In 2007, I graduated from the University of Wisconsin. As I walked across the stage to accept my diploma, I wasn’t thinking about the $30,000 federal student loan bill on which payments would start six months later. Once the Great Recession hit, however, I started to feel the pinch. I struggled to hold on, living paycheck to paycheck and working at a job with no opportunity for growth. So I decided to take an even bigger risk, and get a graduate degree—a choice that would, of course, put me further into debt.

My combined debt after leaving grad school was over $60,000. This time when I crossed the stage, the debt number felt crushing. For a few months after graduation, I was unemployed. Forced to move back into my childhood home for the first time since I was eighteen, I thought I had made a financial miscalculation.

Among the Millennial generation, this story is a common one. Outstanding student loan debt among all graduates now tops $1 trillion—more than credit card debt—with my generation particularly hard hit. The Federal Reserve recently reported that both the proportion of young families with student debt and the amount they’ve incurred have nearly doubled since 2001. In 2012, 60 percent of graduates from four-year colleges faced an average student loan balance of $26,500. Not surprisingly, delinquent payments are also on the rise, even as they are falling for all other types of debt. Ten years ago, student debt only accounted for about 3.5 percent of new delinquent balances on all debt. Now it accounts for over 14 percent.

These alarming numbers have led to stories in the media about how student debt may lead Millennials to delay getting married, having children, and buying houses and furniture. If that is the case, our demand-starved economy will be deprived of a much-needed jolt of purchasing that such “family formation” typically provides. So far, however, there’s not much evidence that more Millennial college grads are deferring home purchases compared to their peers a generation ago. Indeed, a recent Brookings study that looks at student loan borrowers shows that the extra earnings that come with a college degree have allowed college graduates under forty to manage their debts reasonably well. The reason is simple: college degrees generally provide students enough of a bump in income to cover the cost of paying back their loans.

Though I had a slow start, I eventually landed a job in Washington, D.C., and the debt burden has become more manageable over time. My post-secondary education eventually got me where I needed to go. This is true for many college graduates of my generation.

So what’s behind the soaring increase in student debt delinquency? Evidence suggests that the problem is students who attended college and accumulated debt but left without earning a degree. Students who haven’t graduated are more than four times as likely to default on their student loans as those who have, according to a study by the think tank Education Sector. Recent research from the economist Beth Akers shows that borrowers with less than $5,000 in student debt are the most likely to be late on payments. In fact, the more college debt a student incurs, the less likely he or she is to default. This may seem counterintuitive, but it’s not—a low loan balance is indicative of a borrower who didn’t complete school, and is therefore less likely to repay. According to Department of Education statistics, defaulters also tend to be older (the median age is thirty-eight), from low-income backgrounds, with poor financial literacy, and with no degree to show for their efforts. A disproportionate number of them attended for-profit colleges.

This is all evidence of a large crisis in American higher education: we have a big college completion problem. More than thirty-one million adults have earned college credit within the last twenty years but left without any post-secondary credential. By 2012, only 59 percent of students seeking a bachelor’s degree graduated within six years. For students seeking a certificate or degree at a two-year institution, the completion rate was 31 percent.

The Great Recession was tough on everyone in the labor market, but it hit those with less education the hardest, increasing the socioeconomic divide between those with a college degree and those without. In 2013, young adults with a four-year college degree were three times less likely to be unemployed as those with only a high school degree, and made on average twice as much per hour. Those with only some college, including two-year degrees, were about a third less likely to be unemployed. Even workers with a vocational certificate in, say, welding or IT services, which typically takes a year or less to earn, get paid on average 20 percent more than people with only high school diplomas, which translates to about $240,000 more in extra income over a lifetime.

The truth is that we are rapidly moving into a world in which anyone who aspires to a middle-class income, or close to it, needs some kind of post-secondary credential. According to research by Georgetown University, over half of the added jobs since the recession have gone to those who have a bachelor’s degree or better. By 2020, almost 57 percent of all jobs will require at least a post-secondary vocational certificate or higher. Yet our system of higher education and workforce training is not producing anywhere near enough degrees and credentials to fill the growing need, including post-secondary vocational certificates. At current graduation rates, the United States will fall five million credentials short of meeting labor market demands by 2020. This shortfall holds back our economy while exacerbating income inequality.

But this problem suggests an opportunity. If the United States can add the additional twenty million post-secondary-educated workers it needs by 2025, we will boost our gross domestic product by $500 billion per year. We will also strike a blow for income equality.

To reach these goals we have to do two things. First, we need to increase the numbers of low-income post-secondary graduates. Second, we need to help those with college credits but no degree to finally cross the finish line. This means wholesale reform of our higher education and workforce training systems.

The conventional wisdom is that college in America is the great class equalizer. But the truth is increasingly the opposite: higher education is fast becoming yet another perpetuator of inequality. The reason is not that lower-income Americans don’t aspire to college. In 2008, 55 percent of high school graduates from the poorest 20 percent of homes enrolled in college directly from high school, compared to 80 percent of students from the wealthiest 20 percent of homes. While this is a significant gap, it pales in comparison to the difference in college graduation rates. Four out of five twenty-four-year-olds in the upper quarter of the income scale hold four-year college degrees. In the bottom quarter, only one in ten does.

One reason for the difference in graduation rates is not surprising. Kids who grow up in poorer neighborhoods and attend troubled, less rigorous primary and secondary schools tend to start college less academically prepared and are thus more likely to drop out. But another reason is that these students, who have shown their mettle by graduating from the toughest high schools, are repaid for their efforts by getting channeled into the worst-performing colleges—costly for-profits that make false promises of employment in high-wage jobs, or lower-priced but under-resourced community colleges and regional four-year schools with high dropout rates.

In addition, research from Georgetown University shows that black and Latino students attend the least selective higher education institutions, whereas white students increasingly enroll in the most selective, which spend twice as much on educating their students and have nearly twice the graduation rates—and this trend is only getting worse.

What can be done to turn things around? It would help, of course, if elite private schools recruited higher numbers of qualified lower-income and minority students and charged them prices they can afford. But such schools serve a small percentage of all college students. To really move the needle on graduation rates, we need the schools that already enroll the bulk of students, including poorer students—public universities, community colleges, and for-profits—to radically improve their performance.

If you doubt this is possible, consider Georgia State University in Atlanta. The school has 32,000 students, of whom 56 percent receive federal Pell Grants, 60 percent are nonwhite, and 30 percent are the first in their families to attend college. Yet from 2004 to 2012 the school boosted its graduation rate, as computed by the federal government, by 10 percentage points—from 41 percent to 51 percent. The increases in completion rates for students of color have been even more astonishing. According to Georgia State’s own figures (computed differently than the federal figure), the graduation rate of Latinos rose in the past decade from 22 percent to 66 percent; for blacks the rate rose from 29 percent to 57 percent.

GSU pulled this off by recognizing that to succeed, poor and minority students often need extra support. The school deploys academically successful upperclassmen to tutor struggling younger students. It also aggressively utilizes data systems called “predictive analytics” to keep track of individual students’ progress. The system alerts academic advisers whenever students show early signs of coming academic trouble. Those who fail to sign up for required classes, for instance, receive reminder calls. Students in good standing who are relatively close to graduation but miss the deadline to pay their tuition bill are no longer automatically dropped from courses, as in the past. Instead they are offered targeted grants to help them make their payments and get to commencement.

Another school bucking the trend is the University of Central Florida. UCF has pulled off a rare higher education hat trick: it has tripled in size, from 20,000 students in 1992 to more than 60,000 today, in order to serve more of its traditionally diverse, moderate-income students; it has raised its six-year graduation rate from 54 percent in 2003 to 65 percent in 2012; and it has increased its percentage of low-income and Latino students. How? Among other strategies, UCF has created unique partnerships with four area community colleges, whereby students at those colleges who successfully earn two-year associate’s degrees are guaranteed admission into UCF.

Georgia State and UCF are examples of what the New America Foundation calls “Next Generation Universities”—public institutions that have figured out new ways to promote better outcomes for economically and racially diverse students. Both schools have recently joined the University Innovation Alliance, a new consortium of eleven large public research universities committed to making high-quality college degrees accessible to a diverse body of students funded through support from the Gates, Lumina, and Kresge Foundations. Working together, these large universities will test new initiatives and share data, in hopes of helping many more students make it to graduation.

But while philanthropically funded partnerships like these are important, what’s most needed are new government policies that provide incentives for the higher education system to do a better job of graduating lower-income students. A growing number of states, for instance, have adopted so-called performance-based budgeting, whereby public universities are reimbursed not just based on the number of students they enroll but on how many receive degrees. When done right, performance funding can help those public institutions that disproportionately educate the state’s most vulnerable and disadvantaged students but often lose funding to the flagship campus.

Performance funding only works, however, if there is already significant base funding. As states have slashed their higher education budgets over the past two recessions, making higher education institutions fight over an increasingly paltry piece of the pie will do nothing to improve persistence and completion rates.

That’s why federal action is also needed. The federal government spends $167 billion on higher education, mostly through federally subsidized college loans, Pell Grants, work-study programs, and tuition tax credits and deductions. This money flows freely to colleges and universities with very few strings attached. There’s no requirement that schools keep tuition affordable, or improve their graduation rates, or make sure the degrees they confer lead to actual jobs.

That may be about to change. The Obama administration plans to unveil a proposal to have the Department of Education rate America’s colleges and universities on such measures as net price and graduation rate. The aim is to provide prospective college students with better information about their choices and thus put some market pressure on colleges to improve. To ratchet up the pressure even more, the administration wants congressional approval to tie federal higher education funding to those ratings. Meanwhile, lawmakers have introduced legislation that would make public how well on average the graduates of individual colleges and programs within those colleges do in their careers—whether they get and keep jobs, how much they earn, and so forth.

If these and other measures actually pass—and that’s a big “if”—it would go a long way toward holding the higher education system accountable for outcomes and, in theory at least, lead to the availability of more affordable, high-quality degrees.

So far we’ve been talking about students who seek a traditional four-year college diploma. But that’s only part of the story. For tens of millions of Americans, getting ahead means earning a two-year associate’s degree or some kind of industry or job-specific vocational credential. It is these folks, many of them poor or working class, who most often wind up not graduating while still having hefty student loans to pay off. They are the ones the current system has most egregiously failed. Getting more of them across the higher education finish line is one of the best ways we can advance the goal of equitable growth.

Fortunately, there is some action stirring in Washington on this front as well, though not nearly enough. This past summer Congress passed, and the president signed, legislation to streamline and improve the performance of a myriad of federally funded job training programs. That’s a significant and largely unheralded achievement. But because the funding is so small and is limited in scope, the law is of little help to young people who aren’t yet in the workforce, or to the millions of adults who have jobs but want to upgrade their skills in order to earn more.

The Obama administration has also proposed new standards for vocational programs at colleges. Under these so-called gainful employment rules, set to go into effect in 2016, programs will no longer be eligible to take federal student financial aid if, for example, too many of their borrowers default on their loans or the amount of income graduates have to use to pay their loans is too high. The aim of the rule is to weed out the most predatory vocational schools and programs. And while it applies to both nonprofit and for-profit colleges, the latter are likely to be hardest hit. Though only 10 percent of students attend for-profit colleges, they account for almost half the country’s student loan defaults. Not surprisingly, the for-profit college industry will fight like mad in court to weaken the rule (it succeeded in getting an earlier version killed).

But even if all these measures ultimately go into effect, vast gaps will remain in our workforce training system. That’s because America has never developed the kind of robust apprenticeship and skill-upgrading regimes that exist in countries like Germany, with its culture of close cooperation among companies, unions, and government. Perhaps we should build such a system—more funding for the nation’s career and technical schools would be a good start. But politically, it’s unlikely ever to happen in the U.S.

What America does have is the most extensive and richly endowed higher education system in the world. Parts of that system function pretty well as a de facto workforce training system. Many of the nation’s best community colleges, for instance, provide large numbers of relatively low-cost, high-quality two-year degrees and certificates, and have close connections with regional employers such that the skills being taught match the demands of the market.

What’s needed, argues Mary Alice McCarthy of the New America Foundation in a new report, is to improve and expand that higher education system to serve more working adults and young people looking to upgrade their skills. Accountability measures like the ones already discussed are crucial. So too is reform of the Higher Education Act, the main federal legislation determining which students and programs are eligible for financial aid. The problem with that law is that it leaves too many Americans and many promising programs out in the cold.

For instance, federal financial aid generally cannot be spent on post-secondary certificate programs that take less than a year to complete. But many certificate programs in high-demand fields—for, say, phlebotomy or computer-controlled machinery—can be completed in only a few months. Why should the federal government discriminate against education programs just because they get the job done quickly?

The law is also a drag on the spread of one of the most promising trends in higher ed: “competency-based” education. These are programs that measure student progress based on mastery of the subject matter rather than the amount of time spent in a classroom. This allows students who learn quickly or come to school already knowing some of the material being taught—typically those who have already taken some college classes or learned valuable skills on the job—to get their degrees and credentials quicker and at less cost. But because the federal government bases financial aid mostly on the credit hour (that is, time in class rather than actual mastery), colleges that want to move to a competency-based system have to jump through a lot of hoops to get their programs approved by the Department of Education. So far, only three programs have gotten approved to deliver financial aid through direct assessment of skills instead of seat time.

The Higher Education Act is due to be reauthorized. By rewriting it so a wider array of students can benefit from federal aid, while also strengthening accountability for results, Washington could create the workforce training system that would be, like our higher education system generally, the envy of the world.

For low-income Americans with no post-secondary credential, the path to the middle class ends all too soon. Unless we increase the achievement of credentials among members of the bottom half of the income scale, the United States stands to lose out on improving the nation’s economic growth and the equality of its citizens.

Return to “American Life: An Investor’s Guide.”

Rachel Fishman

Rachel Fishman is a policy analyst for the New America Foundation Education Policy Program.