Today’s prevailing accounting of student loans is somewhere along the lines of: “College debt is fine. Students eventually recover, mostly, from the burdens of repayment. And, besides, what other option is there?”
This is, of course, hollow reassurance to the millions who not only struggle in the short-term to meet their debt obligations—particularly if they are among the college-leavers who experience unemployment—but also find themselves lagging in asset accumulation and overall financial well-being, even long after leaving higher education. More Americans, if not many policymakers, are questioning the wisdom of relying on a debt-dependent financial aid system whose greatest recommendation may be that it does only temporary harm to its users. This fall, AEDI released two new student debt reports, synthesizing the growing body of evidence against student loans and seeking to change the accounting of—and the conversation around—how we pay for college and why it matters.
Particularly disturbing is growing evidence revealing how student loans exacerbate inequity, eroding education’s role as an equalizing force and short-circuiting the economic mobility opportunities college has long afforded. While this research is still emerging, it is clear that, if we demand that student loans serve their intended purpose of facilitating post-secondary educational attainment by removing resource constraints from the attendance decision, they are falling far short of this metric.
While the popular conversation about the ‘student debt problem’ tends to focus primarily on high-dollar debt, other studies find concerning effects on net worth and asset accumulation, even at levels of student debt far below these extreme outliers, and even below the ‘recommended’ levels student loan champions suggest should be safe. Students who borrow to finance college may see reduced financial well-being, on a variety of indicators, throughout their lifespans, and this constrained asset accumulation may threaten our aggregate economic security, particularly given the high incidence of student loan usage. To cite just a few examples, Elliott and Nam (2013) find that families with college debt may have 63 percent less net worth than those without outstanding student debt. Hiltonsmith (2013) finds that an average student debt load for a dual-headed household with bachelors’ degrees leads to a wealth loss of nearly $208,000. These reductions in asset standing reduce the effective value of a college degree for those who must borrow. This means that two students who earn exactly the same degree may not reap the same rewards.
But student loans could perhaps still be forgiven if their potentially negative effects only kicked in after they had accomplished their core goal: making a college degree possible. However, here, evidence suggests that loan aversion can be a deterrent, particularly among disadvantaged students. For example, Perna (2000) finds that student loans reduce the chance that Black students enroll in four-year colleges. Even if students overcome this hesitation to borrow and make it to college, the specter of significant student debt may influence major selection, institutional choice, and persistence to degree (Cofer & Somers, 2000), again in ways that disproportionately affect low-income students.
Even as more policymakers accept the evidence behind this indictment of student loans, though, there is still the final objection that, without student loans, many students will be denied any access to college at all. At AEDI, our assertion is that, today, government and household investment in student loans crowd out alternatives, including those that rely on assets rather than debt. But it doesn’t have to be this way. We can pivot from reflexive defense of a flawed student loan system to embrace a truly progressive system of lifelong savings opportunities, financed with generous transfers delivered early enough in a child’s educational trajectory to really make a difference. This kind of financial aid could make the prospect of college again a path to upward mobility and greater equity.