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

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).