Student Loans Buy a Degree, but at What Cost?

Student Loans Buy a Degree, but at What Cost?

Editor's note: This is the first post in a three-part series from The Ladder, the blog of the New America Foundation's Asset Building Program. The other two entries are available here and here.

Student loans are largely understood as an investment in expanding access to higher education. From this perspective, the costs of student loans are almost always worth it, if they result in a college degree. However, new research is emerging to suggest that, at the high levels at which students are forced to borrow to keep up with rapid increases in college costs, loans may work at cross-purposes by accelerating the growth of educational inequality.

For some, the prospect of high-dollar debt may discourage enrollment. For others, even those who make it to college, debt over a certain amount may depress graduation rates and harm post-college financial security. Importantly, these adverse loan effects may kick in far below the astronomical sums often touted by the media as extreme examples of loan excess. Instead of the admittedly unusual case of debt climbing above $100,000, 'high-dollar debt' may compromise outcomes at more like $10,000, or maybe even less. For example, the Education Resources Institute and the Institute for Higher Education Policy find that a $1,000 increase in student loan amount is associated with a 3% increase in students dropping out of college.

A new report by the Assets and Education Initiative (AEDI) at the University of Kansas, suggests that, without complementary asset-based financial aid to cushion students from high-dollar borrowing, student loans may be ineffective tools with which to tackle the U.S.' greatest educational challenge: helping enough students achieve academic success.

While college students are taking on more aggregate debt, the debt burden is not equally shared. Low-income students occupy each extreme of the negative consequences of debt. Due to high levels of debt-aversion, they are most likely to encounter the sticker shock that terminates their academic careers after high school. And, among those students who do persist, they are also most likely to take on debilitating levels of debt to finance their degree. Therefore, student loans may be a more effective strategy for middle- and high-income students who are less sensitive to price when weighing their educational options and have other resources to draw on so that they need to borrow at a much more moderate rate.

Students who use loans to attend and graduate from college are undoubtedly better-positioned for economic security than those who do not go to college. The right question to ask, then, is whether these students realize the same benefit as those who do not have to borrow heavily to attain a degree. There, the answer seems to be no. Developing options to financing college that mitigate the existing consequences of high level debt are critical to interrupting the prevailing forces that keep low-income students on the margins of academic and economic success.

Melinda Lewis is policy director of the Assets and Education Initiative at the University of Kansas.

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