Todd J. Leach: Clearing up some confusions about student debt
Congreve Hall at the University of New Hampshire’s flagship campus, in Durham.
— Photo by Kylejtod
BOSTON
From The New England Journal of Higher Education, a service of The New England Board of Higher Education (nebhe.org)
The student-debt narrative seems to be increasingly dominated by sensational anecdotes. I recently watched a segment on a national morning television show in which a student with $290,000 in student debt was being held up as an example of how big the problem is.
The story suggests that the cost of tuition for a four-year degree, one from a public institution in this case, is nearly $300,000. Only it isn’t, at least not for the institution that the example above was based on. In fact, the average cost of attendance at the institution used in this particular story was only $28,000 a year, according to the federal College Scorecard. One might still argue that $28,000 a year is too high an average cost for tuition, but that also includes room and board. A high-need student could receive up to $6,895 a year in Pell Grants and probably qualify for even more institutional student aid funding. In other words, a high-need student would likely be paying less than $22,000 a year.
This is not to say that there are no institutions that have a cost of attendance that could exceed $290,000, But for high-need students choosing to attend a public institution, or a low-cost pathway at a private institution, and who are eligible for full Pell Grants and institutional aid, it is still possible to find a path that is much less expensive. Some states, such as New Hampshire, offer gap programs that ensure high-need students can attend tuition free. While room and board is separate from tuition, students that are able to commute can further contain the cost of education.
So how is it a student might have two or three times in debt what it actually costs to attend four years of college?
To start with, there are many different loan types that might be lumped under the heading of student debt. As far as federal Direct Loans go, there are subsidized and unsubsidized loans. Direct subsidized loans require a student to demonstrate financial need. High-need students who are still considered “dependents” may borrow up to $23,000 in aggregate of subsidized loans (total across the four years).
In addition, those same dependent students may borrow an additional $8,000 in Direct unsubsidized loans. Independent high-need students can borrow up to $23,000 in subsidized Direct loans and an additional $34,500 in unsubsidized Direct loans. If you are keeping track of the math, it means that a dependent student may borrow up to $31,000 in Direct federal student loans and an independent student may borrow up to $57,500. Those number still do not add up to the $290,000 example showcased in the story referenced in this example.
What else could be in that $290,000 number? Several things, and almost anything. There are plenty of private loan options available that are not need-based and that have few if any restrictions on how that money can be used. In fact, not all debt incurred by students is for education purposes. Students may borrow money for vacations, cars, entertainment or to support a spouse and dependents while they are unable to work during their educational pursuits. When the numbers are self-reported, they might also include money borrowed from friends or family, as well as money the student has racked-up on their credit cards. The reality is that average Direct federal student debt is under $30,000, according to the Federal Reserve.
There have been numerous calls and proposals for debt relief, but to assess the merits of those varied proposals it is first important to understand the various forms of debt and know exactly what debt is being forgiven. It is also important to understand that debt relief would affect individual college graduates very differently.
For example, a student with no financial need who borrows $25,000 in order to fund summer travel experiences will not be affected the same way as a high-need student who minimized their debt by commuting and borrowing only $5,000.
An even greater equity issue may exist when it comes to students who avoided debt altogether. This is not to say that loan-forgiveness programs have no virtue. Like any investment, student-debt forgiveness should not only have a price tag attached to it, but also some specified goals. Some states have used loan forgiveness as a way to attract graduates to a particular region, while other programs are aimed at incentivizing students to choose particular career paths. In either of these cases, the type of loan does not matter since the objective is incentivizing choices, but if the objective is to address economic disparity or poverty in general, then the details, such as the current earning level of those receiving debt forgiveness, matters.
According to the Federal Reserve, the total amount of outstanding student debt is well above a trillion dollars, which raises one final question when assessing forgiveness options: What are the opportunity costs? Even forgiving all $1.5 trillion of outstanding debt will not lower the cost to attend college, improve access or build a stronger pipeline of graduates for the workforce the way an increase in Pell Grants would. Unfortunately, this may be a false choice. These are policy questions, and the reality may be that it is more feasible to gain support for some form of debt forgiveness than to increase direct subsidies such as Pell Grants.
Regardless of the ultimate decisions on debt forgiveness, we should be looking at ways to minimize student debt to begin with. The cost of attending a four-year institution is certainly one major factor and there are several ways that cost could be further reduced, such as: increasing Pell Grant awards; developing more low-cost delivery options (including online, community college transfer pathways and early college options); and, of course, encouraging institutions to continuously work to find efficiencies. Debt could also be reduced by increased screening and accountability for institutions that target vulnerable students with deceptive practices, as we have seen with some for-profit institutions. The federal government has already forgiven billions of dollars in student-loan debt associated with deceptive for-profits, including $5.8 billion that resulted from the failure of Corinthian Colleges. Beyond college costs and accountability, there are other measures that could be considered and that includes greater accountability for loan providers.
There are steps institutions in general can take to ensure careful borrowing decisions on the part of students. For example, a common practice today is to actually package student loans for accepted students and put the onus on the student to turn it down rather than simply informing the student what they are eligible for should they want to take out loans. Perhaps one of the most effective tools for reducing debt is better information. While not a perfect tool, the federal College Scorecard provides information on cost of attendance and on average earnings of graduates, but I suspect very few families and students are making the Scorecard a significant part of their decision process.
Perhaps it is time to expect institutions to more prominently make data, such as their student-loan default rates, available to prospective students. Students should not just be informed how much they can borrow but what are the chances they will be able to pay it back.
Ultimately, the bigger issue may not be the amount of student debt but that graduates are struggling to pay it back. While the focus is currently on whether or not students should be liable for the totality of their student-loan debt, institutions should anticipate greater focus on their student loan default rates and the return on investment for their graduates. Once again, not all student debt is the same.
Todd J. Leach is chancellor emeritus of the University System of New Hampshire and former chair of NEBHE.