Center on Assets, Education, and Inclusion

Student loan balances climbed to $1.2 trillion at the end of 2014, and delinquencies are rising even as they fall for most other types of debt. In fact, students with the smallest balances are most likely to default. Judy Woodruff learns more from Megan McClean of the National Association of Student Financial Aid Administrators and William Elliott of the University of Kansas.

Postsecondary education costs in the United States today are rising with an increasing shift from societal responsibility to individual burden, thereby driving greater student borrowing. Evidence suggests that (i) such student debt may have undesirable educational effects and potentially jeopardize household balance sheets and (ii) student loans may better support educational attainment and economic mobility if accompanied by other, non-repayable financial awards. However, given declines in need-based aid and falling state support for postsecondary costs, policymakers and parents alike have failed to produce a compelling complement to debt-dependent financial aid that is capable of improving outcomes and forestalling assumption of ever-increasing student debt for a majority of U.S. households. This article, which relies on longitudinal data from the Educational Longitudinal Study, finds parental college savings may be an important protective factor in reducing debt assumption. However, several other factors increase the likelihood students will borrow: perceiving financial aid as necessary for college attendance, expecting to borrow to finance higher education, having moderate income, and attending a for-profit college. After controlling for student and school variables, the authors find that parental college savings increase a student’s chance of accumulating lower debt (less than $2,000) compared with students lacking such savings. Policy innovations to increase parental college savings—such as children’s savings accounts—could be an important piece of the response to the student debt problem in the United States.

According to Shapiro, the American Dream “is the promise that those who work equally hard will reap roughly equal rewards” (Shapiro, 2004, p. 87); that is, the American Dream holds that this country is a meritocracy where effort and ability are the primary determinants of success. 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.

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Most people do not dream of going to college and becoming rich; that is, higher education is, for most, a path to the American Dream of middle-class financial security and upward mobility, not a perceived ticket to great riches. Generally, when people dream of being rich, they think of being a professional athlete, an actor, a singer, or entrepreneur, or winning the lottery. People may dream of getting rich, but it is not this illusion of quick fortune that animates individual actions nor characterizes the American ideal. Instead, Americans expect and work toward the opportunity to become middle-class through education, and it is this promise that underscores our vision of ourselves and our presumed ‘contract’ with the institutions that govern U.S. society. In recognition of the role that educational attainment plays in opening the door to this archetypal middle-class ideal, U.S. policy decided some time ago that children’s work would be school work. Children and their parents believe that the reward for innate intellectual ability and expended academic effort will be a chance to reach, not ease and opulence, but security and upward progress. U.S. policy affirms that education is the primary path for achieving the American Dream. Therefore, quick climbs from rags to riches are presumed to be quixotic, fleeting, and not necessarily even desirable. In contrast, the denial of a fair shot to enter and stay in the middle class through education imperils the foundation on which our collective identity rests and threatens to rewrite the American narrative of ‘success’ through effort and ability, mediated through attainment of education.

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According to Dr. Thomas Shapiro, the American dream “is the promise that those who work equally hard will reap roughly equal rewards” (Shapiro, 2004, p. 87). Higher education is widely regarded as a vehicle for sustaining this dream. This belief in the potential of education to act as an equalizer is supported by research, which consistently shows that a person who attains a four-year college degree earns more than a person who does not attain a four-year degree. Indeed, there is considerable evidence that educational achievement is the primary way that Americans born in poverty may leave it. Stories of those who escape poverty through education serve to support a reassuring narrative: providing access to higher education is all that is needed to keep the American dream vibrant.

There have always been holes in this vision of American success, but today more than ever, higher education’s role as a force for equity has deteriorated, such that college may serve more to perpetuate the status quo than to create ladders of opportunity. Tracing and naming the factors that contribute to the erosion of higher education’s equalizing role is an essential step in reinvigorating the American dream. Uncovering those factors begins with an honest conversation about student debt.

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By giving students and families a clear strategy for how to overcome cost barriers, college savings increase the likelihood of enrollment. The prospect of significant borrowing, on the other hand, does little to orient students towards college as a likely part of their futures.

Even small levels of savings make enrollment more likely. Specifically, 45% of low or moderate-income students with no account, 71% with more than $1 of school savings, and 72% of students with school savings of $500+ enroll in college.

On the longer-term challenge of equipping students to succeed, CSAs also show promise, largely through reinforcing a college-saver identity (expects to graduate and sees savings as a strategy for paying for college) that increases engagement and builds expectations.

Conversely, going through school without assets can compromise achievement. Spells of asset poverty prior to age 11 have a particularly negative effect on academic achievement.

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Student debt is understood as an investment in expanding access to higher education, but there is some evidence that debt may work at cross-purposes by impairing or, at least, failing to support, educational outcomes.

For some students, the prospect of high-dollar student debt may discourage enrollment.

Low-income students who are loan-averse may actually decide not to enroll in college at all in order to avoid debt.

Debt over a certain amount (about $10,000) may depress graduation rates and harm post-college financial security, especially for those in the bottom 75% of the income distribution.

As the student debt threshold level increases so too does the dropout level, particularly for poor and minority students.

Higher student loan debt in the first year of college may be associated with lower probabilities of graduating from college among low-income and black students.

Studies suggest that a $1,000 increase in student debt is associated with a 3% increase in students dropping out of college.

Student debt is an ineffective tool with which to tackle the U.S.’ greatest educational challenge: helping students prepare to succeed academically in college. Unlike college savings programs, the prospect of costly student debt does not motivate students to prepare for college.

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In this study, the authors use the Survey of Consumer Finances to determine whether student loans are associated with household net worth. They find that median 2009 net worth ($117,700) for households with no outstanding student loan debt is nearly three times higher than for households with outstanding student loan debt ($42,800). Further, multivariate statistics indicate that households with outstanding student loan debt and a median 2007 net worth of $128,828 incur a loss of about 54 percent of net worth in 2009 compared with households with similar net worth levels but no student loan debt over the same period. The main policy implication of this study is that outstanding student debt may jeopardize the short-run financial health of households. However, this topic is complex and more research is needed before suggesting policy prescriptions.

The financial aid system for low-income students mostly revolves around extending availability of student debt, while higher-income students benefit from asset-based investments, largely administered through the tax code. The result of this divide is seen in poorer educational outcomes for disadvantaged students and an erosion of the equalizing effects of higher education. Policy changes—in higher education and financing, taxation and public assistance, financial aid, and asset accumulation—can reset these respective paths, bringing greater equity and improved educational outcomes, particularly for currently-disadvantaged students.

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The purpose of higher education is, in large part, to position students for later economic success. While those with college degrees command higher lifetime salaries than less-educated Americans, there is reason to worry that beginning adulthood burdened with significant loan balances may compromise household economic security by tilting balance sheets decidedly toward liabilities.

About 18 percent of households in our sample have outstanding student debt. The average family in 2007 had about $26,018 in student debt, and this outstanding student debt can have a negative effect on household net worth. Specifically, median 2009 net worth for a household with no outstanding student debt is nearly three times higher than for a household with outstanding student debt.

The recession seemed to hit households with student debt harder than those without such liabilities. The change in net worth between 2007 and 2009 represents a higher percentage of total 2009 net worth for households with outstanding student debt than it does for households with no outstanding student debt.

A hypothetical household with exactly median 2007 net worth ($128,828) with outstanding student loans is associated with a loss of about 54% in 2009 net worth compared with a household with similar net worth but no student debt.

The increasing student debt burden on households may not be equally shared at different wealth levels. While households at the 15th percentile of net worth with outstanding student debt lost less net worth than similar households at the 50th percentile from 2007 to 2009, the loss for households at the 15th percentile represents 285% of their 2009 net worth but only 54% for households at the 50th percentile.

College graduation is not adequate protection against this loss of net worth. Living in a household with a four-year college graduate with outstanding student debt is associated with a net worth loss of $185,995.90 (about 63% less) compared with living in a household with a four-year college graduate with no outstanding debt.

Others have found that an average student debt burden for a dual-headed household with bachelors’ degrees from four-year universities leads to a lifetime wealth loss of nearly $208,000.1 Over time, then, students with outstanding student debt make up some of the wealth loss, likely through leveraging their increased human capital into earnings potential. However, it appears that they still end up far behind their peers without student debt.

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Today: Two Paths To Higher Ed Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

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Today: Two Paths To Higher Ed Reports

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation

Higher education plays a critical role in the U.S. economy, creating a ladder of economic opportunity for American children, especially for those in poverty. However, despite our collective belief in an American dream of equitable opportunities for all, higher education today increasingly reinforces patterns of relative privilege, particularly as students rely more and more on student loans to finance college access. As borrowing reduces the return on a college degree—by failing to support strong educational attainment and by compromising post-graduation financial security— the inequity of our financial aid system is laid bare. By investing in student borrowing to the exclusion of asset-based approaches with the potential to deliver superior outcomes, we jeopardize the legitimacy of the American dream.

Reimagining financial aid to include asset accumulation for those currently disadvantaged has the potential to meet one of our most critical challenges: equipping enough students to succeed in college education to power future societal economic prosperity, at a cost individual students and our collective economy can afford. This report challenges current assumptions about the innocent nature of student loans and proposes asset-based complements that could transform higher education into an institution of equitable opportunity and a foundation of a revitalized America.

Related items: Briefs

Student Loan Debt Threatens Household Balance Sheets Status Quo: Divergent Financial Aid Systems Yield Disparate Outcomes High-Dollar Student Debt May Compromise Educational Outcomes Before College: Building Expectations and Facilitating Achievement Executive Summary

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Infographics

Today: Two Paths To Higher Ed Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation

According to Shapiro, the American Dream “is the promise that those who work equally hard will reap roughly equal rewards” (Shapiro, 2004, p. 87); that is, the American Dream holds that this country is a meritocracy where effort and ability are the primary determinants of success. 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.

Related items: Briefs

Student Loan Debt Threatens Household Balance Sheets Status Quo: Divergent Financial Aid Systems Yield Disparate Outcomes High-Dollar Student Debt May Compromise Educational Outcomes Before College: Building Expectations and Facilitating Achievement Executive Summary

Student Loans are Widening The Wealth Gap: Time to Focus on Equity Infographics

Today: Two Paths To Higher Ed Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation

Higher education plays a critical role in the U.S. economy, creating a ladder of economic opportunity for American children, especially for those in poverty. However, despite our collective belief in an American dream of equitable opportunities for all, higher education today increasingly reinforces patterns of relative privilege, particularly as students rely more and more on student loans to finance college access. As borrowing reduces the return on a college degree— by failing to support strong educational attainment and by compromising post-graduation financial security—the inequity of our financial aid system is laid bare. By supporting and investing in asset-based savings approaches for all U.S. children, we have the potential to deliver superior outcomes and strengthen the American dream.

Related items: Briefs

Student Loan Debt Threatens Household Balance Sheets Status Quo: Divergent Financial Aid Systems Yield Disparate Outcomes High-Dollar Student Debt May Compromise Educational Outcomes Before College: Building Expectations and Facilitating Achievement Executive Summary

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Infographics

Student Loan Debt: Consequences Tomorrow . . . And For Years to Come Reports

Student Loans are Widening The Wealth Gap: Time to Focus on Equity The Student Loan Problem in America: It is Not Enough to Say, “Students Will Eventually Recover” Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation

Changes in financial aid policies raise questions about students being asked to pay too much for college and whether parents’ college savings for their children helps reduce the burden on students to pay for college. Using trivariate probit analysis with predicted probabilities, in this exploratory study we find recent changes in the financial aid system place a higher responsibility on African American, Latino/Hispanic, and moderate-income students to pay for college themselves. We also find when parents open a savings account, start a state-sponsored savings plan, or open a college investment fund students are less likely to pay for college with student contributions. Therefore, we suggest in addition to grants and scholarships, policies that encourage accumulation of savings for college among minority and lower income families may help reduce the college cost burden they experience.