Fixing America's $1.6 trillion student debt crisis is going to take a serious crackdown on wasteful schools and unnecessary loans, not quick fixes

• In "The Debt Trap: How Student Loans Became a National Catastrophe," journalist Josh Mitchell does a great job of laying out how student debt became America's $1.6 trillion problem.
• But while Mitchell does a good job illuminating the causes of the student loan crisis, his policy solutions fall short.
• Jonathan A. Knee is Professor of Professional Practice at Columbia Business School and a Senior Advisor at Evercore.
• This is an opinion column. The thoughts expressed are those of the author.

If your instinct is that there has to be a good story behind how Americans have collectively racked up $1.6 trillion of college debt - much of it never to be repaid and with the taxpayers holding the bag - Wall Street Journal reporter Josh Mitchell's "The Debt Trap: How Student Loans Became a National Catastrophe" will confirm your suspicions with a vengeance.

It is not just the sheer volume of the obligations that takes one's breath away - more than either outstanding credit card or automotive debt - but the breadth of who the debt touches. Over 20% of adults still owe something, and this is not limited to current and former students. Over the years, various programs have expanded to allow parents, other relatives, and even friends of aspiring students to get stuck with the bill.

The road from the first modest loan program enacted in the 1950s to the out-of-control beast of today is paved with a combination of good intentions and sinister motives. Mitchell is an entertaining guide along that route, introducing us to the colorful personalities that proved influential in the student debt expansion and real borrowers who were crushed by the very programs that were meant to lift them up.

Although "The Debt Trap" has a tendency to overstate for dramatic effect - asserting for instance that, with a 27% market share, Sallie Mae "controlled the student loan industry like few companies dominated any industry" - Mitchell generally delivers the goods by getting some of the sector's most egregious villains to speak to him on-the-record.

A failure of solutions

While the journalism is stellar, where "The Debt Trap" ultimately falls apart is in its policy analysis. The three pages that the book dedicates to a half dozen policy proposals to "fix" the systemic problems behind the student debt bubble in some cases seem designed to repeat the same mistakes of the current system and, in others, ignores Mitchell's excellent reporting on what worked and what didn't.

Take Mitchell's proposal to just go ahead and make community college completely free. The overarching problem with the loan program the book identifies is that by simply guaranteeing repayment, the government incentivized schools and lenders to push students to enroll in programs for which they were ill-suited and expand programs without regard to the outcomes for students - all while consistently jacking up tuition prices. Mitchell notes that most community college students currently drop out and suggests a number of reasons for this other than the most obvious - many of the colleges do a terrible job, both in providing essential student support and in ensuring that their programs are of adequate quality and tied closely to job opportunities.

Indeed, the unchecked growth in for-profit schools Mitchell rightly castigates elsewhere, was in part aided by these obvious and well-known failures of community colleges to prioritize the interests of students over faculty and administrators. Making these schools free for students will obviously reduce their debt load but shift this obligation onto the government's ledger. More importantly, making community colleges the beneficiaries of a vast new entitlement program without addressing their current inadequacies will create an entirely new set of perverse incentives that could make matters even worse.

By contrast, Mitchell proposes to eliminate entirely any subsidy, through loans or otherwise, for graduate school. He repeatedly lumps all master's degrees, PhDs, medical and law degrees, and MBAs together, which makes little sense from a policy perspective.

More significantly, one of the few real success stories highlighted in the reporting where the loan program clearly made a positive difference was the case of the for-profit Florida Coastal School of Law. The loan program was critical to enabling the innovative school to break the traditional law school cartel and effectively serve a cohort of predominantly Black and Hispanic students with below-average LSAT scores - in 2004, with 900 students, 80% of its graduates passed the bar exam, more than any other Florida law school but one. The tale took a dark turn once the business was purchased by a private equity firm and "scaled" up faster than appropriate, but its early success demonstrated the potential of entrepreneurial approaches in targeted areas with government support as long as there is oversight.

A watchful eye is needed

The broader takeaway from the decades of attempts to "fix" government financing of higher education so vividly detailed in "The Debt Trap" is that none will be successful without attacking a peculiarly American conceit regarding regulation.

Both businesses and individuals are happy to receive government largess or protection, but are indignant if this comes with any strings. For my money, there are few phenomena less attractive than the exploitation of a regulatory arbitrage for corporate or personal financial gain by those who whine about the oppressive yoke of regulatory oversight. But time and again in the history of the loan program such whining, dressed up as high-minded policy arguments, has allowed banks and schools to profit from government loans with little oversight into how this money is being spent and for who.

So Sallie Mae, an independent private company originally created as an accounting ruse to ensure that the student loans would not be counted towards the government deficit, was allowed to aggressively market the government guarantee that all student debts would be repaid. Rich families for a time could take out subsidized loans they did not need just to reinvest the money and profit from the spread at taxpayer expense. If the government tells schools and banks they will guarantee any benefit regardless of performance and tells students they can use it anywhere regardless of appropriateness to their skills or job opportunities, the results seem predictable.

Lyndon Johnson, as a Senator, was a driving force behind the original student loan program. He had only been able to attend the Southwest Texas State Teachers College because a local bank had concluded he demonstrated the "honesty, character, industry, and ability" required to secure a loan - which he was indeed able to pay back. That is an awfully high threshold to meet and Johnson saw an important incremental role for the federal government to play to satisfy society's needs for specific skills and individual citizens' ability to realize their full potential.

But if the next wave of "reforms" fail to do the hard work of putting in place some real standards and oversight, on the schools, the students, and any other institutions who participate in the program, we should not be surprised if we are schooled yet again on just how bad the unintended consequences of well-intentioned legislation can be.

Jonathan A. Knee is Professor of Professional Practice at Columbia Business School and a Senior Advisor at Evercore. His next book, "The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans," will be released in September by Portfolio.