Recent Student Loan Research Results: The College Board Analysis

There has been a plethora of headlines highlighting research on student loans including:

• New York Times:  "Study Shows Rise In Average Borrowing By Students"
• US News and World Report:  "Is Student Debt Really A Problem?"
• Marketplace:  "Not All Students Are Deep in Debt"

I thought I would try and make sense of them since they have been coming out fast and furious: 

The College Board started the ball rolling in mid-August with an report focused on NPSAS data which they titled "How Much Are College Students Borrowing?"  Here is a summary of their report:

"New data from the U.S. Department of Education’s National Postsecondary Student Aid Study reveal that while many students are accumulating high levels of debt, these students remain the exception. Between 2003-04 and 2007-08, debt levels increased rapidly for students in the for-profit sector and for all of those earning certificates and two-year degrees. However, the increase was relatively small for bachelor’s degree recipients in public and private four-year colleges.  Because averages do not tell the story of most individual borrowers, it is important to understand the distribution of debt levels among college graduates. While the typical debt levels of college graduates are manageable for those who successfully enter the workforce, there is growing concern about the minority of students who borrow much more than average and who end up with unduly burdensome repayment obligations. The new federal Income- Based Repayment program offers considerable protection for those who rely only on federal loans, but these benefits do not extend to nonfederal loans."

Here are some other key factoids:

• In terms of borrowing, about 59% of students graduated with some debt, including 66% of bachelor degree recipients and 48% of those receiving an associates degree:

"Figure 1 shows that among all of the students who completed a degree or certificate in the 2007-08 academic year, 41 percent graduated with no debt. This was the case for 34 percent of bachelor’s degree recipients, 52 percent of associate degree recipients and 37 percent of those receiving certificates."

• Considering all full-time undergraduates, just over 50% took out a loan in 2007-08: 

"In 2007-08, 54 percent of all full-time students took out a loan (50 percent took out federal loans and 19 percent took out private nonfederal loans)."

• This stat was a bit worrisome as it seems to indicate that students are not maximizing the federal loan opportunities:

"Among full-time students who borrowed, the $7,809 average amount borrowed from private sources was higher than the average $5,432 in federal student loans."

• In terms of median debt levels, the largest growth was in loans taken on at for-profit institutions:

"After adjusting for inflation, the increases were relatively small among public four year college graduates, where the median debt of the 62 percent who borrowed was $17,700 in 2007-08, an increase of 4 percent from four years earlier. A similar pattern occurred among private four-year college graduates, where the median debt of the 72 percent who borrowed was $22,375 in 2007-08, an increase of 5 percent from four years earlier.  Education debt levels grew much more rapidly between 2003-04 and 2007-08 among bachelor’s degree and certificate recipients in the for-profit sector than they had in the preceding four years."

• For those earning a bachelor's degree at for-profit schools, the median increase in debt rose to $32,653, a 23% increase in constant dollars from the 2004 levels.   

A few thoughts about the report:

• While growth in median debt looks tame for most student segments, one area that raises alarm bells is the sharp increase at for-profit institutions, especially the fact that for those who borrowed, 35% took out between $30,000 and $39,999 and 25% of graduates took out more than $40,000 in debt.  The key question that lies outside the scope of this report is what students today are getting in return for this investment.  I encourage students and families to ask schools to see data on placement reports for recent graduates, average salaries for graduates one, three and five years after graduation as well as look up your school's cohort default rate here.  This is a significant investment. 
  

• While many lump together all forms of debt that a student takes on for college as "good debt" since it is an investment in future earnings power, it is important to differentiate federal student debt from private loan debt.  Not only are repayment options better with federal loans but they also carry fixed interest rates often lower than variable-rate private loans that usually have no caps, so when interest rates move up, the cost of the private loans will increase too. 

• How do we fix the problem of those borrowing beyond their means?  This is a tough one.  My first thought is wouldn't it be great if there were built-in triggers that required schools to conduct one-on-one counseling sessions for students who have debt levels above a certain level after each year of their academic career.  These sessions might help uncover grants or scholarships the student might be eligible for, ensure that they are taking out federal loans before private loans, etc.  I hear the collective groans already:
• • We don't have the time or resources to do this kind of intensive counseling. 
  • Administration might not like the thought of us encouraging students to go to lower-cost institutions due to their debt burdens
  Maybe someone could develop an innovative program and apply for one of those innovation grants in the proposed student loan reform bill. 
  

• While debt levels might look manageable for graduates, remember that there is a significant cohort, students who withdraw from school prior to graduation, that is not represented in this report for which most levels of debt will be worrisome.
  • Here is an excerpt from a Greentree Gazette interview with Dick George, CEO of Great Lakes which demonstrates how important the "dropout" issue is:

"The U.S. Department of Education estimates that 76 percent of defaulters on federally guaranteed student loans withdrew from school prior to completing their studies. As a result they can be said to make up a 'cohort' that disproportionately includes low income students, racial and ethnic minorities and first-generation college attendees.  While we may be able to identify a vulnerable cohort, we cannot pre-identify individuals with accuracy."

• Last but not least, it is hard to fathom a statement such as "Most people would say that is a reasonable amount of debt to take on for a baccalaureate degree," when the most updated cumulative default rates indicate that 1 in 4 proprietary (for-profit) borrowers in the 2002 cohort have already defaulted (2 year and 4 year programs not broken out) and almost 1 in 5 freshmen and sophomores (16-18%) at four year institutions are expected to default over the life of their loans based on recent budget projections.  And that was before the economic crisis of the last twelve months.  
  
  • How about this for a speech that won't occur this fall:  "Anyone taking out student loans please raise your hands.  Find four people next to you who are also taking out loans.  One of the five of you will likely default on these loans before they are paid off..."
  • Income Based Repayment might help manage these default statistics downwards by tying borrower's monthly payments to their income levels.