The Impact of Student Loans on College Access

Loans have become an increasingly important component of student financing of postsecondary education in the United States. While the use of loans for financing college is not new Galloway and Wilson (2005) note that the first governmentguaranteed student loan was made 50 years ago in recent years the volume of loans has skyrocketed.

The College Board (2007), which produces an annual report tracking student financial aid for postsecondary education, estimated in its most recent volume that in the 2006-07 academic year students borrowed in excess of $78 billion to finance their college education.

This was a 155 percent increase above the $31 billion that students borrowed 10 years earlier (98 percent in inflation-adjusted dollars). Among undergraduates, loans represent 49 percent of the total, with grants making up 46 percent (the remainder representing work study and tax credits and deductions).

For graduate students, loan debt represented 64 percent of the financial aid they received, compared to 33 percent in the form of grants (College Board, 2007). Three-quarters of the education loans are federally guaranteed or federally funded loans to students or parents.

This paper will provide a brief history of student loan programs in the United States, along with a snapshot of the current status of student loan usage. It then will provide a summary of the research literature on three important aspects of student loans:

The relationship between student loans and college access, choice, persistence, and degree attainment;
The relationship between student loan debt burden and postbaccalaureate outcomes, such as decisions students make about jobs or graduate training; and
The impact of debt aversion, or the hesitation on the part of some students to use debt for financing their postsecondary educations.

The paper closes with some policy options for consideration. The intent of the paper is not to review every study on these topics; there are literally hundreds of studies over the years that have addressed one or more of these questions.

Rather, the paper will attempt to provide an overview of the key findings, often through examples from studies, as well as to identify inconsistencies or questions still unanswered in the literature.

Overview of Student Loans

While student loans have existed for decades, the impetus for the development of the government-backed loans in place today was the passage of the Higher Education Act (HEA) of 1965. This legislation, through Title IV of the act, created the Guaranteed Student Loan (GSL) program.

The GSL program combined private capital with government subsidies of the interest rates and repayment terms, along with government guarantees against default. The number of borrowers and the volume of lending grew slowly at first, but began to rise rapidly in the 1980s and especially after 1992.

By 2006-07, 11 million loans under the renamed Federal Family Education Loan (FFEL) program, amounting to $46 billion, were disbursed to more than nine million borrowers. An additional $14 billion was disbursed through the federal Ford Direct Student Loan program (College Board, 2007).

Figure 1 shows the dollar volume of federal loans to students from 1970 to 2006.2 In the 1992 reauthorization of the HEA, Congress increased the limit on the amount of money students could borrow annually and cumulatively in the federal loan programs.

Prior to these changes, dependent undergraduates could borrow a cumulative total of $17,250 and independent students $37,250 (Heller, 2001). After the 1992-93 academic year, these limits were raised to $23,000 and $46,000, respectively.

Parent borrowing through the Parent Loans for Undergraduate Students (PLUS) program was capped at $4,000 annually prior to the 1992 reauthorization; this cap was eliminated so that in subsequent years, parents could borrow up to the student’s cost of attendance less any other aid received.

The 1992 reauthorization also liberalized the needs-testing that students underwent to qualify for the loans; this change, along with the introduction of unsubsidized loans (described below), led to an increase in the number of borrowers.

Another important milestone in the history of the federal loan programs was the creation of a direct Student Loans (FDSL), the federal government, rather than banks and other organizations, provides the capital for student loans.

The federal government as a source of capital for loans was not new; the Perkins Loan program, originally named the National Defense Student Loan program, had, since 1958, used federal capital as the source of loans for students.

But the Perkins program (a revolving loan program through which the federal government provides capital to colleges to lend to students) has historically been much smaller than the FFEL program (accounting for just $1.1 billion in loan volume in 2006-07).

The creation of the direct lending alternative in 1993 (with the first direct loans disbursed in the 1994-95 academic year) allowed for a large expansion of loans based on federal, rather than private, capital. While the creation of direct loans did not lead to a large increase in the volume of federal student loans in the 1990s, it did shift some of the capital from private to public sources.

Yet another significant development was the emergence of private loans, which are issued by private lenders apart from the federal loan program and are not supported by federal subsidies or default guarantees.

Figure 1 shows private loans separately from federal loans. While the private loans represent a small share of all student loans available (24 percent in 2006-07), they are the fastest-growing lending program in 1993.

Under Ford Direct Student Loans (FDSL), the federal government, rather than banks and other organizations, provides the capital for student loans. The federal government as a source of capital for loans was not new; the Perkins Loan program, originally named the National Defense Student Loan program, had, since 1958, used federal capital as the source of loans for students.

While the creation of direct loans did not lead to a large increase in the volume of federal student loans in the 1990s, it did shift some of the capital from private to public sources.

Over the last decade, federal loan volume increased 107 percent (61 percent after adjusting for inflation), while private loans increased 894 percent (764 percent after adjusting for inflation).

Today, there are two routes through which students can obtain federally guaranteed loans: through the FFEL program (with loan capital supplied by private lenders) and through the FDSL program (with loan capital provided by the government).

In 2006-07, FDSL loans represented 20 percent of all federal loans (College Board, 2007).5 In both FFEL and FDSL there are two primary types of loans: subsidized loans and unsubsidized loans. Subsidized loans are available to meet documented financial need.

The government pays the interest on these loans while students are in school and for a six-month grace period after they leave school. Unsubsidized student loans are available to all students regardless of their financial circumstances.

These loans accrue interest from the time they are issued. Historically, the interest rates on the two types of loans have been the same, but beginning July 1, 2008, the rate on subsidized loans will decline gradually to 3.4 percent while the rate on unsubsidized loans remains fixed at 6.8 percent.

Both subsidized and unsubsidized loans, however, are guaranteed against default by the federal government. Both the FFEL and FDSL programs also offer loans to parents of undergraduate students through the PLUS program.

Table 1 shows the distribution of loan volume in the three major federal programs by type of student and postsecondary institution. Sixty-nine percent of the loan dollars in 2006–07, or $46 billion, went to undergraduate students or their parents, with the majority of these dollars in the subsidized program.

Graduate students received the remaining $20 billion, with the majority of their awards in the unsubsidized program.

Students attending public four-year institutions received 41 percent of the total loan volume in 2005-06, with those in private nonprofit institutions (the majority of which are four-year colleges and universities) receiving another 36 percent.

Proprietary (for-profit) school students received 18 percent of the federal loan dollars and the remaining 5 percent went to students attending community colleges. As shown in figure 1, since 1995-96 nonfederal loans have increased from $1.9 billion in volume to $18.5 billion.

Footnote 2 in this report provides an important caveat regarding these amounts, noting that they are estimates and exclude many forms of debt financing for which there are not reliable data.

The College Board report that tracks private loans notes that “[n]onfederal loans are not included in the student aid total because while they help students finance their education, they do not involve any subsidy” (College Board, 2006, p. 6).

The College Board has also tracked the median debt load of students graduating from college, using data from the National Center for Education Statistics’ National Postsecondary Student Aid Study (NPSAS).

Table 2 shows the proportion of all students who borrowed and the median cumulative amount borrowed through a combination of federal and private loans at the time of graduation for students with different types of degrees graduating from different types of institutions.

Students in proprietary (for-profit) institutions were most likely to have borrowed to help finance their postsecondary educations, and also had the highest debt levels upon graduation.

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