The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-being and Erodes the American Dream

Written By: William Elliott III and Melinda K. Lewis, Joyce Serido, MBA and Lori Hendrickson, M.Ed., CFCS, AFC®, Ph.D.

If higher education is a pathway to the American Dream (i.e., financial security and economic mobility), does student loan debt block that pathway? This book offers an interesting perspective on the correlation between the current student loan program and the long-term impact of student loan debt. Rather than a discussion of a “student loan crisis,” the authors’ explore ways that the student loan program fails to serve students
and undermines economic prosperity.

The book is divided into three sections. In the first section, the evolution of the current student loan program from a needs-based to a merit-based program is described. It provides a theoretical and empirical basis that the current program is pushing the American Dream out of reach for too many people. In the second section, the
authors make the case for a shift away from a debt-dependent to an asset-powered approach to financial security and economic mobility. An analysis of the long-term impact of student loan debt and commentary on ways to move forward is provided in the third section of the book.

An underlying premise of the book is that the current debt-dependent approach to higher education undermines the link between higher education and adult financial security. To illustrate this point: one of the authors borrowed to finance his education (debt-dependent) and continues to struggle to achieve financial security, and the other whose family provided the financial safety net (asset-powered) to pay for college launched a financially stable adult life while instilling financial planning and saving lessons. The authors also discuss the long-term financial implications of each pathway, acknowledging neither path is easy.

The authors discuss the financial aid system within the context of the American societal values. Their long-held belief is that with effort and ability, anyone can achieve upward economic mobility. In our current economy, students are not receiving the expected returns of their efforts. Rather than holding aspirations for the future, many are struggling to achieve financial security. Instead of being an economic equalizer, the current system contributes to these opposing trajectories: asset-powered and debt-dependent. The authors point out that even when two students earn the same degree at the same institution, the value of that degree depends upon how they paid for that education (i.e., debt-dependent or asset-powered).

A history of student financial aid illustrates a change from the needs-based approach of the 1960s to the merit-based approach of the 1980s. The unintended consequence of the shift is that the merit-based approach perpetuates income inequalities instead of leveling the field. The debate over student loan debt, as either an impending crisis (the next housing bubble) or a short-term inconvenience, misses the big point: student loan debt delays or derails financial security for many individuals.

“What is the role of higher education”? Is it a commodity where students pay for its purchase, or is it a pathway to economic mobility and well-being?

The authors advise caution in moving forward with financial aid “reforms” offered to date (e.g., provide more information; income-based repayment; pay-it-forward ) because there is a fundamental misalignment between proposed reforms and higher education as a catalyst for economic mobility.

In examining the evolution of the financial aid system in tandem with poverty in America, the authors lay out a case for an asset-based approach to financing education. The authors offer a thorough explanation and review of research on Child Saving Accounts (CSAs), an asset-powered alternative to debt-dependent educational financing. They argue that establishing a CSA early in life would both promote a “college saver” personal identity and provide more time for the asset to grow in value.

While there is some empirical data linking CSA ownership with individual social-emotional well-being and well-established links between social-emotional well-being and academic achievement, the authors concede that there is no empirical data
at this point linking CSA ownership and academic achievement. Although promising, CSAs and other asset building approaches require major policy changes to replace the current debt-dependent approach.

This is a well-researched and well- documented examination of a significant social and economic problem. It challenges us to ask ourselves, “What is the role of higher education”? Is it a commodity where students pay for its purchase, or is it a pathway to economic mobility and well-being? These are not easy questions to answer.

The authors make a convincing case regarding the need for an alternative to debt-dependent financial aid and for a “rethinking” of the system instead of “tinkering” with the current system. Yet, such a major shift will take some time. How do we guide students and families making decisions about higher education now? Perhaps that is a question for a different book. This one certainly exposes a gap that needs to be addressed.