The public policy debate over broad student debt cancellation is forcing colleges to confront their role in a lending system that provides critical access for those wanting to attend but comes at a cost that can limit the value of higher education. Eliminating the need to borrow positions colleges to attract and retain strong students, but sustaining and scaling the policy is challenging.
There is a reason only 76 colleges and universities have adopted no-loan policies since Princeton University’s seminal program in 2001: It is expensive. Most schools employing the strategy have large endowments, enroll nominal numbers of needy students and are selective institutions. Some universities counted in the ranks restrict eligibility or have had to scale back their programs.
Still, as institutions compete for the best students — who are increasingly price-sensitive or may lack financial resources — bolstering grants to supplant debt may become a central component of more aid packages.
“Colleges are legitimately worried about student loan debt, but they’re also concerned that if they don’t do this, they won’t be able to compete for the students they want,” said Robert Kelchen, a higher education professor at the University of Tennessee at Knoxville.
In many ways, Smith fits the profile of the typical college with a no-loan policy. The liberal arts college in western Massachusetts educates about 2,600 women at the undergraduate level, with a $2 billion endowment. It has a prestigious reputation but Smith President Kathleen McCartney wants to center its inclusiveness with the new financial aid policy.
“There was a real racial disparity in borrowing — 89 percent of our Black students had loans and only 56 percent of our White students,” McCartney said. “We’ve been working on a plan to promote racial justice and equity, and we thought we just have to eliminate loans. That will send a powerful message to our students that we are serious about racial justice.”
About 60 percent of Smith students rely on financial aid and graduate with an average of $19,000 in debt. While that’s below the national average of roughly $30,000, McCartney said she believes the college could do more. Double-digit endowment returns coupled with a $50 million gift from a graduate has created a path.
A portion of the money will fund one-time grants of $1,000 for low-income students to start their college careers and $2,000 grants for graduating seniors to embark on life after college. Taken as a whole, the student aid initiatives represent a $7 million annual increase to Smith’s financial aid budget. The college anticipates it will award more than $90 million in aid next year.
Freshman Livie Johnston, 18, said she nearly cried after reading McCartney’s email announcing the initiatives. The Minnesota native has borrowed $3,500 in her first year and until now had anticipated relying on loans until graduation.
“I’m completely covered by Smith’s financial aid for the next three years of my education here, which makes a really big difference for the affordability of grad school,” said Johnston, who plans to major in English before pursuing a master’s degree in library and information science. “This really takes a lot of the stress off.”
Giving undergraduates an opportunity to pursue their dreams without being encumbered by debt is exactly what McCartney said Smith is trying to provide. But is this sustainable?
“We’ve done the modeling so that even if there’s a downturn, we’ll still be able to support this program,” McCartney said. “This is a real priority. And we’re going to steward the endowment carefully so that it remains a priority.”
Colleges and universities have had mixed results with loan reduction policies.
Some institutions, such as Lafayette College in Pennsylvania, have expanded their programs to include more students. At least two, Carleton College in Minnesota and Claremont McKenna College in California, ended their policies in the wake of the Great Recession of 2008. Several others, including Dartmouth College and Yale University, have reduced the generosity of their policies for middle- and upper-income students.
Some schools have been victims of their own success. Take the University of Virginia, which introduced AccessUVa in 2004 for all undergraduates from families earning less than twice the federal poverty guideline. The initiative boosted socioeconomic diversity at the public flagship. But costs nearly quadrupled as enrollment climbed, leading U-Va. to reintroduce loans a decade later.
Students protested the decision and the university maintained that it still offered generous financial aid packages to those in need. In the aftermath, U-Va. scored large donations that bolstered aid for low-income students, but never resurrected the no-loan initiative.
“There is a lot volatility in these sorts of programs that naturally limit the types of institutions that can sustain them,” said Dominique Baker, an assistant professor of education policy at Southern Methodist University in Dallas.
Fluctuations in eligible students come at a cost and colleges have to account for every dollar, she said. As a result, fundraising is critical to the life span of these programs. Kelchen, at the University of Tennessee, said donors seem more interested in supporting students than facilities these days, affording colleges an opportunity to focus fundraising campaigns on financial aid.
Philanthropy is a driving force behind Ohio State’s Scarlet & Gray Advantage program. The university plans to raise $800 million, including $500 million in endowments, over the next decade so no student, regardless of income, has to rely on loans. It’s an ambitious plan for an institution with 53,000 undergraduates.
To kick off the campaign, Ohio State and its top donors are creating a $50 million pool to match the first $50 million in private donations. President Kristina M. Johnson estimates that philanthropy will account for 45 percent of what’s needed to keep the policy alive. She said the program has staying power because of the university’s multifaceted approach.
All participating students will be afforded opportunities to work on or off-campus, with the expectation of contributing their earnings to their education. A mix of scholarships, state grants and federal grants will contribute to the remaining expenses.
Johnson said the new policy is built on a foundation of existing cost-saving measures, including freezing tuition for in-state students and using less expensive open-access textbooks, that have already driven down borrowing at Ohio State. Less than half of students who earned a bachelor’s degree in 2020 had debt. Those that did owed an average of $27,000.
“Sustainability requires intentionality,” Johnson said. “We are looking at being more efficient, more effective.”
The program will start off in the fall of 2022 with 125 students as a pilot. Unlike other loan reduction programs at public institutions, which are targeted to state residents, such as the University of Michigan, Ohio State’s will also be open to out-of-state students. The decision could add substantial cost to the initiative as nonresidents pay more tuition, but Johnson points out that roughly 80 percent of undergrads hail from the Buckeye State.
While no-loan policies can dramatically reduce student debt, they don’t always eliminate the need to borrow. Most schools with these policies, including Smith and Ohio State, use grants or alternatives to loans to address what’s known as demonstrated financial need — the difference between the cost of attendance and expected family contribution (EFC).
Because of the way the EFC is calculated — with a mix of income, assets and household size — the dollar amount may be more than a family can afford to pay out of pocket. Despite Princeton’s long-standing no-loan policy, about 17 percent of recent seniors graduated with an average $9,400 in debt, according to the school.