. College costs now take up more than one in every five dollars a family earns--up from one in seven in 1980. During the same period, America revolutionized the way it finances college: In the seventies, two-thirds of all aid came in the form of grants; today, two-thirds comes in the form of loans. Few public policy developments have been as sudden, massive, and negligibly acknowledged. (If the significance is not clear, consider the difference between someone giving you a car and lending you the money to buy one.)

The college cost explosion has begun to undermine some basic American principles. From 1982 to 1989, the percentage of private college and university students from wealthier families jumped from 50 percent to 63 percent. The 30-year trend of expanded opportunity, inaugurated by the GI Bill after World War II, has begun to reverse.

Income-contingent loans--or pay-as-you-can loans, as I'll call them--can change the decision calculus of a low-income high school student. Right now, he might look at loans and decide that college is not a sensible wager. His time horizons are short, and he finds it nearly impossible to envision a future lucrative enough that he could pay off a loan. He sees around him men and women enslaved by shady high-interest loans and few instances of high-wage, well-educated workers. Others in low-income communities might have developed an entitlement mentality that makes them eschew loans and "wait" for grants. In either case, with a pay-as-you-can loan, the government can say: "You have no excuse not to go to college. If you take out a loan, graduate, and still earn nothing, you will pay nothing. But if education pays you dividends, as it does for most people, you will have plenty of cash with which to gratefully repay society."

The benefits are not limited to the poor. Consider middle-class parents who know that their daughter could get into a top-tier private school but fear they can't afford the tuition. Under pay-as-you-can, their child can take out loans knowing that if she doesn't rake it in, she will still have affordable payments.

Yet for all the potentially revolutionary effects on access, what appealed most to Clinton about pay-as-you-can loans was the connection to service. He believed that more college students might have pursued careers in teaching, social work, or law enforcement over the past 15 years had they not been so loaded down with debt. Clearly, debt levels have affected a range of life choices. In 1985, 32 percent of all college graduates said debt pushed them to rent, not buy, housing; in 1991, 47 percent said so. In 1985, 25 percent said debt forced them to work two or more jobs; by 1991, almost 40 percent said it did. The average indebtedness of medical students, for example, rose from $14,622 in 1979 to a staggering $45,840 in 1990, increasing pressure on graduates to enter high-paying specialties such as dermatology rather than less profitable but essential fields like family medicine or pediatrics. So the Clinton loan reform really had an extraordinary premise: Government should make it easier for people to earn less. As Clinton said in 1993, "People are not free if they cannot take advantage of what the Almighty gave them." Ronald Reagan said that if he could get government off our backs, Americans would show their innate creativity and economic energy. Clinton's collegeaid reform suggested that if government could get financial debt off their backs, Americans would be free to serve others.

The Money Chase

Heather Doe is a fictitious college student. She's a junior at Paiselley College, where she studies semiotics, feminist architecture, and literature of the Amazon. After graduation she hopes to do something socially useful as long as it's not too hard.

Heather's father is a junior executive at a major biotech firm, and her mother manages a local franchise of Mail Boxes, Etc. Together the Does earn $80,000, not quite enough to cover Paiselley's $25,000 tuition and expenses. The school gave Heather a $7,000 grant, plus a $1,000 scholarship from the local church, and her parents put up $11,000. For the rest, she went to her local bank, Union National Federal, and got a $5,000 Stafford loan. She took out loans of varying sizes all four years of college. The Stafford loan has three advantages for Heather. Because the loan is guaranteed by the federal government, she gets a low interest rate (6.2 percent in 1993); she doesn't have to provide collateral; and she doesn't have to pay the interest that accrues while she's in school. After graduation, she will pay $230 a month for 10 years to retire her $20,000 debt. Union National Federal executives like the Stafford loan, too. They know that if Heather flees to Nicaragua to work in the coffee fields and defaults, the U.S. Treasury will cover the debt.

Until the sixties, banks had been understandably reluctant to loan money to students: They had no jobs, no credit history, no collateral, no proof of future earnings, and strange haircuts. Congress, however, wanted young people to go to college anyway. It passed the Higher Education Act of 1965, which gave special incentives--the interest subsidy and the loan guarantee--to those banks willing to help. Within two decades, student loans became highly profitable, more consistently lucrative than even mortgages or car loans.

To further ensure that banks would provide loans, Congress created a complex network of backup entities to give lenders a comfortable arrangement. A system of state-sanctioned "guaranty agencies" would collect defaulted loans, so banks wouldn't have the hassle. If Heather defaults on her loan, Union National Federal would be reimbursed by a guaranty agency which--follow the bouncing check--would be largely reimbursed by Uncle Sam. That guaranty agency would send collectors after Heather. If the guaranty agency succeeds in getting her to cough up the $20,000, they are...