Report: Changing student loan system can make education 'great equalizer'


LAWRENCE — When it comes to student loans in the United States, we’re not getting our money’s worth. That is the conclusion of two University of Kansas scholars who have authored a report calling for gradually replacing the current system of paying for higher education primarily through student loans with an asset-based approach capable of restoring the education path as the "great equalizer" in society it is truly meant to be.

William Elliott III, associate professor of social welfare and director of KU’s Assets and Education Initiative (AEDI), and Melinda Lewis, associate professor of practice and AEDI policy director, authored “We Can Do Better Than This: Asking More of Our Student Loan Program than just ‘Students Eventually Recover.’” The report, available online, outlines problems with the current student loan system and calls for a gradual transition to a system in which asset transfers and family savings, held in Children’s Savings Accounts, are an essential tool which people pay for higher education. As the evidence compiled in the report makes clear, there is increasing reason to believe that even small amounts of debt can be crushing for some students, preventing some from getting a college education while delaying even college graduates’ savings and financial achievements.

“It’s a heavily financed system with a purpose to create equity in education,” Elliott said of student loans. “We should hold it to that standard, then, instead of simply contenting ourselves with ensuring that student loans do not irreparably harm people or clinging to student loans because we cannot imagine alternatives. Instead, today, our policy response to the student debt ‘crisis’ mostly sends the message that  we’re OK with the system only harming some people as long as it helps some others.”

There is an ongoing debate among policy makers, scholars and others about how to fix the problems associated with significant student debt. Elliott and Lewis contend that any calls to “tweak” or alter the current system are not solving the problem but simply maintaining a flawed model. Indeed, an overly narrow accounting of student loans’ effects may lead to policy responses that even exacerbate loans’ disequalizing tendencies. For example, some proposals, implicitly recognizing the problems many student borrowers face, have called for extending the period of time students have to repay loans or setting aside 10 percent of an individual’s income to pay for loans.

“That’s not solving the problem it’s only extending it over a longer period of time,” Elliott said. “These types of approaches 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. No better are proposals to reduce loan dependence by channeling low-income students to less expensive types of institutions, a practice that may result in an explicitly ‘two-tiered’ higher education system.”

While acknowledging that student loans may still play a role in the college financing of higher-income students and other select cases, the authors conclude that there is no longer a compelling rationale for significant government stake in perpetuating this system. The American Dream states that through hard work anyone can be successful and economically secure. However, a government-funded system that discourages some from achieving the very education necessary to be economically successful, while saddling even those who graduate from college with debt that constrains saving, investing, buying homes and even getting married is by its very nature a flawed engine of equality.

“We posit that, if the student loan program strengthened the education path as an equalizer in society, upon graduating, two students with similar degrees should be able to achieve similar returns on their credentials, holding all else equal,” Elliott and Lewis wrote. “However, research indicates that student loans may, instead, reduce the return on college.”

The authors call for establishing Child Savings Accounts, or CSAs, as a prime alternative to dependence on borrowing. They cite several examples of programs across the United States in which accounts are established for children at birth. Properly designed, such accounts have the potential to help reduce debt upon graduation, but also to improve student outcomes even long before college, as found in previous research. Students with savings are more likely than their peers to attend and graduate college than their peers who lack savings. They are better positioned for positive financial outcomes following college, too, with less debt upon graduation and a connection to the financial mainstream. If higher education of some kind is understood as an essential part of progression toward the American Dream, CSAs may be far better-equipped for this journey than the shackles of debt dependence.

The billions of dollars invested in the student loan system annually could go a long way to making CSAs available for all children, the authors contend. And the success of future generations should be more important than the status quo.

“Scratching the surface of the U.S. student loan debate reveals that we allow student debt a sort of grace unparalleled in U.S. policy, continually moving the goalposts as we seek to console ourselves that a financial aid system predicated largely on borrowing can, somehow, work,” Elliott and Lewis write. “U.S. policy should prioritize outcomes over instruments, and we must not allow ourselves to cling to an intervention for sentimental value or because we are afraid of what would follow in the breach. Overheated debate about the ‘next financial crisis’ notwithstanding, evidence reveals real dangers in continuing on our current path with student loans—for individuals, for the macro-economy, and, perhaps most importantly, for our vision of ourselves and the dream that animates us.”

Wed, 09/10/2014

author

Mike Krings

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