Though Still in the Minority, Growing Percentage of Bachelor’s Degree Recipients Graduate with High Levels of Debt

Wednesday, May 26, 2010

A growing minority of college graduates are borrowing too much and using the kinds of loans that are likely to cause them significant repayment difficulties, according to a recent report on student debt by Sandy Baum, professor emerita of economics at Skidmore College and an independent policy analyst for the College Board, and Patricia Steele, also an independent policy analyst.

Who Borrows Most? Bachelor’s Degree Recipients with High Levels of Student Debt examines characteristics of undergraduate students who have the highest levels of debt. The problem is not that all students are borrowing too much. Instead, the report’s authors found that some groups of borrowers may be at risk of serious financial difficulty, and that many young people have a limited understanding of the effects of the obligations they are undertaking and cannot accurately predict future earnings. Who Borrows Most? found that, of the 66 percent of bachelor’s degree recipients who graduated with debt, one-fourth borrowed $35,500 or more.

“Student loans can contribute significantly to providing educational opportunities. However, it is vital that we educate students and parents about loans. We also need to design policies to protect students as much as possible from unmanageable debt,” said Baum.

The report found that high debt is most common among students who graduated from for-profit institutions, where more than half of 2007-08 bachelor’s degree recipients graduated with $30,500 or more in debt. Nonfederal borrowing is also most widespread in this sector. Among for-profit bachelor’s degree recipients, 65 percent of borrowers had an average of $11,300 in nonfederal debt — in addition to their federal student loans.

Baum said, “Students using nonfederal loans to pay for college are of particular concern because private student loans generally have higher interest rates and do not come with the same repayment protection as federal student loans. These are the students who are more likely to face repayment difficulties.”

High debt does not necessarily indicate that a student will have difficulty repaying the debt. Some with high debt will not have trouble paying it off because they will have high earnings. On the other hand, many students with relatively low debt may struggle because of weak earnings or failure to complete a certificate or degree program. For example, the 10 percent of associate degree recipients who graduated with more than $20,400 in debt may be at least as vulnerable as the bachelor’s degree recipients with twice as much debt.

“The lowest-income students are not the most likely to graduate with high debt. In fact, low-income dependent students are no more likely than middle-income students to graduate from college with a great deal of debt,” said Steele.

High undergraduate debt is more common among independent students, who generally do not receive support from their parents. Twenty-four percent of independent students graduating with a bachelor’s degree in 2007-08 had at least $30,500 of debt. Overall, the frequency of high debt is twice as high among independent students as among dependent students. Among dependent students, debt is not correlated with family income.

The highest concentration of nonfederal debt is among dependent students from families with incomes of $100,000 or higher, for whom 70 percent of the debt is nonfederal. It is quite likely that many of these families never apply for federal financial aid so are not offered federal student loans.

College Board President Gaston Caperton said, “The analyses in Who Borrows Most? emphasize the urgent need not only to strengthen postsecondary financing policies but to provide better guidance and improved financial literacy for students before they take out loans that will get them into trouble down the road. The College Board remains committed to working with our member schools and colleges, policymakers and families to help students understand their options and make level-headed decisions.”

The report was released on April 26.