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Reducing the Dangers of Debt
Student loans could be a more positive tool in college access efforts

By Robert Shireman

An education expert recently told me that low-income families who won't borrow for college "just don't understand" the concept of investing now for returns in the future. "We need financial literacy, so they can see that the debt is temporary. Over the long run, they'll be far better off with that college degree," he said.

While this is a common refrain from the highly educated, the reality is not so simple. The problem is that taking out a loan for college requires a leap of faith that is not entirely justified. Yes, it is true that a college graduate, on average, earns close to a million dollars more over a lifetime than a high school graduate. But there are two trick words in that sentence. First, you have to graduate from college, a feat that barely half of those who start college currently achieve within six years. Second, the high economic returns to education are an average. Actual salaries of college graduates vary enormously because of career and life choices, skills, geography, fluctuations in the economy, and plain old luck.

While it is in our nation's economic and social interests for more Americans to seek advanced education and training, the incentives and risks faced by individuals are more complicated. Most potential students who see college debt as too risky a gamble are not being short-sighted. They are being careful, a commendable attribute. While they recognize the potential gain is high, they also worry about the cost of failure: Without substantially increased earnings, they may well face repayment burdens that make them worse off than if they had not taken the loans in the first place.

A deep ambivalence
In a recent series of interviews, both students and college officials expressed a deep ambivalence about student loans. Even among financial aid professionals, conflict and confusion are common themes. "It would scare me to death if my daughter were taking out loans," said Mary Gill, former coordinator of financial aid for California's community colleges. "I would hate to see her freedom impinged upon right now. It would wrench my gut."

Despite conventional wisdom, the personal and professional risks of borrowing for college are not limited to low-income college dropouts. Instead, they affect a wide spectrum of American families.

    Some of these personal and professional risks are:
  • Disincentives for service careers. Recent graduates who want to go into teaching, social work, religious service, and other helping professions find that their college debt pushes them in other directions.
  • Delay of marriage, family, and home ownership. Student loan payments make it more difficult for young adults to afford a home mortgage. Borrowers also report that it has delayed their plans for marriage and children.
  • Reduced ability to save for retirement, and for their own children's college education. Increasingly, borrowers are extending student loan repayment across 20 or even 30 years. This reduces their ability to save for their own retirement, and to help pay for their own children's higher education expenses.

As these issues give pause to parents and students with moderate to high incomes, it is no wonder that those with lower incomes are confused and worried about student loans. There is even confusion among policymakers. "One of the problems is that people who are shaping public policy and allocating funds often view loans and grants on the same level as aid," said Bridget Burns, a graduate student at Oregon State University and a student member of Oregon's higher education board. "It doesn't have the same kind of effect at all. Grants actually give people an incentive to go to school, and loans are a disincentive. That's a problem when you're trying to promote access. Loans alone just don't do the job."

The cost of not borrowing
Student loans bridge the financial aid gap for millions of students, helping them to enroll, complete their initial degrees, and in many cases go on to graduate and professional study. When the fear of debt prevents someone from pursuing or fully engaging in education and training, the costs extend well beyond that individual's life prospects. Missed educational opportunities undermine our nation's economic competitiveness and civic health through reduced productivity and innovation and lower levels of family literacy and community engagement.

For lower income students, affordability-perceived and actual-plays a major role in whether, and where, they go to college. It also affects how they approach their studies and, therefore, how likely they are to graduate. If a young adult sees herself as a student, she is more likely to persist. It is much more difficult to maintain that self-image if you are enrolled part-time while working, a pattern that is more common for students of modest means. That is one of the reasons why part-time students have higher dropout rates than full-time students. They have less time to study and are less connected to their fellow students and the formal and informal supports that could help them fulfill their academic potential.

Excessive work is also a factor for full-time students. Working while in school can be a positive contribution to achievement and college completion. However, research has found that if work takes up much more than 15 hours a week, it becomes an impediment to academic success. Still, nearly a third of traditional-age, full-time students work more than 20 hours a week on top of their schooling. The lower your income, the more likely you are to be in this group. And here is the kicker for this group of hard-working full-time students: 60 percent of them did not take out a student loan. In other words, 60 percent could have reduced their work burden with a student loan, but chose not to. Should they be congratulated for their commitment? Or should they be pitied because they are more likely to drop out or to graduate with lower grades than they are capable of?

How many talented students turn away from tough majors like science and engineering because the courses do not leave enough time for the work hours required to pay the bills? Financial aid is certainly not the only factor behind these gaps in the quality and intensity of enrollment between lower- and higher-income students. But it is a contributing factor.

The image we like to have of our system is of the hard-working student from a tough background who leaps far beyond his parents' educational and income levels. But this American dream does not come true as often as it should. Set aside all of the students who drop out of high school, and set aside the high school graduates who are not qualified for college-two factors that disproportionately affect low-income families. There is still a large gap in college participation relative to family income.

Among high school graduates who are from higher-income families and are college-qualified, 83 percent enroll in four-year colleges. But among low-income families, only 52 percent enroll in four-year colleges within two years of graduating high school. When two-year colleges are included, the reality is that almost every college-qualified, high-income high school graduate enrolls within two years, while more than one in five qualified low-income students does not go at all.

A better financial aid system
Our nation's progress and economic competitiveness require a more educated populace than we have today. The current federal financial aid system is not designed in a way that will move us forward in enrolling more students in college and helping them to earn their degrees. To make substantial progress, Congress could take two steps: Reduce the dangers associated with student loans, and provide incentives for colleges to enroll and graduate lower-income students.

The first step, making student loans less dangerous, is not difficult to achieve. Both Australia and England have built protections into their financial aid systems, so that borrowers do not face repayment burdens that are excessive given their incomes. This could be implemented in the United States through our income tax system. Indeed, student loan and other college enrollment information is already shared with the Internal Revenue Service because of the existing array of tuition tax credits and a student loan interest deduction. Augmenting or adjusting this system to better assist people with student loans would go a long way to relieving the fears faced by potential students, and the real problems faced by borrowers.

The second step involves creating a more thoughtful and productive connection between federal and state postsecondary policies. While federal policy has long been focused on access for low-income students, states and colleges have become increasingly focused on getting high-income, high-achieving students to attend one institution or another, or to remain in-state. For the country, these bidding wars are unproductive; they spend precious resources in ways that leave us with the same net number of students in college.

To address this problem, the federal government should provide states and postsecondary institutions with matching funds based on the number of low-income students (perhaps measured by Pell Grant enrollment), and the number who earn a degree. The funding should not be based on enrollment or graduation rates. That approach would create incentives for excluding some students from higher education. Funding based on low-income college participation and degree completion-and tied to each individual student-would create all the right incentives:

  • States and colleges would have a financial motivation for reaching out to low-income communities for potential students, telling them how to prepare for college, and giving them advice on paying for it. The more successful the efforts, the more funding the schools and the state qualify for.
  • If Pell Grant eligibility is used as the measure of low-income enrollment, institutions would have a stronger incentive to ensure that families have assistance in applying for financial aid. This is particularly important at community colleges, where many students do not know about or fail to apply for the help they are entitled to.
  • Colleges would have reason to more closely monitor the retention and completion of students from low-income backgrounds, providing them with more aggressive support and assistance.
  • States that improve pre-college academic achievement would benefit from the increased federal funds that come from higher college-going and completion numbers.

The most important outcome is the incentive and signaling effect of tying the funding formula to the enrollment and retention of low-income students. What gets measured, gets done. While the federal funds could be designated for financial aid, it might be best to allow for considerable flexibility so that the laboratory of state policy is able to operate at maximum efficiency.

These two policy shifts are the most important steps that Congress could take to improve college access and success and reduce the fears and burdens of student debt. They would lead to increased enrollment, more intensive participation, higher levels of retention, and, ultimately, more adults with advanced education and training.

Robert Shireman is the executive director of The Institute for College Access and Success:, and a visiting scholar at the UC Berkeley Center for Studies in Higher Education.

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National CrossTalk Summer 2005



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