Why Do Students Borrow So Much? Recent National
Trends in Student Loan Debt. ERIC Digest.
by Redd, Kenneth E.
College students are leaving their higher education institutions with
more educational loan debt than ever before. From academic year 1994- 1995
to 1999-2000, the amount postsecondary education students borrowed through
the federal student loan programs jumped from $24 billion to $33.7 billion
(U.S. Department of Education 1999 and 2000a). Cumulative federal student
loan debt for bachelor's degree recipients rose 19 percent, while total
debt for borrowers who received master's and other advanced degrees more
than doubled (Scherschel 2000). What has led to the increased use of student
loans? Is the rising indebtedness harming students' futures?
While concern about rising student debt levels remains high (Scherschel
1999a and 2000), recent data reveal that much of the increased borrowing
occurred due to the expansion of the loan programs rather than to growth
in college costs. Further, many of the new loan recipients came from middle-
and upper-income families, and most undergraduate borrowers do not appear
to have been adversely affected by their added indebtedness.
REASONS WHY BORROWING INCREASED
Several recent studies (King 1999, Redd 1994, Scherschel 1999a and 1999b)
provide three possible reasons for the growth of student loans. First,
increases in federal grant aid have not kept pace with rising postsecondary
education costs, and the widening gap between college prices and grant
aid compelled more students to borrow. Second, students' financial need
has increased as educational costs have grown, and more of this need is
met by loans. And third, increases in loan limits and ease of borrowing
have allowed more students to receive loans. Each of these reasons has
merit and deserves consideration.
There is no question that postsecondary education costs grew rapidly
during the 1990s. The College Board's most recent Trends in College Prices
report (College Board 2000) shows that, when adjusted for inflation, tuition
and fee charges at four-year public colleges and universities increased
49 percent during the decade; at four-year private institutions, tuition
prices rose 32 percent. Meanwhile, median income for families with a head
of household age 45 to 54 (families most likely to have college-aged children)
grew by just 4 percent, and appropriations for Federal Pell Grants (aid
for low-income undergraduates) increased only 15 percent.
At first glance, these factors would appear to have been the primary
causes for the growth in borrowing. However, data from the National Center
for Education Statistics' National Postsecondary Student Aid Study (U.S.
Department of Education 2000b and 2000c) show that, for middle- and upper-
income undergraduate students, amounts of loans actually grew faster than
their total costs. For families with income of $40,000 to $59,999, the
average annual amount of federal student loans grew to $3,729 from $3,216
during the 1992-93 to 1995-96 period, but total cost of attendance (tuition,
fees, room, board, books, educational supplies, and other expenses) fell
from $14,150 to $13,267. Costs declined because a greater share of the
students were enrolled at lower-cost four-year public institutions in 1995-96
than in 1992-93. Despite the shift in enrollment to less expensive colleges
and universities, students from middle-income families borrowed more. Among
all undergraduate borrowers, average federal student loans grew 16 percent
but educational costs increased just 3 percent. Clearly, growth in educational
costs does not completely explain the increase in borrowing.
Similarly, amounts borrowed grew much faster than upper-income students'
demonstrated financial need. Financial need is defined as the difference
between students' and families' total postsecondary education costs and
the estimated amounts they can afford to pay from their income and other
resources. For undergraduates from families with income of $80,000 or more,
financial need increased only 3 percent, but average loan amounts jumped
13 percent. Low-income students faced the opposite extreme; for undergraduates
from families with income of under $20,000, financial need jumped 23 percent,
while average amounts borrowed only grew 11 percent (U.S. Department of
Education 2000b and 2000c).
These results strongly suggest that much of the growth in borrowing
also can be attributed to the changes made in the Higher Education Act
(HEA), the federal law that governs the financial aid programs. In 1992,
the law increased the annual and cumulative maximum amounts students could
borrow (Redd 1999). Annual loan limits under the Stafford Subsidized Loan
program (loans provided to students based on their financial need) for
second-year undergraduates were raised to $3,500 from $2,625. The maximum
loan to students in the third or higher year of undergraduate study was
raised to $5,500 from $4,000, and graduate/professional student loan maximums
grew to $8,500 from $7,500. More importantly, the law also authorized a
new loan program-the Stafford Unsubsidized Loan program-which essentially
allowed all students, regardless of their families' financial need or income,
to receive assistance. Students also were allowed to receive both subsidized
and unsubsidized loans in the same academic year. When the new unsubsidized
loan amounts were combined with the maximum subsidized amounts, undergraduates
in the junior or senior years could borrow up to $10,500 in federal student
Income Levels of Students Who Received Loans:
Much of the recent growth in federal student loan borrowing has been
through the Stafford Unsubsidized Loan program. From its inception in 1993-1994
to 1999-2000, the amount of unsubsidized loans more than tripled-rising
from $4.1 billion to $12.9 billion. In the same period, amounts of subsidized
loans grew 40 percent, from about $12.5 billion to $17.5 billion (U.S.
Department of Education 1999 and 2000a).
Because students may receive unsubsidized loans regardless of their
families' incomes, a large share of the added loan dollars appear to have
gone to students from middle- and upper-income families. The percentage
of undergraduate students from families with income between $60,000 and
$79,999 who received federal student loans grew from 56 percent in 1992-93
to 67 percent in 1995- 96. At the same time, the proportion of borrowers
from families with income of less than $20,000 who received federal loans
dropped from 52 percent to 49 percent (U.S. Department of Education 2000b
and 2000c). Middle- and upper-income families who might not have qualified
for need-based Stafford Subsidized Loans became eligible to receive Stafford
Unsubsidized Loans. While the unsubsidized program allowed more middle-
and upper-income students to receive loans, it is possible that a number
of these students were borrowing more than they really needed to attend
postsecondary education (King 1999, Redd 1994 and 1999).
THE EFFECTS OF LOANS ON BORROWERS WHO RECEIVE DEGREES
However, the growth in indebtedness has to be put into a larger context.
For some students, borrowing could be a wise investment because it allows
them to finish their educational programs and increases the odds of achieving
success in employment and other areas of life. For others, borrowing might
lead to financial burdens. It is commonly suggested that loan repayment
obligations may cause some loan recipients to delay home and car purchases,
marriage, child rearing, and other aspects of life (Baum and Saunders 1998).
Recent information (Baum and Saunders 1998, Choy 2000, Davis 2000) shows
that despite the recent increases in borrowing, loan repayment obligations
represent just a small portion of most borrowers' after-college salaries.
For borrowers who received bachelor's degrees in engineering from four-year
public colleges and universities in 1999, monthly loan repayments accounted
for just 4.4 percent of average starting salaries. For computer science
majors, loan repayments represented only 4.5 percent of average wages,
and among education majors, loan repayments equaled only 7 percent of starting
salaries. These findings are not meant to suggest that all borrowers were
able to repay their loans without hardship. Students from medical, dental,
and other professional degree programs typically face debts of $100,000
or more (National Association of Student Financial Aid Administrators 1999).
Another study (Davis 2000) shows that borrowers who do not finish their
educational programs have a much more difficult time in repaying their
loans. Students who leave higher education without obtaining a bachelor's
degree often have lower incomes than degree recipients, which makes it
much harder for non- completers to repay their loans.
Federal student loan borrowing grew primarily because the maximum loan
limits were increased and middle- and upper-income students became eligible
for Stafford Unsubsidized Loans. However, despite the increases in cumulative
debt that occurred, most undergraduate loan recipients appear to be able
to repay their loans with little difficulty, as long as they complete their
degree programs. However, repayment obligations are much more difficult
for professional school students, who often leave their institutions with
debt of $100,000 or more, and for undergraduate borrowers who do not complete
degree programs. More research would provide greater insights into how
indebtedness affects these students after they leave higher education.
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