The Real College Debt Crisis

Tuesday, June 23, 2015

In his landmark book “The Structure of Scientific Revolutions” Thomas Kuhn (1962) discusses how periods of normal science are interrupted by periods of revolutionary science. Kuhn suggests that during periods of normal science researchers identify questions to investigate based on the existing knowledge. The insights that spring from these analyses are constrained, then, by the limits of the prevailing paradigm, such that resulting changes tend to mostly comprise tweaks around the margins, rather than fundamental reconsiderations. In The Real College Debt Crisis, we posit that the U.S. financial aid model has been functioning in a period of normal science with the goal of financial aid being to help young adults pay for college. However, if the primary if not exclusive goal of financial aid is to help young adults pay for college, little attention is likely to be given to what source the money comes from, only that there is money available to pay.  

Periods of normal science persist so long as the current paradigm is able to continue solving the problems the field faces. However, paradigm crisis arise when the current paradigm becomes increasingly less able to solve a growing number of the problems facing the field, or when external events provoke a clamor for a different vision.

Examples of External Events Driving Higher Education into Crisis:

  • Poverty in Schools – Slightly more than half of public school students live in poverty.[1] According to the nation’s top teachers, this poverty, along with family stress and learning and psychological problems are the greatest barriers to school success.[2]
  • Education as an Equalizer – The academic achievement gap by economic class has widened in the past few decades, even as racial gaps have closed somewhat.[3] Even when disadvantaged students score comparably to their privileged peers, they are less able to translate that achievement into higher educational success. Today, 41% of low-income students with the top math scores graduate from college compared to 74% of high-income students with the top math scores. Financial status seems to matter even more than academic performance; low-income students with the top math scores have the same chance of graduating college as high-income students with next to the lowest math scores.[4]   
  • State Funding – As higher education is increasingly framed as a private good rather than a public investment, cost burdens shift to students and families. Nationwide, states spent 28% less on higher education in 2013 than in 2008, cuts that are directly correlated with increases in tuition and other fees and reductions in educational quality (Oliff et al., 2013). According to Geiger and Heller (2011), in 1980, student tuition accounted for about 20% of major universities’ operating funds, but by 2006 this share had more than doubled, to 43%.
  • College Costs – It is estimated that the average total cost of college attendance and room and board at an in-state, public four-year college for the 2012–13 school year was $8,655, an increase of 4.8 percent from the prior school year and a continuation of trends of years of nearly uninterrupted cost increases. The average total cost of a private four-year college also rose by 4.2 percent in 2012–13 to $29,056 (College Board, 2012).
  • Student Debt – Total borrowing for college hit $113.4 billion in the 2011-2012 school year, up 24% from 5 years earlier (College Board, 2012). Today, the average bachelor student graduates with about $21,000 in student debt and the average graduate student graduates with over $55,000 in student debt. Further, low-income individuals are more likely to have student loans. About 76% of low-income and only 53% of high-income individuals with bachelor’s degrees have student loans (Elliott, Lewis, & Johnson, 2014).
  • Return on Degree – 18- to 39-year-olds with 2- or 4-year degrees with outstanding student debt are less likely to perceive an immediate payoff from having gone to college than similarly-situated young adults without outstanding student debt (63% versus 81%, respectively) (Fry, 2014).

As the conversations intensify about the failures of the higher education system to deliver on the American Dream for all citizens equally, a period of scientific revolution appears to be looming. The looming revolution is causing the underlying assumptions of the current financial aid system to have to reckon with new questions that have only come to light because people have been freed by the crisis to think about the problems the financial aid system faces from a totally different vantage point. Instead of asking the old, more narrow question,

Are indebted college graduates better off than if they had never gone to college?

people have begun to ask,

Are students who have to borrow to finance their college educations able to attain equitable outcomes—the same chance at the American Dream—compared to those who did not have to borrow for higher education?

Nevertheless, in periods of revolution challenges to the current paradigm are often met with stern resis­tance because the old way of thinking is so engrained into the psyche and rou­tines of most people that departure is almost unconceivable, and imagining an alternative fear provoking.

Despite resistance, this new frame for evaluating the effectiveness of the student loan program is revealing a paradigm in crisis:

  • Social Choices
    • Career Choice – student loan debt drives graduates away from low-paying and public-sector jobs (Minicozzi, 2005; Rothstein & Rouse, 2011).
    • Marriage – delay of marriage and family formation (Baum & O’Malley, 2003; Gicheva 2011).
  • Financial Instability
    • Student Loan Delinquency - Of borrowers who began repayment 30% were delinquent (60 to 120 days late on payments) at some point in 2012 (Brown, et al. 2014).
    • It is not Just About Amount - 34% of students with just $5,000 of outstanding debt—hardly “high” by most measures—default on their student loans (Brown, Haughwout, Lee, Scally, & van der Klaau, 2015).
    • Credit - Students with student loans have credit scores that are 24 points lower than students without such loans (Brown & Caldwell, 2013).
  • Wealth Inequality
    • Net Worth – An average student debt load ($53,000) for a dual-headed household with bachelor’s degrees from 4-year universities leads to a wealth loss of nearly $208,000 (Hiltonsmith, 2013; Fry, 2014; Cooper & Wang, 2014).
    • Homeownership – Illustrating the potential for lost asset accumulation opportunities, homeownership rates of 30-year-old student loan borrowers decreased by more than 5% compared with homeownership rates of 30-year-old non-borrowers (Brown & Caldwell, 2013; delay buying a home, Houle & Berger, 2014).
    • Retirement Savings – 4-year college graduates with median debt of $23,300 had about $115,000 less in retirement savings than a 4-year college graduate with no student loans by the time they reach age 73 (Egoian, 2013).

In recognition of the true nature, scope, and gravity of the student loan problem, Elliott and Lewis suggest we must begin to imagine meaningful alternatives, and to insist that our financial aid system perform up to the standards of our American values, which hold that only effort expended and innate ability possessed should determine one’s relative outcomes. The United States invests in education—particularly higher education—as the principal path to prosperity and the cornerstone of our economic mobility system. These potential outcomes cannot be realized without a financial aid system that enhances, rather than compromises, education’s potency as an equalizer.

Children’s Savings Accounts (CSAs) may be one such intervention. Typically initiated at birth or kindergarten, families’ investments are leveraged with an initial deposit and/or matching funds to add public or philanthropic funds to families’ savings, usually at a 1:1 ratio. Helping children and families build assets from birth CSAs may help to balance out the current just-in-time, debt-dependent approach to financial aid. CSAs may work on multiple dimensions—preparation, access, completion and post-college financial health:

College Preparation Findings

  • An experimental test of CSAs finds infants from households with incomes lower than 200% of the poverty line who were randomly assigned to receive the CSAs demonstrated significantly higher social-emotional skills at age four than their counterparts who did not receive a CSA (Huang et al., 2014). These skills may be particularly important in closing the achievement gap. Durlak and colleagues find that children with improved social and emotional skills display attitudes, behavior, and academic performance that reflected an 11 percentile-point gain in achievement, compared to controls (Durlak, Weissberg, Dymnicki, Tyalor and Schellinger, 2011). There is evidence, then, that CSAs are helping to equip these young children with the social and emotional competencies that, later, correspond to improved educational outcomes.
  • Kim, Sherraden, Huang, and Clancy (2015), using experimental data, examine the impact of CSA on the durability of parents’ educational expectations from birth to age four. They find that parents in the treatment group have higher expectations for their children and that their expectations are more likely than parents in the control group to remain constant or increase. Importantly, Hess, Holloway, Dickson, and Price (1984) find that mothers’ expectations when their child is in preschool are positively linked to their child’s sixth grade math and vocabulary.

Post-Secondary Enrollment and Graduation Findings

Correlational research suggests that children’s savings show some potential for improving a student’s chances of making it all the way to graduation:

  • Children in low- and moderate-income households with college-saver identities and school-designated savings of $500 or less are about three times more likely to graduate college than children who have a college-bound identity only (Elliott, Song, & Nam, 2013).

Post-College Financial Health

If these effects on children’s educational expectations and identities most distinguish CSAs from other interventions to improve children’s financial statuses, it is perhaps in the post-college period that they most differentiate themselves from other forms of financial aid. Importantly, it is here that Americans’ doubts about the viability of reliance on student debt are most pronounced, and here that education’s efficacy as a catalyst of economic mobility is most imperiled. The experience of owning a savings account, and the cultivation of pro-savings habits, may position young adults to capitalize on the economic advantages that are, for most, the motivation for attending college in the first place.

  • Friedline and Elliott (2013) find that children between ages 15 to 19 who have savings are more likely to have a savings account, credit card, stocks, bonds, vehicle, and a home at age 22 to 25 than if they did not have savings of their own between ages 15 to 19.
  • Friedline, Johnson, and Hughes (2014) find that the overwhelming majority of young adults owned a savings account at or before the acquisition of all financial products including checking, CD, money market, savings bond, stock, and retirement accounts.

What the evidence suggests is that CSAs may be a gateway not only to greater educational attainment, itself a conduit of economic mobility, but also a more diversified asset portfolio. As such, it might matter little if children are able to accumulate large stocks of assets in their savings accounts; instead, the test is whether, as a gateway financial instrument, CSAs lead to greater asset accumulation in other forms such as stocks, retirement accounts, and real estate.

  • For example, Friedline et al. (2014) find that while owning a savings account as a young adult only contributed $50 toward liquid assets, the added contribution of combined stock and retirement accounts—themselves products of savings account ownership—was $5,283.

This asset building not only stands in sharp contrast to the bleak financial fortunes of heavily indebted recent college graduates; it also may position young adults for significantly improved economic outcomes over their lifetimes. For example, the Pew Charitable Trust (2013) finds capital income has a strong relationship with moving up the economic ladder.

  • They find that Americans who move from the bottom of the income ladder had 6 times higher median liquid savings, 8 times higher median wealth, and 21 times higher median home equity than those who remained at the bottom.

So, by building a more diversified portfolio, CSAs may result in increased asset accumulation, which, in turn, may lead to higher odds of moving up the economic ladder. But Children’s Savings Accounts do not only provide the opportunity for individuals to build assets, they provide a vehicle for a wealth transfer, as well. The idea of a wealth transfer is wholly consistent with American history, with our collective narrative of individual effort, and with our shared identity. In the 19th Century there was the Homestead Act and in the 20th Century there was the GI Bill. In the 21th Century there has yet to be a significant wealth transfer, a routine correction in the American capitalist system. However, as inequality grows, the logic of wealth transfers as aligned with the ideal of effort and ability as deciding who succeeds and who fails becomes increasingly clear to a larger number of Americans. For instance, in the New York Times/CBS News poll, 6 in 10 Americans said government should do more to reduce the gap between the rich and the poor.[5] The same poll finds an equal proportion believing that only a few people at the top have an opportunity to advance.[6] It is this fading vitality of the American Dream of upward mobility that poses the greatest threat to current economic institutions, and the greatest likelihood of sparking a financial aid revolution.

When seen through this lens, which clearly exposes student debt as fundamentally incompatible with the function of our higher education system and, in contrast, CSAs capitalized with significant transfers as potentially capable of revitalizing the legitimacy of the American Dream, the moment of scientific revolution seems imminent. Then, as Kuhn (1962) explains, new solutions can emerge, suddenly apparent to minds unshackled by the old paradigms. Here, there are several options for financing a new financial aid system, and many paths to implementation. Possibilities for the next wealth transfer using CSAs might include augmenting existing scholarship or grant programs with opportunities for early commitment asset-building programs. For example, historically important and respected programs like the Pell Grant could be leveraged by dedicating a portion of funds each year to students in as early as fifth grade, allowing the student and their families to invest this money to accumulate even more assets for college. Foundations could leverage the dollars they are using for scholarships in similar ways. The United States has proven itself on many occasions to be up to tremendous challenges, when directing our collective innovation and resolve to even formidable problems. This moment, when the hopes of a growing number of talented children are dashed in the service of sustaining an ill-conceived and unjust dependence on student borrowing, may be just such a time.

[3] Reardon, S.F., “The Widening Academic Achievement Gap Between the Rich and the Poor: New Evidence and Possible Explanations,” in Whither Opportunity? Rising Inequality, Schools, and Children’s Life Chances, eds. Greg J. Duncan and Richard M. Murmane. (New York, NY: Russell Sage Foundation, 2011).

[6] Ibid.

(Social Media block)


Thank you for this well-researched article. I am amazed by the wealth of research to back up the effectiveness of Children's Savings Accounts as a "gateway financial instrument." May I ask the name of the author of this blog post?

Submitted by Melinda Lewis (not verified) on

Hello! And thank you for your comment. This post was authored by AEDI Director Willie Elliott, although Dr. Terri Friedline, Director of Financial Inclusion, has done a lot of the work on CSAs as gateway financial instruments. Any of us would be happy to talk with you more!

New Book Released

Today’s student loan system is in place because of a political compromise, and growing discontent with student debt may signal that this arrangement has run its course. While there are resources and organizations in place to help those struggling with debt, the time has come to consider a new direction for financial aid, William Elliott III and Melinda Lewis argue in “Student Debt: A Reference Handbook.”

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