Student borrowing: debt, default, and repayment.

AuthorLochner, Lance

Three significant economic trends in the United States and other developed countries have altered the landscape of higher education substantially in recent decades, with important implications for student borrowing and repayment behavior, Alex Monge-Naranjo and I argue in a series of recent papers. (1) First, the costs of college have increased markedly, even after accounting for inflation and expansions in student aid. Second, average returns to college (net of tuition payments) have increased sharply. Third, labor market uncertainty has increased considerably, highlighted by the Great Recession.

The first two trends, rising costs and returns to college, have contributed to a dramatic increase in demand for student loans. Annual student borrowing levels doubled in the 1990s and then again over the next decade. (2) Combined government and private student debt levels in the U.S. quadrupled from $250 billion in 2003 to $1.1 trillion in 2013, reflecting sizeable increases in both the incidence of debt and debt levels among borrowers. (3)

Figure 1 documents the changing distribution of cumulative debt among U.S. baccalaureate recipients since 1989-90. The fraction of college graduates borrowing less than $10,000, including non-borrowers, declined from over 70 percent to less than 40 percent, while the fraction of college graduates borrowing more than $30,000 rose from 4 percent to 30 percent. (4)

The steady rise in student borrowing over the late 1990s and 2000s masks the fact that government student loan limits remained unchanged (in nominal dollars) between 1993 and 2008. Adjusting for inflation, this reflects a nearly 50 percent decline in value. In 2008, aggregate Stafford loan limits for dependent undergraduate students jumped from $23,000 to $31,000, although this value was still less than the 1993 limit after accounting for inflation. Not surprisingly, the share of full-time/full-year undergraduates that maxed out Stafford loans increased more than five-fold from 1989-90 to 2003-04. (5) Undergraduates turned more and more to private lenders to help finance their education prior to the 2008 increase in federal student loan limits and contemporaneous collapse in private credit markets. Undergraduate borrowing from non-federal sources peaked at 25 percent of all undergraduate borrowing. Despite this increase in private lending, there are reasons for concern that a growing fraction of youth from low-income and even middle-income backgrounds are unable to access the resources they need to attend college. (6)

At the same time, there are concerns that many recent students are taking on too much debt. Growing levels of debt, coupled with rising labor market uncertainty and the last recession have led to a sharp increase in student loan default rates after more than a decade of decline. Borrowers who are 270 days or more (180 days or more prior to 1998) late on their Stafford student loan payments are considered to be in default. Figure 2 shows that two-year cohort default rates more than doubled between 2005 and 2011, with default rates increasing most at for-profit institutions and public two-year schools.

Altogether, these trends raise two seemingly contradictory concerns: Can today's college students borrow enough? Or, are they borrowing too much? Growing evidence suggests that both concerns are justified, with important implications for the design of student loan programs.

Can College Students Borrow Enough?

Monge-Naranjo and I document that the rising costs and returns of college, coupled with declining real government student loan limits, make it likely that credit constraints have become more salient in recent years. (7) Indeed, one in three full-time/ full-year undergraduates in 2003-04 exhausted their...

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