Researchers show excessive student loan debt causes young people to fall behind in saving, investing for future

Thu, 10/31/2013

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LAWRENCE — The American Dream has always held that if one works hard he or she can be successful and attain sufficient wealth to live a financially comfortable life. Higher education has always been understood to be a crucial link in the chain between effort and attainment. Increasingly, however, college is elusive for many striving low-income youth, calling into question the role of higher education as a ladder of economic mobility. Professors from the University of Kansas’ School of Social Welfare have authored a report arguing that excessive student loan debt is standing in the way of many college graduates’ ability to achieve the American dream.

William Elliott III, associate professor and director of the Assets and Education Initiative in KU’s School of Social Welfare, and Melinda Lewis, associate professor of the practice, have authored “Student Loans are Widening the Wealth Gap: Time to Focus on Equity.” The report states that evidence shows that young people who graduate with a four-year degree and student loan debt suffer short-term losses in accumulating assets. Whether it is because students are saddled with large debt payments, credit constraints or if it is being loan averse, they are unable to save for retirement, accumulate capital such as real estate and business, invest in stocks and other financial products and save as much as their counterparts who graduate without loans.

However, given the long-term advantage for college graduates, as compared to those who do not complete higher education, some of the most concerning effects of student loans may be related to potential effects on the number of people, particularly those from disadvantaged backgrounds, who seek higher education in the first place.

“Student loans, as they are designed now, are based on future earnings, and they’re designed for the point of enrollment,” Lewis said. “While student loans are conceived as ‘just-in-time’ financial aid, though, there is evidence that they may start working in subtle and negative ways to suppress college enrollment by raising the specter of unattainable college costs.”

The United States is in a period of stagnant enrollment in higher education. With fewer young people enrolling in college and persisting to graduation, fewer are earning degrees, which can lead to even less asset accumulation than their peers who complete a four-year degree program.

“Our findings show that education still matters,” Elliott said. “When you compare those with and without student loans to those without a degree, they still have more assets. What we want to emphasize is that, in considering whether the United States has the financial aid system we need and deserve, the correct question is not whether those who go to college are better off than those who don’t. It’s whether those who have to borrow to pay for college are realizing the same return on their educational investment as those who finance their studies with a store of assets.”

The evidence analyzed by Elliott underscores that those who don’t need to rely on loans to finance an education are gaining an advantage over their peers. Young people working in the same jobs for the same wages are forced to devote a share of their income to paying off the loans when they could be saving, which Americans tend to do at low rates, and accumulating other financial assets. That leads to inequality in which the same amount of work does not amount to the same level of benefit for all, Elliott and Lewis argue. As a result, young people in their prime earning years are losing out on the chance to save, invest and acquire equity. Often by the time they have debts paid off and can save, their lifetime earnings have flattened out.

“By not investing, or being able to save early on, in the short term there is clearly asset loss,” Elliott said.

To address the inequality, Elliott and Lewis call not for an end to the student loan model, but a rethinking of how money for higher education is spent. Student loans are a valuable tool for facilitating access to college, but Americans are much too dependent upon them, they argue. Evidence shows that grants are a better predictor of college completion rates and that loans can be most effective when combined with grants and savings.

Research from the Assets and Education Institute also has shown that saving from an early age, even when done in small amounts, is incredibly effective at helping students — including those from low-income families — reach and complete college. Spending for student loans increases by millions of dollars each year. If that increase were instead used to fund programs such as early childhood savings accounts, change could be made without increasing spending, Elliott said. Many cities and states across the nation are beginning programs in which children are given savings accounts at birth with a small amount of start up money. The accounts, intended for use in paying for education are proving effective at helping kids reach college, even if they don’t pay for the entire cost of education.

The Assets and Education Initiative is releasing its report in conjunction with an article by Elliott and Ilsung Nam, professor at the Reformed Technological Seminary in Seoul, South Korea, in the Federal Reserve in St. Louis’ journal the Review. The article is called “Is student debt jeopardizing the short-term financial health of U.S. Households?" An earlier version was presented in February. 

Elliott will participate in “Generation Debt: The Promise, Perils and Future of Student Loans” on Nov. 18 at the Federal Reserve in St. Louis. He also will discuss the research at KU’s “Is There an American Dream For You? How Institutional Failure Perpetuates Poverty,” Nov. 7 on the KU Lawrence campus and on Nov. 23 in Washington, D.C., at the American Studies Association conference “Beyond the Logic of Debt, Toward an Ethics of Collective Dissent.”

“The United States, and especially future generations of college students, deserve a financial aid system better suited to their needs,” Lewis said. “Supporting student savings is a powerful and also politically viable way to transition from debt-dependence to asset empowerment. As opposed to expanding grants, which can be viewed as a handout, if we could help increase savings we could improve college outcomes and help young people build a stronger financial future. There is momentum in Children’s Savings Account development in communities around the country. And there are ways to leverage existing financial aid dollars to better support asset building and educational achievement, such as including a savings component within the Pell Grant program. We’ve found that low-income families can and do save, so it’s time for a national conversation about taking those approaches to scale.”



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