Relieving Student Debt Should Trump Merit Scholarships

In an interview last year, Dalton Conley, director of NYU’s Center for Advanced Social Science Research, compared two hypothetical kids — one from a family with some money and the other from poor parents. Both are born with the same level of intelligence, both are ambitious and both work hard in school. In a meritocracy, the two would enjoy the same opportunity to get ahead. But the fact that one might graduate from college free and clear while the other is burdened with $50,000 in debt makes a huge difference in terms of their long-term earnings prospects.– From Alternet.com, “The American Dream is Alive and Well … in Finland!” By Joshua Holland, posted on December 11, 2007

Student loan debt matters. Conventional financial wisdom holds that student loan debt is one of only a few instances of “good debt.” Like a mortgage, the student loan represents and investment that is likely to pay off in the long run. But sometimes college debt can be too much of a good thing.

If Joshua Holland is correct in his assertion that heavy student debt can have a long-term impact on graduates’ earning power, then one of the best investments a college can make is to channel its scholarship funds into debt relief. Several colleges and universities have already taken this approach, supplanting what would traditionally have been the loan portion of their high-need students’ financial aid packages with additional grants. Some colleges have even extended this loan relief to a portion of its middle-class enrollees.

For colleges this makes good sense. For one thing, it removes financial strife as a possible retention issue. In addition, in boosting the potential earning power of graduates– by removing the debt burden — the college is investing in its own long-term future, as alumni with higher earning power are more likely to support their institutions financially in the future.

For HBCUs, many of whose students graduate with significant student debt, this would be an especially wise move. Many of the nation’s HBCUs report disturbingly low levels of alumni contributions, a fact that no doubt contributes to the financial strife experienced by so many of these institutions. Strong financial support from alumni builds strong endowments, and swapping 50,000 dollars in loans for 50,000 in scholarship funds during at students’ undergraduate years could mean a return of 4 to 5 times that amount in future donations.

Not surprisingly, it has been those institutions with the strongest endowments and the highest levels of alumni contribution that have taken the lead in eliminating student loan debt, Harvard and Princeton among them. In the end, however, It will be those schools with the lowest levels of alumni contribution and the least secure financial profiles that will gain the most from instituting these enhanced aid programs. A focus on eliminating student debt will transform the opportunities availble to graduates from HBCUs and other institutions that serve economically diverse student populations.

Without the burden of substantial loan payments, such students will have the opportunity to buy homes earlier, begin investing earlier, and even to enroll in non-funded (and income boosting) graduate programs much earlier than their loan-free counterparts. Institutions that replace loan aid with grant aid could reap the benefits of their graduates’ increased economic opportunity for many decades to come.

Posted by Ajuan Mance