image by Quinn Dombrowski (University of Chicago)

As Chicago Proves, Student Debt Isn’t Necessarily Good Debt

Nearly one million people in Illinois’ most populous county are one crisis away from financial ruin

What It's Worth

On June 7, the Federal Reserve Banks of Chicago and San Francisco, CFED and Citi Foundation convened 120 civil rights, youth empowerment and community economic development leaders in Chicago to discuss a new book, What It’s Worth: Strengthening the Financial Future of Communities, Families and the Nation. The book, which highlights the numerous factors that coalesce to predict financial health and well-being, was designed to be a starting point for communities to come together to probe solutions to the biggest challenges they face.

The event in Chicago was the perfect example of such a discussion. At a time when Chicagoans face some of the most significant social problems they’ve seen in decades, several community-based organizations are engineering promising solutions that are ripe for scale. Meanwhile, opportunities to develop new solutions abound, and if we are to overcome some of these most pressing challenges, the public, private, nonprofit and philanthropic sectors must come together and leverage the many ways in which large-scale systems intersect, including housing, transportation, education and more.

To understand the significance of this moment for the City of Chicago, consider Cook County’s liquid asset poverty rate, which measures how many people have sufficient savings to subsist at the poverty level for just three months in the event that a household’s primary source of income is disrupted. As CFED’s Assets & Opportunity Local Data Center reveals, in 2015, nearly half (43.3%) of Cook County households were liquid asset poor, meaning that they could not weather an unexpected illness, job loss or other financial storm. In other words, nearly one million people in Illinois’ most populous county are one crisis away from financial ruin.

Nearly one million people in Illinois’ most populous county are one crisis away from financial ruin.

“But Student Loan Debt is Good Debt”: Maybe Not in Cook County

To put this problem in perspective, consider just one of the many topics that generated buzz among participants at the June 7 event: student loan debt. As Leslie McGranahan, Senior Economist and Research Advisor at the Federal Reserve Bank of Chicago noted, Cook County households now have less total debt and more savings than they did before the Great Recession. In part, these data can be explained by factors such as young homebuyers’ conservatism when it comes to taking out mortgages, as well as Chicagoans’ general recognition of so-called “bad debt,” such as credit card or auto loan debt.

Despite these signs of progress, McGranahan noted that student loan debt, traditionally thought of as “good debt,” continues to increase across all Chicago ZIP codes. Without sufficient savings, enrolling in and completing a college degree program is a significant uphill battle, especially given rising tuition costs. But higher education is increasingly seen as a ticket to the middle class, helping to explain why in Cook County, student loans are the single largest source of non-housing related debt. For 80% of Cook County residents and 95% of Chicagoans, student loan debt now exceeds credit card and auto loan debt. The majority of the amount of this debt is owned by individuals with professional and graduate school degrees, which likely increased their earning power. More troubling, however, is that the majority of debt holders did not graduate with an Associate’s or professional degree, nor did they finish a training program. The result? These former students remain low-income wage earners with a slim chance of paying down their student debt.

For 80% of Cook County residents and 95% of Chicagoans, student loan debt now exceeds credit card and auto loan debt.

For the one million Cook County households living in liquid asset poverty, matriculating into a degree or trade program a risky proposition, especially because, as Sarah Bloom Raskin notes in her essay, many households are taking on more debt to pay for education. “On average,” Bloom Raskin found, “70 percent of students graduating from public and private nonprofit colleges had student loan debt.” Students who leave school without a degree are four times more likely than graduates to default on their student loans and catapult into other financial problems. Alex Costakis, Development Manager at the Center for Economic Progress, illustrated this risk by pointing out how these same students, feeling saddled by their debt, become reluctant or unable to purchase other assets, such as buying a home or starting a business. Without these assets, the chance to build equity and invest in their future is off the table.

Changing the Equation to Support Vulnerable Populations through Postsecondary Education

While the gravity of the student debt crisis facing Chicagoans was palpable at the What It’s Worth event, the conversation wasn’t all doom and gloom. Rather, experts at the event recognized that completing a diploma or certificate program is as much about the financial stability of the student and their family as it is about their ability to complete academic assignments. In other words, if we can boost the financial capability of vulnerable Cook County households, we can reverse the trends that McGranahan and others discussed at the event.

Here are just a few of the model solutions for building financial well-being in Chicago that surfaced at the convening:

  • Incentivize students to apply for grants and utilize tax credits. Illinois’ Danville Area Community College incentivizes students to participate in the Federal Application for Federal Student Aid (FAFSA) program by offering enrollment fairs with free tuition giveaways. Nearly 90% of students participate. Once “in the system,” these students can take advantage of a centralized scholarship database to make it easier to access more than 70 scholarship opportunities. In addition, programs like those at Center for Economic Progress help students ensure they correctly claim the American Opportunity Credit, Earned Income Tax Credit and Tuition Tax Deductions through their free community-based tax preparation sites.
  • Make community college free. Not all job opportunities require a four-year degree, and sometimes, an Associate’s degree opens the door to more advanced degree programs that would otherwise be out of reach. New legislation in more than a dozen states and communities would waive community college and trade school tuition. In her chapter, “A Lifecycle Approach to Putting Higher Education within Reach” Martha Kanter summarizes several innovative programs to support low-income students, including Chicago Star Scholarships. This offer provides matriculating students in City Colleges to students with meeting high school testing and GPA requirements.
  • Use IDAs for education expenses. Assets for Independence (AFI), a federally-funded national program, provides up to $4,000 in college or technical school tuition funds to students who create a financial goal, save at least $500 and participate in financial education through an Individual Development Account (IDA) program. When combined with Pell grants, this support can make it possible to complete a degree or certificate program. More community-oriented organizations and agencies in Illinois should take advantage of this funding. And, because funding for this inexpensive but valuable program is facing elimination by the U.S. Senate, take action today to tell Congress not to gut this critical program.

We will continue to share highlights from What It’s Worth and the many discussions the book is making possible in communities across the country. Sign up for updates and follow What It’s Worth on Twitter at @StrongFinFuture.

by Lee Davenport and Sean Luechtefeld, CFED

Sign up to receive a free copy of the book at For regular updates, follow @StrongFinFuture.

[1] Matthew Reed and Debbie Cochrane, “Student Debt and the Class of 2013” (Washington, DC and Oakland, CA: Institute for College Access and Success, November 2014).

What It’s Worth

Let’s strengthen the financial future of families, communities and the nation

What It's Worth

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What It’s Worth

Let’s strengthen the financial future of families, communities and the nation