CUTTING OUR LOSSES TO BUILD A BETTER FUTURE: REPLACING STUDENT LOANS WITH CHILDREN’S SAVINGS ACCOUNTS FOR A MORE EQUITABLE, EFFICIENT, AND EFFECTIVE FINANCIAL AID SYSTEM To date, our analysis of the U.S. student loan system has mostly critiqued ‘over-reliance’ on student debt and discussed asset-based initiatives such as Children’s Savings Accounts (CSAs) as complements rather than alternatives to student loans (see Elliott & Lewis, 2013). This nuance was in part informed by our understanding of the evidence at that point, which seemed to suggest that debt loads above a certain threshold (say, $10,000) were particularly problematic (e.g., Dwyer, McCloud, & Hodson, 2011), and that ensuring that students did not depend entirely on student borrowing might mitigate the worst effects. However, we acknowledge that some of our reluctance to more completely indict the student loan system was rooted in our recognition of the considerable policy inertia and significant vested interest behind it,
and our concerns that our core message—the potential for superior educational and financial outcomes through the lever of asset development (Assets and Education Initiative, 2013)—might be lost if our voices were marginalized as stridently or unrealistically opposed to student loans. It is intentionally, then, that we here pivot to this more absolute critique of student loans and a clearer proposal to move away from debt-financing of higher education. We are still willing to admit that the evidence is not clear that there can be absolutely no role for student loans; however, their role may be more justified in the case of higher-income students, to facilitate attendance at more selective institutions, avoid employment while studying, or preserve familial assets, but we no longer see a compelling rationale for maintaining a significant government stake in perpetuating a student loan system. Nor do we see a way to adequately capitalize the asset-based alternative that holds such tremendous promise to restore higher education as a catalyst for equity and prosperity in our society as long as we continue to divert such high levels of precious resources to a student loan program whose greatest recommendation is that its customers seem to, for the most part, eventually rebound from their use of its products. The realizations below, which cumulatively lead to our proposal to replace the current student loan system with a coherent savings structure and a robust reparation for damage already inflicted on student borrowers, have not come without careful consideration.
INCLUDING MEASURES OF EQUITY IN THE ACCOUNTING OF THE STUDENT LOAN PROGRAM CAN MORE CORRECTLY DIAGNOSE THE NEED FOR A NEW DIRECTION The U.S. federal student loan program has received considerable policy attention in recent years, particularly as popular media coverage of repayment woes skyrocketed following the financial collapse (see Frizell, 2014; Korkki, 2014; Levin, 2013) and the associated increase in unemployment for even college graduates (Mishcel, Bivens, Gould, & Shierholz, 2013). However, the policies proposed in the aftermath have almost exclusively focused on softening the blow dealt by student loans, rather than avoiding the damage in the first place. Approaches such as income-based repayment plans, in their various iterations (Talbott, 2014), are designed to help borrowers cope with the consequences of their student borrowing,
yet none have been demonstrated to truly avoid the educational, social, and financial hazards of our debt-dependent system. Temporary reductions in interest rates would reduce the cost of borrowing, at least in the short term (Lindstrom, 2013), but would not address loans’ deterrent effects (Baum & O’Malley, 2003), particularly since few prospective students understand the real cost of financing. Even as understanding of student loans as a dis-equalizing force has permeated popular discussion to some degree (see Thompson, 2014), there has been little reconsideration of the fundamental wisdom of relying on debt to facilitate such an important part of the U.S. path to economic mobility. Indeed, some proposals might exacerbate inequity in higher education.
For example, if we encourage low-income students to enroll in less expensive two-year schools to reduce their expenses (Goldrick-Rab & Kendall, 2014) and, then, need to borrow, but economicallyadvantaged students can choose their schools without such considerations, we run a real risk of creating an explicitly 19 two-tiered structure, particularly since all institutions are not created equal in terms of educational outcomes (for an example of how institutions are not created equally see NCES, 2011). Reimagining, and, then, rebuilding, the U.S. financial aid system must begin with more completely accounting for the true costs of student loans, to students and the larger economy (see, Hiltonsmith, 2013; Elliott & Lewis, 2013; Dugan & Kafka, 2014).
In this light, it is clear that, while current proposals center on reducing monthly payment burdens because these ‘tweaks’ can reduce the incidence of delinquency and default (Sheets & Crawford, 2014), potentially masking the problems, they do little to address the long-term effects of student loans, before and after college, and may even move in the wrong direction. Indeed, innovations that seek to reduce the strain on student borrowers by extending the repayment period or making other modifications may only prolong the harmful effects on financial and life outcomes (e.g., Egoian, 2013). Today, we cannot claim ignorance of student loans’ failure to catalyze greater educational achievement, increase students’ engagement in school, and foster stronger economic foundations (Cofer & Somers, 2000; Perna, 2000; Heller, 2008; Kim, 2007; Dwyer, McCloud, & Hodson, 2011;
Fry, 2014, among others). There is a growing body of evidence that reveals the dimensions on which student loans endanger the well-being of individual borrowers, the institutions dependent on them, and our macro-economy (Frizell, 2014; Korkki, 2014). Data reveal that disadvantaged students, particularly low-income and students of color, are disproportionately affected by these forces (Fenske, Porter, & DuBrock, 2000; Kim, 2007). These disparate effects are particularly unacceptable given the role of higher education in fostering greater equity and upward mobility (Greenstone, Looney, Patashnik, & Yu, 2013). When we measure the student loan system comprehensively,
looking beyond repayment burden to consider the fullness of what we should expect from our financial aid system, the imperative for reform becomes more urgent, and our way more apparent. REDUCING ABSOLUTE BORROWING IMPERATIVE TO RELIEVE ILL EFFECTS OF STUDENT LOANS This fuller accounting of the effects of student loans reveals not only the different dimensions on which student loans may harm prospective, current, and former college students and their households, but also the serious limitations of any reforms that do not reduce absolute dependence on student borrowing. Contrary to popular belief (Sanchez, 2012), it is not only the extremely ‘high-dollar’ loans—still relatively rare—that should be alarming (Egoian, 2013). Indeed, since some of these loans are incurred by relatively advantaged students pursuing exceptional degrees,
these outliers may be far less dangerous than the ‘routine’ assumption of several thousand dollars in debt by millions of Americans. What is increasingly clear is that there is no ‘safe’ level of student loan debt. Analysis reveals negative effects on asset accumulation and subsequent financial well-being at levels even far below ‘recommended’ thresholds, revealing the limitations of any efforts to protect students by simply trying to avoid huge loans (Akers, 2014; Egoian, 2013). Indeed, to the extent to which the collective narrative focuses on high-dollar debt as the problem (e.g., Edmiston, Brooks, & Shepelwich, 2012), the psychic toll may be increased for those who wonder why their ‘small’ loans are still crippling. Additionally, while talk of high-dollar debt may be particularly off-putting to debt-averse low-income students, even the prospect of relatively small student loans may deter some prospective college-goers and, certainly, does little to motivate their engagement (Cunningham & Santiago, 2008).
It is absolutely true that some students manage to borrow for college and still do fine, at least eventually. It is also true that, in what is becoming a predictable outcome, many students who borrow even fairly small amounts experience disruptions in their college experience, thwarting of their academic aspirations, and/or delay in their life progression (American Student Assistance, 2013; Mishory, O’Sullivan, & Invincibles, 2012). In no other area of U.S. commerce do we invest so heavily in a product that we acknowledge may be quite harmful, without knowing the threshold at which such negative effects might commence. With the caveats required before student loans can be safely recommended, we should focus our policy energies on reducing the utilization of student loans through the most efficient and equitable means possible.
