The amounts individual students borrow to fund their education depend on their circumstances. The longer students stay in school, the more they are likely to borrow. So, 8 percent of 2011-12 associate degree recipients borrowed $30,000 or more. Among bachelor’s degree recipients, 29 percent borrowed this much. And more than three-quarters of graduate degree recipients borrowed this much.
Debt levels also vary across types of institutions. Students who enroll in for-profit institutions borrow more than similar students attending public and private nonprofit colleges and universities.
Family income also matters. Among 2011-12 bachelor’s degree recipients, about 40 percent of those from the top half of the family income distribution graduated without debt, compared with about 20 percent of those from the bottom half. Those from families in the top quarter of the income distribution were less likely than others to borrow $30,000 or more, but there was no significant difference across the rest of the income distribution in the share of graduates borrowing this much.
Because students borrow much more for graduate school than for their undergraduate studies, much of the outstanding student debt is owed by people with relatively high incomes. In 2013, 47 percent of the outstanding student debt was held by households in the top quarter of the income distribution and only 11 percent was held by those in the lowest income quartile. This is not about the family backgrounds of these borrowers, but about where they ended up after they completed their education.
Going to college iincreases earnings potential. So, it makes sense for students to borrow some of the money they need to pay tuition and living expenses and repay their loans out of the extra earnings they have because of their education. But the private loan market works well only for borrowers with collateral and/or strong credit histories. If you don’t make the required payments on your car loan, the lender will repossess the car. But the bank can’t take back your college education and many students have little history with credit markets.
The federal government can offer better terms to student borrowers, providing the liquidity they need to pay for college now, in anticipation of higher earnings in the future.
The core purpose of the federal student loan program is not to subsidize students. Other public funding—including state appropriations to public colleges and federal and state grant aid—are the main ways taxpayers help students pay for college.
The main purpose of federal student loans is to solve cash flow problems. Loans provide liquidity. The federal student loan programs now in effect allow all students to borrow—regardless of their financial circumstances. Since 2010, all these loans have been made directly by the federal government. And federal loans can be repaid through programs that limit monthly payments to affordable percentages of borrowers’ incomes.
Many discussions of college being “unaffordable” focus on high and rising tuition prices, without much attention to the resources available to students to pay those prices. Plus, too many times we talk about college expense without considering the return on investment.
There is no one indicator that can show whether college is affordable. Instead, measuring affordability requires a thoughtful approach that considers:
Sticker prices and net prices (after financial aid)
Students’ earnings while in school
Expected earnings premium—how much the education will pay off in future earnings
In general individuals with a college degree earn much more than those with just a high school education. Increased educational attainment has significant benefits both for society as a whole and for the students themselves.
The students who attend for-profit institutions are disproportionately older, black and Hispanic, from low-income backgrounds, and with weak academic preparation. Students borrow much more to attend these schools than they would if they enrolled in public colleges. And completion rates are very low for students seeking associate or bachelor’s degrees.
During the great recession, there was very rapid growth in the for-profit sector. Much of it came from big companies—like the University of Phoenix—who signed up all kinds of students who had no idea what they were getting into. In 2000, New York University held the title of “highest-debt institution” with its students and former students owing $2.2 billion. In 2014, the University of Phoenix topped that list; its students and former students owe over $35.5 billion. In fact, all seven of the institutions with the highest levels of student debt are in the for-profits sector.
Two large for-profit institutions have recently gone out of business because of financial problems, leaving many students in the lurch. And a number of lawsuits highlight the questionable practices that are too common in this sector.
The answer to this question depends on whether this issue is institutional grant aid or federal and state financial aid.
Institutional grant aid reduces the tuition prices facing students. It allows institutions to charge different prices to different students—frequently based on their financial circumstances but sometimes based on their high school grades, test scores, athletic ability.
When colleges raise their tuition, they frequently increase their aid budgets to help students pay the higher prices. But giving these discounts means the college gets less revenue relative to the published price. So, there is a close relationship between sticker prices and institutional grant aid.
Federal and state financial aid is different. Some people argue that the simple forces of supply and demand mean that when the government gives students more money, colleges will raise their prices. This idea is sometimes called the “Bennett Hypothesis” (after former U.S. Secretary of Education William Bennett, who popularized the idea in 1987).
The empirical evidence about this impact is weak—outside of the for-profit sector. But even if this aid does put upward pressure on sticker prices, it’s a small price to pay. The point of the federal student loan and grant programs is to increase demand for college. Without federal student aid, lots of low- and moderate- income students would not go to college—they simply would not be able to pay. So, if we can make higher education possible for more people, it’s a fair trade-off that there might be some upward pressure on sticker prices.
There is an active movement among states to make community colleges tuition free. Tennessee was the first state to implement such a policy and the Obama administration proposed a related idea at the national level. Several states have followed Tennessee’s lead and New York recently passed legislation that will eliminate tuition for students from households with incomes below $125,000 at both two-year and four-year public institutions.
There are a number of problems with these policies. The central issue is that students don’t just need lower prices to succeed in college. They have to attend institutions that have sufficient resources to offer the courses they need, provide academic and social support systems, and ensure quality. Promising zero tuition is likely to limit the resources available to provide these important services, even as state funding per student has declined dramatically over time.
Another issue is that the state programs tend to be “last dollar” programs. They fill in the gaps between federal and state need-based aid and tuition prices. Many low- and moderate-income students already have their tuition paid through these need-based programs. So the extra dollars will just go to those whose incomes are too high to qualify for other aid. Unlike need-based programs that attempt to level the playing field, free college programs tend to provide equal subsidies to rich and poor alike.
Borrowers can repay their federal student loans through an income-driven system that limits monthly payments to an affordable share of income and forgives unpaid debt after 10, 20, or 25 years of payments. But too many options and bureaucratic hurdles prevent many people from taking advantage of this policy. Other countries, including Australia, automatically enroll borrowers in such a program, making it very difficult for them to default. The United States could implement a similar policy, in addition to improving the details of the program so it works better for both borrowers and taxpayers.
The funds to cover the costs of college must come from somewhere. But many people don’t want either students and families or taxpayers to have to pay. From a practical perspective, borrowing for college makes sense: people have limited resources before they get an education, but an education can boost their income over time. It’s also practical that the government should help: society benefits as a whole by having an educated populace. Government-sponsored grant aid and student loans are an investment that generally pays off. State and federal policies should address the problems of students being unable to enroll in or complete college because of financial barriers, of students enrolling in and borrowing for institutions and programs that have little chance of paying off for them, and of students who struggle with loan repayment because of unforeseen circumstances—not eliminate opportunities by doing away with all loans.
Some students pay less because their finances make it difficult for them to pay. Others, who could pay full price, pay less because the institution wants to provide an incentive for them to enroll there instead of elsewhere.
This idea of “tuition discounting” is not a bad thing. Many highly selective institutions have long waiting lists of students willing and able to pay their sticker prices; however, these institutions want to enroll the best students they can and many of those students can’t afford to pay. Other institutions would have empty seats if they did not discount so generously; if they lowered the sticker price enough to fill the class, their total revenues would be too low to operate. By meeting as closely as possible each student’s willingness and ability to pay, institutions are able to attract a variety of students and stay operational.