What’s Driving Debt

In the murder mystery of what’s driving up the student debt burden, most people finger rising tuition prices as the main culprit.

A survey earlier this year by Sallie Mae found that student and their parents, wary of high debt loads, are more likely than in the past to rule colleges out of their search process on the basis of price. State politicians regularly cite the debt burden as a reason to contain tuition growth at public universities. Even President Obama got into the fray, saying in his acceptance speech at the Democratic National Convention in September that he'd work with colleges and universities to slow the rise in college tuition by half over the next decade.

In a new paper released by the Cornell Higher Education Research Institute, University of Richmond business professor James Monks finds that when it comes to getting burdened by debt, the increase in price isn’t an innocent bystander, but it has several accomplices, particularly the admissions and financial aid policies at a given institution.

“While the cost of attendance does play a statistically significant role in determining student debt levels at private institutions, admissions and financial aid policies, graduation rates, and the mix of majors across students are also significant and important in determining student debt levels,” Monks wrote in the paper. “Specifically, whether an institution is need-blind in admitting its students and/or meets the full demonstrated need of all of its students can increase average student debt upon graduation by as much as 30 percent.”

Monks examined a national pool of 747 four-year, not-for profit, bachelor's-degree granting, accredited institutions with valid financial aid profiles, and relied on data from the College Board’s Annual Survey of Colleges and the 2011 Integrated Postsecondary Education System (IPEDS) database.

The findings call into question the overwhelming focus on controlling tuition prices as a way to tackle student debt levels. In his paper, Monks notes that states could alter admissions and aid policies in ways that would better control debt levels. “Policies that solely focus on tuition levels and tuition growth are overly simplistic and ignore other important factors in determining student debt,” Monks wrote.

Controlling for the economic profile of the incoming class and institution type, Monks found that colleges and universities that pledge to meet meet students’ full demonstrated need see lower debt levels among graduates than institutions that "gap" -- or admit students but do not provide full financial need, driving more students to take out loans. Along those lines, students at institutions with “no loans” policies – only a small number of wealthy institutions – have 47 percent less debt upon graduation than institutions without that policy.  Students at institutions with limited-loan policies have debt burdens that are 12 percent lower than peers at institutions without such policies.

On the other hand, institutions that admit students irrespective of financial need, so-called “need-blind” institutions, have higher debt burdens than institutions that factor aid into the decision.

“While it is usually considered beneficial for applicants and students for an institution to practice need-blind admissions, as it creates greater opportunities for students from lower-income families, it appears to have the unintended consequence of leading to higher average debt levels as more low-income students constitute the subsequent graduating class,” Monks wrote.

Among public universities, Monks found that the listed cost of attendance was not a statistically significant factor in determining student debt levels, and that aid policies, institutional expenditures, graduation rates, and the mix of majors showed a greater correlation with debt levels.

Monks also found no major difference between average debt levels of students at public and private institutions.

The concern about “gapping” students is partly what drove Wesleyan University to abandon its need-blind status earlier this year.

“I’m willing to give up the label of need blindness in favor of giving students who are here the best chance of succeeding,” said Wesleyan President Michael Roth at the time. “Our job is not to wear a badge of moral purity. Our job is to provide the best chance of success to the students we graduate.”

The lower debt burden at institutions that consider financial need in the admissions process is likely attributable to the fact that need-aware institutions are likely to avoid admitting too many students with too high a debt burden.

The problem with considering financial need in the admissions process, particularly at public universities, critics say, is that such policies could freeze out students who, through no fault of their own, do not have the financial means necessary to attend. Such policies would undermine what many see as a central purpose of public colleges and universities -- to provide a pathway to the middle class for low-income students.

At the same time, many institutions do not have the financial resources to meet the full demonstrated need of admitted students. Even those college with significant financial resources are starting to reconsider whether being fully need-blind if a viable financial path. Last month Grinnell College -- which has the fifth largest endowment among liberal arts colleges -- announced plans to rethink its aid policy.

Other Findings

Selectivity:  Higher incoming SAT scores were correlated with lower average debt burdens, Monks found. He attributes this difference to the correlation between family income and test scores.

Graduation Rates: Higher graduation rates lead to higher levels of debt, presumably because students are not dropping out as underclassmen and therefore not spending as much on tuition. The paper does not explore whether having more students graduate in four years, as opposed to five or six, keeps tuition down. Indiana University and the University of Texas at Austin are both pushing to increase the number of students who graduate within four years to keep loan burdens down.

Majors: Institutions where a higher number of students graduate with degrees in majors with expected earnings above the average saw higher debt levels, presumably because students were willing to take on higher debt burdens if they believed they would be willing to pay them back.