Debt, Capital, and Inequality: U.S. Higher Education Funding Policy through the Lens of Human Capital Theory

Abstract

This paper examines U.S. higher education funding policy as a case study in the practical consequences of Human Capital Theory (HCT) when translated into a debt-financed policy architecture. Since the 1965 Higher Education Act, the United States has progressively shifted the burden of financing postsecondary education from public appropriation toward individual borrowing, on the premise that education functions as an investment yielding predictable private and social returns. By 2026, outstanding student loan debt in the United States has reached approximately $1.87 trillion, held by over 42 million borrowers, making it the second-largest category of household debt after mortgages. This analysis traces the historiography of federal funding policy from the land-grant and GI Bill era through the current Repayment Assistance Plan (RAP) and narrowed Public Service Loan Forgiveness (PSLF) rules, and applies Human Capital Theory as an analytical lens to interrogate a central contradiction: a theory premised on equalizing opportunity through investment in human capital has, in policy practice, produced differentiated and often regressive debt burdens across income, generational, and institutional lines. Using trend data on aggregate debt growth and distributional patterns by borrower cohort, the paper argues that the loan-centric funding model converts an ostensibly investment-neutral theory into a stratifying mechanism, because the assumptions HCT requires  perfect information, transferable returns, and uniform access to capital markets  do not hold uniformly across the U.S. borrower population. The paper concludes with policy implications for reconciling investment-based financing with equity-oriented educational access