A recent report from Education Sector shows that about half of America’s college undergraduates go into debt these days in order to work toward their degrees. In 1993 only 32 percent of college students took out loans to pay for their educations, so these latest figures, from 2008, based on the U.S. Education Department’s National Postsecondary Student Aid Survey, represent quite an increase in student debt over the past 15 years.
Furthermore, Ed Sector points out in its report titled “Drowning in Debt: The Emerging Student Loan Crisis,” the biggest increase in student loans has been in the private loan sector: loans not originated through federal programs whose (sometimes subsidized) interest rates and repayment schedules are strictly regulated. Private student loans were nearly nonexistent in 1993, but by 2008, according to Ed Sector, they accounted for 14 percent of undergraduate borrowing. “Drowning in Debt” attributes the private-lending surge partly to the cheap-credit phenomenon of the middle of this decade, which inspired an array of entities that included Sallie Mae and the Bank of America—plus a raft of bubble-years outfits such as EduCap (under investigation by the Internal Revenue Service) and the now-moribund Campus Door (which settled a lawsuit by New York state authorities over alleged deceptive marketing)—to begin “aggressively marketing private loans to hundreds of thousands of college students.” According to Ed Sector, the interest rates on those loans (which have been vastly curtailed with the collapse of financial markets) were often at sub-prime levels of up to 19 percent. Without the protections of the federal loan programs, it’s also much harder for students to delay repayments of such loans if they can’t find jobs after graduation or decide to go on to graduate school.
The multi-billion-dollar private-loan business is only part of an alarming upward trend in student borrowing. During the school year ending in 2008, for example, about 65 percent of students at four-year private universities borrowed in order to pay for their educations with loans averaging just under $10,000 a year—a 70 percent increase over 1993’s average debt loads as calculated in 2007 dollars. Even at state schools charging low tuition, more than 50 percent of students took out loans in 2008. At for-profit-universities, the number of students using borrowed funds jumped to 92 percent in 2008, compared with 53 percent in 1993 (the average size of students’ annual debt load at for-profits similarly soared by 57 percent over the past fifteen years, to $9,600. It’s at for-profit schools that private loans (as contrasted to federal loans) are most heavily represented, with 43 percent of loans to full-time students originating in the private sector, a near-tripling of a 16 percent figure for 2004.
Graduating from college with nearly $40,000 in debt hanging over your head—the situation these days for the average student borrower putting in four years at a private university—is a daunting prospect, especially if your degree is in a liberal-arts field that qualifies you for no more than an entry level job. Nonetheless, the College Board, the non-profit organization that sponsors and a variety of programs aimed at improving the college prospects of low-income young people, has been strangely dismissive of Ed Sector’s findings. Inside Higher Education quoted Patricia Steele, a research associate at the College Board, accusing the report of generating an overall “sense of hype” because “nowhere in the report” did Ed Sector point out that half of college students don’t borrow at all for their educations.
“It’s important to point out because it scares the hell out of low-income students, who are nervous enough about whether they can afford college,” Steele told Inside Higher Ed. “The might read about this and think everybody’s out there borrowing $35,000, and that’s just not true….This does not represent the core of what’s happening in student debt.”
One reason for the defensiveness in the higher-education establishment concerning “Drowning in Debt” is that the report’s authors Erin Dillon and Kevin Carey, point the finger of blame at a culprit that many colleges and universities don’t like to talk about: soaring college costs, especially “out-of-control tuition increases,” that have steadily outpaced inflation over the past fifteen years. They write: “[A]s long as college prices increase faster than grant aid, family income, and available federal loans, students and families will have to borrow the difference from somewhere, and at market rates.” Indeed, the report’s figures make it clear that many private four-year-colleges and nearly all for-profit colleges are increasingly dependent on student borrowing to keep their doors open. Paradoxically, black and Hispanic students, who are often economically disadvantaged to start with, are borrowing a disproportionate share of their education expenses from private lenders at higher interest rates and with the higher risk of default that characterizes private student lending.
Furthermore, Dillon and Carey point out, many private colleges, in order to meet their skyrocketing overheads, have gradually tailored their student aid way from low-income students with high financial needs toward students from upper-middle-class families who can play nearly full-freight. “Merit” scholarships for the comfortably off now constitute 25 percent of private college aid. Even state universities have substantially increased the amount of non-need-based financial aid they award, in order to attract academically talented students among state residents, and also, as the report notes, to assuage their tax-paying middle-income residents worried about college costs.
Changes in the federal student loan program proposed by the Obama administration won’t alleviate the current student-debt crisis much, as they are expected mostly to generate more money for federal Pell grants for the neediest students but offer little help to the not-quite-so-needy. “[C]reating better incentives for colleges to restrain prices” would be a better way to stanch the debt surge, says Ed Sector—but don’t look for that to happen soon.