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March 19
Pushing the Limit on Federal Loans
It probably won’t surprise too many people that a new federal report shows sizable increases in borrowing of federal loans by undergraduate students. But the extent of the borrowing, and the changes in who is borrowing and the kinds of loans they are taking, may well open some eyes, at a time when policy makers are intensely focused on student debt and the availability of loans.
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The report, “Trends in Undergraduate Borrowing II: Federal Student Loans in 1995–96, 1999–2000, and 2003–04,” comes from the National Center for Education Statistics at the U.S. Education Department’s Institute of Education Sciences. It updates a 2000 report that examined how student borrowing had changed from 1989-90 through 1995-96, spinning the data forward to provide a near-current picture.
Among the report’s key findings:
- More students are borrowing. The proportion of all undergraduate students who received federal loans increased from 25 percent in 1995-96 to 33 percent in 2003-4.
- Most of that increase resulted from growth in borrowing of unsubsidized loans. Unlike subsidized loans — on which the federal government pays the interest while borrowers are in school and which are available only to borrowers who qualify under the federal definition of financial need — unsubsidized loans are available to students who do not show financial need and the students pay in-school interest, though the rates are capped and are lower than for private, or alternative, loans. While the percent of undergraduates with subsidized loans grew to 26 from 22 percent between 1995-6 and 2003-4, borrowing of unsubsidized loans more than doubled, to 21 percent from 10 percent of all undergraduates. The percentage of all undergraduates with both subsidized and unsubsidized loans also doubled, to 15 percent from 7 percent, over that period.
- More and more borrowers are borrowing as much as they can in federally backed loans. In 1995-6, 57 percent of dependent students (those who are financially supported by their parents) and 13 percent of independent students had borrowed the maximum amount in subsidized and unsubsidized loans allowed under federal law. By 2003-4, those proportions had soared to 73 and 36 percent, respectively. Sen. Edward M. Kennedy (D-Mass.) suggested this month that the government consider increasing the limits on how much students can borrow (most likely in unsubsidized loans) both in response to the credit crunch and to growing concerns about how much students are borrowing from private, non-government sources.
- Middle income students are seeing the sharpest increase in borrowing. The proportion of students from low-income backgrounds who had subsidized and/or unsubsidized federal loans grew only slightly from 1995-6 to 2003-4, from 34 percent to 36 percent for independent students and 37 percent for dependent ones. By contrast, the proportions increased by 4 points for dependent students from lower middle income backgrounds, 8 points for dependent upper middle income students, and 10 points for dependent high income students. Among independent students, the increases were 15 percentage points for both lower and upper middle income borrowers and 9 points for high income students.
- Students at for-profit institutions were likeliest to borrow. In 2003–4, 72 percent of undergraduates enrolled in private for-profit institutions took out a federal loan, compared to 11 percent of undergraduates at public 2-year, 42 percent of those at public 4-year, and 53 percent of students at private nonprofit four-year institutions. But while the rates of borrowing at two-year institutions remained low, and were kept low in part because federal loans are restricted to students attending at least half-time, the proportion of two-year college students who held federal loans did nearly double between 1995-96 and 2003-4, from 6 percent to 11 percent.
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Comments
For those people who work in financial aid, none of this is a surprise.
In economic terms, when you offer someone ‘free’ money they are going to take it each and every time. Even if it has to be ‘paid’ back at another time. The motto for this generation of college students should be ‘live for today, don’t worry about tomorrow’
One of the factors driving the cost of education is the idea of ‘life style.’ Everyone wants to have the good college life of their ‘dreams’ afterall isn’t that how we sell a college education as ‘your dream?’ The trouble with all of this is that it is not a dream it is a reality. Usually reality has self sacrifice built into it. But today most of our students, do not want to sacrifice, they want it now, and the more the better.
We need to thank our congress for this whole loan business. When they were looking for votes in the early 70’s they created this system, after all they couldn’t justify just having educational funding for ‘poor’ people only, as we know poor people do not vote, it is the middle class and upper middle class that vote and they deserve a chance at the ‘educational hog trough of free money’
Today, much of our loan crisis is do to our congressional folks and media coverage. What did congress think was going to happen when they lowered the incentive for private banks to participate in the loan business? It seems to me someone somewhere wants more and more schools to go to direct lending. If you read anything about DL, it is more costly to the taxpayer and to the student borrower then the FFELP program. But who cares about such things, not the taxpayer.After all in Economics 101, there are no free lunches, someone always pays.
Have a good day.
Jim, at 9:25 am EDT on March 19, 2008
The incentives are all wrong
When I was an undergrad—a single mom on welfare—my $3,000 student loan at 9% seemed like an insurmountable debt.
Two decades later, I returned to school and was better off financially as a grad student than working—thanks to student loans. I had a part-time grad assistantship that covered my tuition and basic living expenses and gave me fantastic health insurance because it was based on a low-risk group.
I also maxed out my student loans. At 2.3% interest and payments deferred for 3 years, it wouldn’t have made economic sense for me not to. And as a middle-class person, I didn’t foresee any problems in paying it all back.
Yes, I used the money to maintain a nice lifestyle and ironically, lent a big chunk to my son to help him pay for college.
Due to the income tax deduction for student loans, I have no incentive to pay my loans off early, even though I could.
Yes, I feel guilty now that I know more. But the incentives are all wrong.
Anon, at 11:30 am EDT on March 19, 2008
This is a strange report about undergraduate borrowing, apparently approved by a Secretary who has argued for transparency in student financial aid. (Did the authors not get the word?) While arguments rage across the country about private loans and college tactics like “admit-deny,” this report ignores such issues. Why is the Department reluctant to show who is borrowing private (alternative) loans and whether they have used up their federal eligibility? Does the Department not know that many colleges admit students but deny them grant aid in favor of loans, as a tool to try to influence their U.S. News and other rankings? Such information is available in the NPSAS files used to prepare this report, but it is conspicuously missing. If this report is any indication, the Department is more interested in withholding than releasing information that would be of great help to students, parents, taxpayers, and policymakers.
Higher Ed Veteran, at 11:45 am EDT on March 19, 2008
Political Solution is just more Loans
I’ve analyzed the issue for private lenders, and despite the upswing in business volume they are seeing declines in profitability. I’ve also been watching Congress on the issue but their solution seems to be increase the amount of money available in subsidized loans while making the student loan companies pay in for a larger part of the risk on these funds.
So lenders are backing out of the business, or looking for supplemental income from student credit cards. We could be moving toward a publicly-run subsidized loan system, but I doubt that saves the tax payers or students any money. And the private loans will still be available, at huge cost and necessary, so long as education costs rise in the double-digits each year.
Student Loan Analyst, at 3:10 pm EDT on March 19, 2008
The reason these loans are up is that middle class famalies get told that their share of their childrens education is some dollar amount that never see’s the inside of our bank accounts except for pay day. We live in Hawaii and the cost of living here is as bad or worse than New York/San Francisco. My daughter was a valadictorian of her grad class in 2006(high school) but our income brought her only awards that were a small portion of the tuition at the schools she applied to. She has been accepted to NYU ,New School New York both she dreamed of attending but I can’t afford to send her there and we can’t qualify for sub. loans.If I co-sign for her on a standard loan and something happens to her I still have to pay off the loans after while trying to afford retirement. So we pay for others to go to school with our taxes (I am happy for them) but we also have to pay for out daughter to attend.She has come home from New Yoek mid year to live at home and attend the cheapest possible public college here. She is working 2 -3 jobs to do so.There is no reality in the system and her dreams and all the effort she put in through high school academicly was thrown back in her face. Kids until 23 are punished for any success their parents have even when we can’t afford to help them.So they make a evry poor financial decision to enter into a high interest loan that will never be forgiven even at death with a co signer.
LN, at 3:10 pm EDT on March 19, 2008
I agree with Jim. I think this generation doesn’t care for it’s current actions. It’s the “I can pay it off later” mentality. I have seen many young people who have enrolled half time maxing out their federal loan eligibility only to hit their aggregate limits in their junior/senior year. I personally believe raising the limit is a good idea, with the exception that it should be prorated to enrollment status, similar to the Pell Grant.
$1-.98, at 6:45 am EDT on March 22, 2008
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College costs and federal loans
Just a few quick thoughts about Doug Lederman’s excellent article:
My specialty is in funding nursing education programs. Since about 1975, the leaders within nursing have deliberately chosen to close down diploma nursing programs throughout the nation and to try to make a bachelor degree the minimum educational standard for entrance into nursing. This decision has cost nursing students, on the average, about $30,000 to $50,000 over the course of their education. That’s about the difference in cost bewteen hospital-based diploma nursing schools, and BSN schools.
Why?
Another area of cost control gone missing is in the use of the internet in higher education. This technology was supposed to be a great equalizer in providing high quality, lower cost education. Judging by the meteroric rise in the cost of college in the past fifteen years, there’s been a major accident on the information highway that’s prevented these savings from getting passed on to the avaregae college student.
Lastly, as Lederman points out, the loan increases are especially sharp among students attending for profit colleges. That in itself speaks volumes and needs to be examined at the federal level.
feudi pandola, at 9:10 am EDT on March 19, 2008