A Question For Sandy Baum

What should boards know about student debt?

By AGB    //    Volume 20,  Number 3   //    May/June 2012

With more students accumulating more student debt, Trusteeship consulted economist Sandy Baum to ask what it means, whether it’s as bad as it seems, and what boards can do about it.

Much has been written in the news media about student debt now surpassing credit-card debt. What does this mean for students and families?

The main force pushing up the total amount of outstanding student debt is growth in the number of people going to college. Enrollment in degree  granting institutions increased from 15.3 million in fall 2000 to 20.6 million in fall 2010. The comparison to credit-card debt is particularly misleading because that form of debt plummeted with the credit crunch.

Some students are borrowing too much money and taking out types of loans that are quite risky. Federal loans come with fixed interest rates and protection for borrowers whose incomes are not high enough to support debt payments. In contrast, private student loans generally have variable rates that can go quite high. If students are unemployed or underemployed, they are still required to make payments. And private loans are not dischargeable in bankruptcy. Institutions that are not discouraging this sort of borrowing should examine their practices. This is a serious problem, particularly for students in courses of study that are unlikely to lead to financially stable outcomes. But for most students, reasonable borrowing opens doors to educational opportunities and much more promising futures than they would otherwise have.

What trends are you seeing in borrowing for higher education?

The percentage of students within each sector of higher education who borrow is not increasing rapidly. Average debt levels are growing, but the growth in the share of students enrolling in the for-profit sector explains a significant portion of the growth in average debt levels. These students— who tend to be older, of lower income, and with weak academic preparation—are more likely to borrow and borrow much higher amounts than students in public or independent nonprofit institutions. Also, for-profit institutions have much higher tuition rates than public institutions. This sector accounted for 3 percent of total enrollments in 2000 and 9 percent in 2009. We should focus our attention on the students who are running into debt problems, not treat student loans in general as dangerous.

What do boards need to know about student debt?

Boards should know the average and range of debt their students are accumulating and compare those figures to national averages. They should also find out how loans are treated in the financial-aid packages their students are offered. Are students told that their financial need is being met through a combination of grants, federal loans, parent loans, and private loans? Do they understand that not all of these sources of funds should be considered “financial aid”—and that they should think carefully about how much debt they are accumulating? Institutions whose students are borrowing much more than the national average should consider ways of addressing this issue.

What does all of this mean in terms of the tuition and financial-aid policies boards and their institutions should be considering?

Much of the drama surrounding student debt is based on a misunderstanding of the real issues. Institutions and their representatives have a responsibility to increase public understanding of the important role of student loans and of what the real danger signs are for students and families. Institutional aid policies that direct funds to students who could pay on their own instead of to those who really need the help lead to increased borrowing among students least equipped to handle the debt. Holding tuition increases in check and ensuring that students with the most limited financial means pay the lowest net prices is important for keeping student debt levels manageable.

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