The College Board released its annual report this week on how Americans finance a higher education, and it showed that for the first time in some two decades the total amount of borrowing for college actually dropped by $5 billion from the previous year. In the face of media reports about college graduates struggling under crushing debt, the report’s authors go to great lengths to point out that the story is not as bad as we are often made to believe.
“Stories in the press about individual students with startling amounts of debt obscure actual borrowing patterns,” the report says.
True, few undergraduates leave school with $100,000 in debt, but several other studies in the last month on student loans have uncovered worrisome trends that the College Board report plays down:
- Without home equity to tap, parents are taking on expensive loans. The number of borrowers taking out Parent Plus loans has nearly doubled since 2000, and loan volume has increased from $4.3 billion to $10.6 billion.
- Graduates are increasingly defaulting on their loans. Of the borrowers who entered repayment between October 2009 and September 2010, 9.1 percent had defaulted by the following September. Less than a decade ago, the default rate was at its historic low, 4.5 percent.
- Average debt continues to rise. Average student debt now stands at $26,600 at graduation, up 5 percent from the previous year. Three out of four college leaders think that’s a reasonable amount, but one out of two Americans think it’s too high, according to a survey by Time magazine.
Given that financing a college education with debt is now the norm, how can the system be improved so that these trends don’t continue to worsen? Last week, I moderated a panel at the National Press Club about what to do about rising default rates. I walked away realizing just how difficult this problem is to fix and how basically every solution has unintended consequences for some group of students or institutions. (In the interest of full disclosure, the event was sponsored by Career Education Corporation, a for-profit provider which operates several institutions with high default rates.)
Among the ideas that seemed to get the most traction among the audience made up mostly of financial-aid officers:
The government should allow colleges to limit a student’s loan eligibility.
Right now, they are only allowed to put caps on borrowing on a case-by-case basis. Last fall, the Education Department invited colleges to test alternative ways of administering federal student aid, including an experience that would let institutions reduce students’ annual loan eligibility by at least $2,000. Hopefully, those experiments will provide insights on how to expand the idea to more institutions.
Require institutions to have more “skin in the game.”
Colleges with high default rates are treated the same as those with low rates (the threshold to be kicked out of the federal program is pretty high). The system should be tiered so that those with higher rates have access to less money than those with lower rates.
Research shows that the best way to ensure that students repay their loans is that they complete a degree. So if we’re going to put limits on borrowing, perhaps we should focus on the first few years of college when students are more likely to drop out.
Improve financial literacy.
It was pointed out at the forum that counseling about loans happens at the beginning and end of college, exactly when students have many other concerns on their minds. Financial literacy programs need to start much earlier in a student’s career (like elementary school) and colleges need to remind students and parents as much as possible about the level of debt they are taking on.
photo credit: DebtConsolidationDeal.com