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Institutions provide the economic conditions that make it possible for people to believe that their hard work and ability will determine their success or failure. This task is facilitated by Americans’ strong desire to feel as though their destiny can be controlled and that institutions will ‘echo’ their own contributions, rather than work against them.1 Primed to look for evidence of this ‘effort plus ability equals outcomes’ equation, Americans cling to this ideal, even as it recedes in reality for many. There is no evidence that Americans today are less capable or less committed than in previous generations,
in the aggregate. Instead, particularly in today’s highly specialized, technology driven, global world, the upward mobility that animates the American Dream is only possible if effort and ability are combined with institutional might. Post-Great Recession,
Americans are surrounded by examples of unsupportive institutions and the crumbling aspirations of those whose effort and ability have failed to yield advancement. These adverse conditions are not just constraining financial progress; they imperil the foundation of even this robust American Dream. Today, a majority of Americans (63 percent) no longer believe American institutions are able to facilitate children being better off than their parents (Luhby, 2014). Instead of aspiring to economic mobility, many now hope for financial security – not dreaming of getting ahead but striving not to fall behind. While some Americans display tremendous capacity to hope against all hope, the average person requires grounds for believing that achieving the American Dream is possible.
In this sense, belief in the American Dream as it relates to one’s own life is more malleable than the vague ideal one might hold for the country; it can and does readily change depending on the economic context in which one finds oneself. This suggests that people see the American Dream as more or less achievable in their own lives based largely on how institutions like the education system, labor market, and economic markets are functioning for them (Hochschild & Scovronick, 2003). The significance of the U.S. education system in sustaining the American Dream cannot be overstated. Americans’ understanding of ‘effort and ability’ features educational attainment prominently, particularly the higher education widely understood to correlate with superior employment and earnings prospects and, then, upward mobility.
Here, too, though, the aspirations of a generation of young people are colliding with the economic realities they confront, contributing to the shaky foundation on which the American Dream stands today. While it is clear that it does pay to get an education, there is plenty of evidence to suggest that it pays off unevenly. First, economically disadvantaged students carry their inferior academic preparation—forged in inferior primary and secondary schools and exacerbated by familial differences in educational investments—into post-secondary education,
where it contributes to lower completion rates (Bailey & Dynarski, 2011) and longer paths to degree because of the need to take remedial classes (Engle & Tinto, 2008). Second, even highly-qualified students do not achieve equitably in college, as the economics of higher education strongly influence institutional selection to steer even high-achieving low-income students or students of color to less selective schools that spend less per student on instruction, have lower graduation rates, and yield poorer labor market returns than more competitive institutions (Carnevale & Strohl, 2013). Indeed, analysis of this ‘undermatching’ (Hoxby & Avery, 2012) suggests the existence of two tiers of higher education and powerful forces that track students into one or the other,
based more on socioeconomic status than innate ability. Higher education cannot be an equalizing force if it delivers an unequal product with highly disparate outcomes. As evidence of the gap between different types of institutions, more than half of community college students fail to complete a degree, receive a certificate, or transfer to a four-year institution within six years (NCES, 2011), considerably poorer interim outcomes than students at more selective, four-year institutions. Completion does not erase the legacies of inequity either. Despite the fact that education nearly always ‘pays’ compared to failure to pursue post-secondary studies, research suggests that the precise level of economic advantage afforded from a higher education depends on school selectivity,
major, and chosen occupation. Specifically, the rate of return on a bachelor’s degree from a noncompetitive four-year private institution is under 6 percent while the rate of return on a bachelor’s degree at the most competitive public institutions is over 12 percent (Owen & Sawhill, 2013). While there is certainly an economic need for diverse majors and a case to be made for the non-financial benefits of post-secondary education, the extent to which career choice may be influenced by the student’s socioeconomic background also warrants examination,
since the lifetime difference in earnings between, for example, a student who majored in engineering and a student who studied arts or humanities can be well over $1 million (Schneider, 2013). And, finally, even when two students earn the exact same degree from the exact same institution, the real value of that credential may vary depending on the way in which they financed it, as student loan debt may erode asset accumulation for years following degree completion, thus increasing the real cost of the degree (e.g., Hiltonsmith, 2013). Today, high college costs due in part to diminishing state funding, declining availability of non-repayable financial aid and poorer labor market outcomes may raise doubts in the minds of parents and children about whether the return on college is too risky to justify the investment of required financial and personal resources. In the lives of individual students and in the aggregate for this generation, then, education—one of the most critical institutions shaping opportunity in today’s America—may be seen as less capable of facilitating a path to the American Dream.
SHIFTING UNDERSTANDING OF EDUCATION’S WELFARE FUNCTION IN AMERICA Since the beginning of the 20th century, education has become a locus for the emphasis on opportunity, through expanded support for public schools, colleges, and universities, and eventually through provision of government subsidies to facilitate individual access to higher education. In 1976, in talking about the function of education in the American welfare system Janowitz wrote, “Perhaps the most significant difference between the institutional bases of the welfare state in Great Britain and the United States was the emphasis placed on public education –
especially for lower income groups – in the United States. Massive support for the expansion of public education, including higher education, in the United States must be seen as a central component of the American notion of welfare—the idea that through public education both personal betterment and national social and economic development would take place” (pp. 34 & 35). Now such an accepted part of our approach to fostering upward mobility, it must be emphasized that placing education in this central role was not a foregone conclusion, but instead an explicit and intentional decision about how our nation, specifically, would build policy structures to complement individual effort and ability.
While European nations have relied on the “direct redistributive role of the welfare state to reconcile citizenship and markets”, the United States has chosen to use education as a lever for ensuring equitable outcomes (Carnevale & Strohl, 2010, p. 83). This distinctly American conviction—that economic disparity can be narrowed through individual effort in school, the pursuit of higher education, and calculated public investments in educational opportunities—runs deep. In the past few decades, though, while there is little evidence that Americans’ beliefs about the importance of education as a gateway to opportunity have eroded, there has nonetheless been a repositioning and repurposing of education policies, within a shifting frame of ‘welfare’.
Education has been increasingly viewed as a primarily individual, rather than societal good, with the accompanying retrenchment paralleled by cuts in other arenas of welfare policy, as well. In the higher education domain, this shift can be clearly traced by examining political pronouncements about financial aid since the 1965 enactment of the Higher Education Act. While education is certainly not the only policy sphere where shifts in arrangements between individuals and the government are reshaping opportunities and risks (Hacker, 2008), these trends are seen vividly in higher education, looking, for example, at the evolution of how presidents talk about, specifically, financial aid policy. In talking about the Higher Education Act Reauthorization of 1968 President Lyndon B. Johnson said, “So to thousands of young people education will be available. And it is a truism that education is no longer a luxury. Education in this day and age is a necessity.”
Here, the federal government’s role is understood as making education available to all. Similarly, speaking of the Higher Education Act Reauthorization of 1980 President Jimmy Carter said, “We’ve brought college within reach of every student in the nation who’s qualified for higher education. The idea that lack of money should be no barrier to a college education is no longer a dream-it is a reality.” In education as in labor arrangements, income supports, and other policies that touch family finances, in the mid-1980s a shift occurred. Instead of education being framed as something in which the federal government had a large stake, the burden for paying for college shifted to the individual.
Because relatively few households could finance these new obligations without some external assistance, given the high cost of college, this ‘risk shift’ (Hacker, 2008) necessitated a larger role for student loans, absent policy innovations that would bridge these gaps.
In 1983 President Ronald Reagan explicitly articulated this shift, “The cost of education is primarily the responsibility of the family. The Federal Government has a role to play in helping needy students get a chance to receive a college education.” Clearly, then, as with other welfare policies, one’s view of education is based on values, which then drive the metrics emphasized and the outcomes considered acceptable. In this report, a part of what we contend is that student loans do not align with the notion that effort and ability should determine who succeeds and who fails. Americans believe that people who work equally hard and have roughly equal ability should achieve similar outcomes, and our sharing of these values drive our assertions that, because education has a role in America as part of its welfare state,
it matters not only that people have access to financial aid for paying for college. If the American Dream is to remain real, it also matters what type of financial aid they have access to and what its effects are. It is along these dimensions that we encounter concerns with the student loans. THE STUDENT LOAN PROGRAM’S ROLE IN INSTITUTIONALIZING UNEQUAL OUTCOMES When the Higher Education Act of 1965 was enacted, student loans were not meant to be the primary instrument for financing college. In fact, student borrowing did not become the primary instrument for financing college until about the mid-1980s. Instead, grants were primarily intended for lower-income students, with loans, a compromise of sorts between Democrats’ and Republicans’ different ideas about how to expand educational opportunities, meant to help middle-income students confront the short-term cash crunch associated with the cost of college.
During this period student loans were made by private lenders. However, to get private lenders to be willing to offer loans to students who, for the most part, had no credit history, the banks had to be given a guarantee that they could recoup their losses if a student defaulted. The concessions that resulted took student loans down a path which has resulted in a fairly unique debt instrument, one with an outsized significance in U.S. policy and, today, Americans’ balance sheets. If we understand student loan default as a result of the inherent difficulty in accurately predicting the return on college and not simply borrowers’ unwillingness to pay, we see this request for rules that preference lenders, though practical from the perspective of financial institutions, as creating a kind of perverse outcome where the goal becomes more to protect the financial institutions than the recipients.
Given the subsequent trajectory of student loans, where borrowing has become a primary mechanism of college access for most prospective students, this positioning of financial aid within the larger credit market should have perhaps raised more alarm. Again, here it is important to recognize education—and public support for the same—not as mere academic instruction, but as a sort of “American welfare”, vastly preferred to their alternative—direct payments. It is within this role of education that we find greatest concern over this protection of institutions instead of individuals. Here, for our particular emphasis on the educational attainment and equitable outcomes of low-income and otherwise disadvantaged students, for whom education functions more explicitly as a form of welfare than for high-income students, student borrowing may be especially ill-suited. To show how the student loan program is hindering the ability of education to fulfill its role as an equalizer,
we pull together a growing body of research that suggests student loans, large and small, can have negative effects on far too many potential students’ college preparation, the decision to enroll in college, which college to select, whether to stay and complete college, which job to take after college, whether and when to marry, when to have kids, the amount of overall financial stress experienced, whether to buy a home, and whether, when, and how much to save for retirement. We acknowledge that, as with all secondary data analysis, there are no ‘perfect’ studies; however, this evidence on a variety of outcomes, from different researchers utilizing a range of methods and datasets, at a minimum, points to the need for a distinct and fuller assessment of the U.S. student loan system,
including its potential role in contributing to Americans’ perceptions that their greatest hopes are increasingly elusive. Reviewing the growing body of research makes a compelling case on its own that the student loan program exacerbates uneven returns on a college degree and erodes, then, some of the equalizing potential of our higher education system. We recognize, within the context of today’s financial aid debate, that some may view these student loan effects as small costs to pay for the right to receive an education. Indeed,
some Americans may choose to delay buying a home or getting married, and generational differences may lead some to make different life choices altogether (Nielsen, 2014). Our intention here is simply to point out the unacceptable inequity of a system that asks some, but not all,students to pay these costs, and frames such inequity as an inevitable price of higher education access. We believe that the American Dream requires that personal preferences and life goals must determine individuals’
paths, not the constraints leveled by the way in which they financed the higher education they pursued on their journey. This leads to different conclusions about the seriousness of student loan effects and, then, the urgency of constructing alternatives. For example, Rose (2014) states, “A sizable number of people are certainly inconvenienced for their first 10 years after graduation and face a long period of repayments, but a relatively small percentage confront default” (p. 30, emphasis added). We would and have agreed with Dr. Rose that it still pays off to attend college,
even if you have to take out student loans. However, this certainly does not mitigate the harsh reality that college pays off more for those who do not have to take out loans. It is that inequity that is problematic. And the disparity in outcomes is often quite consequential. The average time that it takes to repay student loans grew from about seven years in 1992 to a little more than 13 years in 2010 (Akers & Chingos, 2014), and this is likely to continue to grow as Income-Based Repayment plans grow in popularity (Akers & Chingos, 2014), touted as a way for overburdened students to cope with the strain of their debt burdens. These programs, which have doubled in use over the last two years itself a sign that there is a student debt problem in America,
extend normal repayment plans from 10 years to up to 25 years. In light of evidence of the long-term financial implications of diverting income to debt repayment instead of asset accumulation, payment schedules that extend the period of indebtedness may only exacerbate the divides. Even if the advantage realized by a student who does not have to borrow for higher education is small, and even if the student who had to take out loans is better off than he or she would be without a college education,
this just seems at odds with the goal of education being an equalizer in society. Even more fundamentally, this landscape is incompatible with the spirit of the American Dream that promises that effort and ability will determine who succeeds and fails in life. It is particularly disturbing as a proposed ‘solution’ to the growing public angst about student loans’ effects on the economic mobility and financial security of young Americans, failing as it does to address the underlying causes of their distress. Particularly out of sync with the stated and understood purpose of student loans to facilitate greater access to higher education, though, are the ways in which borrowing influences students’
decisions prior to college entrance, again in highly unequal ways. Apart from the fact that the mere thought of having to finance college through the student loan program is associated with some students opting not to attend college—debt aversion—the student loan program helps to institutionalize separate educational paths for those who have money for college and those who do not. For instance, field evidence suggests that students facing the prospect of considerable debt may be steered toward twoyear colleges as opposed to a four-year college by high school personnel such as teachers and counselors, even when they are academically qualified to attend more selective institutions (Elliott, 2013). One high school counselor put it this way,
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