Why Do Students Borrow So Much? Recent National Trends in Student Loan Debt

By — Educational Resource Information Center (U.S. Department of Education)
Updated on Jul 26, 2007

College students are leaving their higher education institutions with more educational loan debt than ever before. From academic year 1994- 1995 to 1999-2000, the amount postsecondary education students borrowed through the federal student loan programs jumped from $24 billion to $33.7 billion (U.S. Department of Education 1999 and 2000a). Cumulative federal student loan debt for bachelor's degree recipients rose 19 percent, while total debt for borrowers who received master's and other advanced degrees more than doubled (Scherschel 2000). What has led to the increased use of student loans? Is the rising indebtedness harming students' futures? 

While concern about rising student debt levels remains high (Scherschel 1999a and 2000), recent data reveal that much of the increased borrowing occurred due to the expansion of the loan programs rather than to growth in college costs. Further, many of the new loan recipients came from middle- and upper-income families, and most undergraduate borrowers do not appear to have been adversely affected by their added indebtedness. 

Reasons why Borrowing has Increased

Several recent studies (King 1999, Redd 1994, Scherschel 1999a and 1999b) provide three possible reasons for the growth of student loans. First, increases in federal grant aid have not kept pace with rising postsecondary education costs, and the widening gap between college prices and grant aid compelled more students to borrow. Second, students' financial need has increased as educational costs have grown, and more of this need is met by loans. And third, increases in loan limits and ease of borrowing have allowed more students to receive loans. Each of these reasons has merit and deserves consideration. 

There is no question that postsecondary education costs grew rapidly during the 1990s. The College Board's most recent Trends in College Prices report (College Board 2000) shows that, when adjusted for inflation, tuition and fee charges at four-year public colleges and universities increased 49 percent during the decade; at four-year private institutions, tuition prices rose 32 percent. Meanwhile, median income for families with a head of household age 45 to 54 (families most likely to have college-aged children) grew by just 4 percent, and appropriations for Federal Pell Grants (aid for low-income undergraduates) increased only 15 percent. 

At first glance, these factors would appear to have been the primary causes for the growth in borrowing. However, data from the National Center for Education Statistics' National Postsecondary Student Aid Study (U.S. Department of Education 2000b and 2000c) show that, for middle- and upper- income undergraduate students, amounts of loans actually grew faster than their total costs. For families with income of $40,000 to $59,999, the average annual amount of federal student loans grew to $3,729 from $3,216 during the 1992-93 to 1995-96 period, but total cost of attendance (tuition, fees, room, board, books, educational supplies, and other expenses) fell from $14,150 to $13,267. Costs declined because a greater share of the students were enrolled at lower-cost four-year public institutions in 1995-96 than in 1992-93. Despite the shift in enrollment to less expensive colleges and universities, students from middle-income families borrowed more. Among all undergraduate borrowers, average federal student loans grew 16 percent but educational costs increased just 3 percent. Clearly, growth in educational costs does not completely explain the increase in borrowing. 

Similarly, amounts borrowed grew much faster than upper-income students' demonstrated financial need. Financial need is defined as the difference between students' and families' total postsecondary education costs and the estimated amounts they can afford to pay from their income and other resources. For undergraduates from families with income of $80,000 or more, financial need increased only 3 percent, but average loan amounts jumped 13 percent. Low-income students faced the opposite extreme; for undergraduates from families with income of under $20,000, financial need jumped 23 percent, while average amounts borrowed only grew 11 percent (U.S. Department of Education 2000b and 2000c). 

These results strongly suggest that much of the growth in borrowing also can be attributed to the changes made in the Higher Education Act (HEA), the federal law that governs the financial aid programs. In 1992, the law increased the annual and cumulative maximum amounts students could borrow (Redd 1999). Annual loan limits under the Stafford Subsidized Loan program (loans provided to students based on their financial need) for second-year undergraduates were raised to $3,500 from $2,625. The maximum loan to students in the third or higher year of undergraduate study was raised to $5,500 from $4,000, and graduate/professional student loan maximums grew to $8,500 from $7,500. More importantly, the law also authorized a new loan program-the Stafford Unsubsidized Loan program-which essentially allowed all students, regardless of their families' financial need or income, to receive assistance. Students also were allowed to receive both subsidized and unsubsidized loans in the same academic year. When the new unsubsidized loan amounts were combined with the maximum subsidized amounts, undergraduates in the junior or senior years could borrow up to $10,500 in federal student loans annually. 

Income Levels of Students Who Received Loans: 

Much of the recent growth in federal student loan borrowing has been through the Stafford Unsubsidized Loan program. From its inception in 1993-1994 to 1999-2000, the amount of unsubsidized loans more than tripled-rising from $4.1 billion to $12.9 billion. In the same period, amounts of subsidized loans grew 40 percent, from about $12.5 billion to $17.5 billion (U.S. Department of Education 1999 and 2000a). 

Because students may receive unsubsidized loans regardless of their families' incomes, a large share of the added loan dollars appear to have gone to students from middle- and upper-income families. The percentage of undergraduate students from families with income between $60,000 and $79,999 who received federal student loans grew from 56 percent in 1992-93 to 67 percent in 1995- 96. At the same time, the proportion of borrowers from families with income of less than $20,000 who received federal loans dropped from 52 percent to 49 percent (U.S. Department of Education 2000b and 2000c). Middle- and upper-income families who might not have qualified for need-based Stafford Subsidized Loans became eligible to receive Stafford Unsubsidized Loans. While the unsubsidized program allowed more middle- and upper-income students to receive loans, it is possible that a number of these students were borrowing more than they really needed to attend postsecondary education (King 1999, Redd 1994 and 1999). 

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