By Bahar Akman Imboden
There is increased evidence that student loans perpetuate, if not aggravate, existing inequalities.[i] Studies show that debt is disproportionately burdening low- and middle-income households,[ii] blacks,[iii] Latinos,[iv] and women.[v] Research also indicates that individuals with student debt are more likely than their debt-free counterparts to report financial difficulties.[vi] While current literature on the effect of student loans on degree attainment has yielded mixed research findings,[vii] the suggestion that a negative impact is possible is, in itself, troubling.
In truth, we have increasingly relied on student and parent loans to finance higher education because it has proven to be a politically viable bipartisan solution to increasing access of diverse populations to higher education. However, other than access, can we vouch with confidence that loans are doing more good than harm for the majority of students who use them?
The recent Brookings study projects that 40 percent of borrowers are at risk of defaulting on their student loans by 2023.[viii] Even if on average a student is better off with loans, are we ready to leave about half of the borrowers struggling to repay even a small loan of $5,000 to 10,000?
To make matters worse, the loan system has created perverse incentives for many actors operating in the higher education space:
➢ There are no incentives for states to increase their appropriations for higher education or for colleges to decrease their tuitions. Both actors are confident that students and their parents will have easy access to loans to cover increases.[ix] The relationship between tuition increases and access to loans has become a chicken and an egg problem.
➢ Several predatory for-profit schools have based their business models on the availability of these loans with little commitment to providing quality education. This resulted in considerable amount of debt for many who hold worthless degrees (or no degree) and are unable to repay. [x]
➢ Students have bought into this culture of borrowing for college in pursuit of the American Dream, which have desensitized them to price and mislead them to think that high tuitions and expensive amenities mean quality education and prestige.[xi]
➢ Loan servicers are given no incentives to properly advise borrowers about repayment plan options as they profit more from leaving them in expensive plans.[xii]
➢ Fraudulent debt relief companies have preyed on struggling borrowers with promises of reduced or forgiven debt.[xiii]
➢ Private lenders have thrived within this culture of borrowing: unable to fully cover increasing tuitions with federal loans, students have increasingly become dependent on high interest private loans to complete their degrees.[xiv]
At Hildreth Institute, we believe that student loans are not the right financial aid tool. Our heavy dependence on loans to finance college has resulted in many unintended but detrimental results, which is threatening the financial stability of our youth, their families, our colleges, and the economy.
Our goal is #ZeroDebt!
We demand #ZeroDebt for current debtors and for future college goers.
We have identified a set of actionable policies that will help lower the current and future debt. We seek to enlist the support and collaboration of four main actors: higher education institutions, States and the federal government, employers, and nonprofit organizations so that we can gradually wean ourselves from loans.
We believe that together, we can achieve #ZeroDebt.
Stay tuned for our upcoming white papers series highlighting the policies we are proposing.
[i] Jason N. Houle and Cody Warner, (2017), “Into the Red and Back to the Nest? Student Debt, College Completion, and Returning to the Parental Home among Young Adults”, Sociology of Education, Vol. 90(1) 89–108
[ii] Michal Grinstein-Weiss, Dana C. Perantie, Samuel H. Taylor, Shenyang Guo, and Ramesh Raghavan (2016), “Racial disparities in education debt burden among low- and moderate-income households,” Children and Youth Services Review 65: 166–174.
[iii] Kim, Jinhee; Chatterjee, Swarn; Young, J.; Moon, U. J., (2017), “The Cost of Access: Racial Disparities in Student Loan Burdens of Young Adults”, College Student Journal, Vol.51, N.1, pp. 99–114; Sara Goldrick-Rab, Robert Kelchen, and Jason Houle (2014), “The Color of Student Debt: Implications of Federal Loan Program Reforms for Black Students and Historically, Black Colleges and Universities,” Wisconsin Hope Lab Discussion Paper, Madison, WI; Fenaba R. Addo, Jason N. Houle, and Daniel Simon (2016), “Young, Black, and (Still) in the Red: Parental Wealth, Race, and Student Loan Debt,” Race and Social Problems, 8(1), 64–76; Danielle Douglas-Gabriel (2016),” Public-interest groups are calling on Education Dept. to track racial disparities in student lending,” Washington Post, https://www.washingtonpost.com/news/grade-point/wp/2016/09/15/public-interest-groups-calling-on-education-department-to-track-racial-disparities-in-student-lending/; Judith Scott-Clayton and Jing Li (2016), “Black-white disparity in student loan debt more than triples after graduation,” Evidence Speaks Reports, Vol 2, #3, Washington, DC: Brookings Institution.
[iv] Marshall Steinbaum & Kavya Vaghul (2016), “How the student debt crisis affects African Americans and Latinos,” Washington, DC: Washington Center for Equitable Growth; Mark Huelsman (2015), “The Debt Divide: The Racial and Class Bias Behind the “New Normal” of Student Borrowing,” Washington, DC: Demos;
[v] The American Association of University Women (2017), “Deeper in Debt: Women and Student Loans,” Washington, DC: AAUW
[vi] Mathieu R. Despard, Samuel H. Taylor, Dana C. Perantie, and Michal Grinstein-Weiss, (2016), “The Burden of Student Debt: Findings from a Survey of Low- and Moderate-Income Households”, (CSD Research Brief №16–15). St. Louis, MO: Washington University, Center for Social Development. Anthony Cilluffo, (2017), “5 facts about student loans, Washington, DC: Pew Research Center: http://www.pewresearch.org/fact-tank/2017/08/24/5-facts-about-student-loans/
[vii] Positive effect on degree attainment: Brandon Jackson, & John Reynolds, (2013), “The price of opportunity: Race, student loan debt, and college achievement”. Sociological Inquiry, 83(3), 335–368; Min Zhan and Xiaoling Xiang, (2013) “An Event History Analysis of Educational Loans and College Graduation: A Focus on Differences by Race and Ethnicity” (CSD Working papers, №13–35). St. Louis, MO: Washington University, Center for Social Development. Negative effect on degree attainment: Rachel E. Dwyer, Laura McCloud, and Randy Hodson, (2012). “Debt and graduation from American universities” Social Forces, 90(4), 1133–1155; Dongbin Kim (2007), “The effect of loans on Students’ degree attainment: Differences by student and institutional characteristics”. Harvard Educational Review, 77(1), 64–100.
[viii] Judith Scott-Clayton, (2018), “The looming student loan default crisis is worse than we thought”, Evidence Speaks Reports, Vol 2, #34, Washington, DC: Brookings Institution.
[ix] David O. Lucca, Taylor Nadauld, and Karen Shen, (2015), “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs”, Federal Reserve Bank of New York Staff Reports, no. 733; Grey Gordon and Aaron Hedlund, (2016), “Accounting for the Rise in College Tuition”, NBER Working Paper №21967, Cambridge, MA: National Bureau of Economic Research.
[x] Stephanie Riegg Cellini and Rajeev Darolia, (2016), “Different degrees of debt: Student borrowing in the for-profit, nonprofit, and public sectors”, Washington, DC: Brown Center for Education, the Brookings Institution; James Surowiecki, (2015), “The Rise and Fall of For-Profit Schools”, The New Yorker November 2 Issue — https://www.newyorker.com/magazine/2015/11/02/the-rise-and-fall-of-for-profit-schools; Stephanie Riegg Cellini, Claudia Goldin, (2014), “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” The American Economic Journal: Economic Policy V.6 :174–206
[xi] Alexander Monge-Naranjo, (2014) “Recent Trends in Student Loans: More Loans and Higher Balances” Federal Reserve Bank of St Louis. https://research.stlouisfed.org/publications/economic-synopses/2014/05/16/recent-trends-in-student-loans-more-loans-and-higher-balances/
[xii] The Consumer Financial Protection Bureau (2017), “CFPB Report Finds That 9 in 10 of the Highest-Risk Student Loan Borrowers Were Not Enrolled in Affordable Repayment Plans”: https://www.consumerfinance.gov/about-us/newsroom/cfpb-report-finds-9-10-highest-risk-student-loan-borrowers-were-not-enrolled-affordable-repayment-plans/
[xiii] The Consumer Financial Protection Bureau (2016), “CFPB Halts Student Loan Debt Relief Scam,” https://www.consumerfinance.gov/about-us/newsroom/cfpb-halts-student-loan-debt-relief-scam/ ; Katie Lobosco, “Beware of student debt relief scams”, CNNMoney: http://money.cnn.com/2017/10/13/pf/college/student-debt-relief-scams-ftc/index.html
[xiv] An estimated of 1.4 million students a year use private student loan debt to bridge the gap between the cost of college and their financial aid and savings. See: Jessica Dickler, (2017), “Student loan interest rates edge higher and higher” CNBC — https://www.cnbc.com/2017/07/18/student-loan-interest-rates-edge-higher-and-higher.html; College Board, (2017), “Total Federal and Nonfederal Loans over Time” — https://trends.collegeboard.org/student-aid/figures-tables/total-federal-and-nonfederal-loans-over-time