Higher education is supposed to be a critical first step on the ladder that leads to economic mobility. But William Elliott and Melinda Lewis say that students often leave school with debilitating debt that delays or even prevents any upward climb on that ladder.
The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream (Praeger, 2015) shows how current aid models contribute to inequality, and discusses a number of promising alternatives.
The authors, both associate professors in the School of Social Welfare at the University of Kansas, say the current conversation overlooks the impact of debt at a fundamental level.
“This is not about whether we’re facing the next housing bubble or that sort of thing,” says Elliott. “It’s the idea that this student debt crisis is chipping away at our ability to start families, save for retirement. It’s a different measure.”
After the Higher Education Act was revised in the 1970s, the government shifted to giving money directly to students instead of institutions. Is that when financial aid and tuition began to get out of hand?
Elliott: The roots of it were in the HEA, but we really start seeing the change in the early 1980s. We started seeing that financial aid was being made up largely of student loan debt. It became a much bigger portion of the actual financial aid package.
Lewis: What we see in terms of tuition prices reflects the reduction in state—but also public—support for the concept of public higher education. It really parallels. At the federal level we saw a shift from sending aid to institutions to putting more of those dollars in the hands of students and families as the burden of paying for college shifted to the shoulders of those same students and their families.
At the state level, we saw that shift of fiscal responsibility evidenced in higher prices—not so much because it cost more to educate students but because the portion of an institution’s budget made up of tuition has risen steadily and dramatically in what is supposed to be the affordable public higher education sector.
You wrote, “The financial aid system for low-income students is increasingly centered on helping those students incur debt, while the system for higher-income students encourages the accumulation of assets.” What did you mean by that?
Lewis: Even in thinking about my own children and the way that higher education financing is playing out for them, we support accumulation of education assets through our tax code. What that looks like in my family’s finances is that my husband and I get a significant state tax benefit for putting money into a 529 account for our kids.
Over the 18 years that we are financially preparing for each of them to go to college, there is sizeable public investment in the form of deferred tax liability on our part in our children’s education financing.
Contrasted with a family that doesn’t earn enough to have a tax liability, they are not able to get that same benefit for accumulating assets. Instead they confront the point of having to pay for college without any kind of a capital base.
What they are greeted with then is not a commensurate asset investment but a promissory note, which is how they are expected to pay for that same higher education.
So even though college is more accessible and, in some cases, more affordable, we’re doing a disservice to the majority of students who are being saddled with debt?
Elliott: We’re not only doing a disservice to them, we’re doing a disservice to the country. We have this thing called The American Dream, based on the idea that effort and ability will determine outcomes. If that breaks down, it weakens our basic belief in America in a real way.
Lewis: We don’t think that education itself is counterproductive. The evidence still suggests that young adults who go to college do better in most cases than if they didn’t. But it is certainly the case that they don’t do as well as they would if they didn’t borrow.
For the first time, some people beginning to assume positions of power have been affected by student debt. Do you think that’s who will drive change?
Lewis: Certainly it’s changed the political conversation. If you look at presidential campaigns in this cycle compared to one or two cycles ago, the way that they talk about student debt is no longer kind of vague or diffuse or an impersonal issue. They are often talking, from both political parties, about their own experiences with student debt.
Debt has become a mainstream way that people finance their educations, which has placed it much more center-stage. It’s still true, though, that disadvantaged groups in our society bear disproportionately the burdens educationally, socially and financially of student debt.
That’s why we’ve tried to focus the conversation more on equity, so we don’t lose sight of the fact that student debt is still a dis-equalizing force in what is supposed to be our great equalizer, higher education.
There have been a number of ideas to alleviate student debt, including Pay it Forward or income-based repayment. While these ideas sound plausible, you suggest that they actually exacerbate inequity.
Elliott: I really think about these as treating the symptoms. We say, “Let’s do something to deal with the default rates.” So we create income-based repayment plans which extend the period of time that one pays on their student loans. Now, that sounds like a solution to the problem, but all it’s doing is tamping down the symptoms that we see.
When we start looking at things like asset accumulation, net worth and retirement savings, by creating income-based repayment plans and extending the period of time it takes to pay it off, we are actually exacerbating the problem: “I can’t save now because I’ve got to pay off my student loans first.”
You devote a portion of the book to Children’s Savings Accounts. Explain how they differ from 529 programs.
Elliott: They can be part of a 529 program. The idea is that each child receives, say, $500 at birth and is enrolled in this CSA, and they can receive matching funds and incentives and things like that.
They are different from a regular 529, which is often limited to higher-income families because there are initial fees to pay and that doesn’t maximize the money of low-income people. Low-income people can’t put large amounts of money into a 529 so they don’t reap the same amount of tax benefit that higher-income families can.
But if you are saving $1 in a CSA and you get another dollar added, which is called a match, then that helps even low-income people.
Even if you put in just $1, you get a return on $1 in a way that you couldn’t in a regular 529 or a bank account or credit account.
We’re heading into an election year and candidates have proposed solutions to the student debt problem, including free college and even a total bailout similar to the auto industry.
Elliott: Let me address those. With the two-year free college and free college more generally, we really believe that’s an opportunity to create greater inequity in many cases. Even though it sounds like a great thing, in this case, free is not necessarily the best idea.
Our research shows that counselors are directing low-income students based upon financing toward two-year colleges. What we fear is that if you have a universal two-year program, it’s going to disproportionately affect low-income people.
They are going to be pressured into going to these two-year colleges, which might be great for some kids but totally wrong for other kids. That can actually increase inequality. We can begin training kids for certain types of jobs through our two-year programs but not other managerial and higher level jobs, which could be really damaging in the long run.
You also mentioned a bailout. I think a bailout makes a lot of sense, but only if we’re taking on a program like Children’s Savings Accounts from early on so we’re not doing bailouts time and time again.
If we just do a bailout and we keep the same student debt system in place, it only means 10 or 20 years from now we’ll need another bailout. That’s not good for anybody.
Lewis: There are a lot of conversations percolating about looking at post-college financial health indicators and thinking we should be getting more from our financial aid than just paying that tuition bill at the point of enrollment. Those conversations are translating to new ideas, different kinds of proposals that are about building an education trajectory for all children equitably.
I think that we could see continued development and new types of proposals from candidates and new administrations.
Tim Goral is senior editor of UB.