The negative consequences of relying on loans to raise higher education attainment

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The U.S. cannot reach the levels of educational attainment required for international competitiveness in a global, technologically driven economy without closing the considerable gaps in attainment that persist across groups. Gaps in attainment based on family income are among the most vexing. Compared with students from higher-income families, students from low-income families are less likely to enroll in college and, among those who do enroll, are less likely to graduate.

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One particularly formidable barrier limiting higher-education attainment — especially for low-income students — is the need to rely on loans to pay college costs.

Students are increasingly using loans to pay for college. At all types of higher education institutions, both the shares of students who are borrowing and the amounts they are borrowing have been increasing. According to the College Board's Trends in Student Aid 2013, 57 percent of 2012 public four-year bachelor's degree recipients borrowed an average of $25,000, whereas 52 percent of 2001-02 graduates borrowed an average of $20,400 (constant 2012 dollars). These increases are not surprising, given the dramatic rise in the costs of attending college. According to the College Board's Trends in College Pricing 2013, after controlling for inflation, average published tuition and fees (that is, the sticker price) increased over the past 30 years by 231percent at public four-year institutions, 164 percent at public two-year institutions, and 153 percent at private, not-for-profit four-year institutions.

Borrowing pays off for many students, especially those who borrow reasonable amounts, complete their degrees, and secure steady employment. But for many other students, the heavy reliance on student loans to pay for college costs is problematic. First, the amount borrowed is high for a noteworthy share of students. Trends in Student Aid shows that 7 percent of all those who first enrolled in postsecondary education in 2003-04 had accumulated more than $30,000 in student loan debt by 2009, five years after first enrolling; 2 precent had accumulated more than $50,000 in five years.

Second, focusing only on cumulative debt ignores the considerable costs of the interest on these loans. In the 2014 report, Borrowing Against the Future: The Hidden Costs of Financing U.S. Higher Education, the Center for Culture, Opportunity and Politics at the University of California, Berkeley Institute for Research on Labor and Employment estimates that interest payments on student loans (federal and nonfederal) amounted to $34 billion in 2012, a 127 percent increase in constant dollars from the total amount in 2002.

Third, borrowing is risky — especially for students who do not complete their programs and go on to higher-paying jobs that provide the income necessary to repay their debts. Not surprisingly, loan default rates are higher for borrowers who drop out than for other borrowers. And as noted above, lower-income students are more likely to drop out of college than higher-income students.

Fourth, given the riskiness of loans, it should not be surprising that many individuals are unwilling to borrow. Individuals from low-income families and who are the first in their families to attend college are particularly reluctant to use loans to pay college costs. Some who are unwilling to borrow may forgo higher education, while others attempt to finance college costs with no loans and high amounts of paid employment. Yet, working a high number of hours limits the amount of time students can devote to their coursework, and also often leads to longer time-to-degree and lower rates of degree completion.

Recognizing that loans will continue to be a primary mechanism for financing college costs, federal policymakers should act to minimize the negative consequences, especially for students from low-income families. Federal policymakers can reduce these negative consequences in at least three ways: maximize the availability of need-based grants, improve knowledge of college costs and appropriate financing mechanisms, and support state and institutional efforts to improve college completion rates.

Federal policymakers can maximize the availability of need-based grants directly through fully funding of the federal Pell Grant Program and indirectly through incentives that encourage states and institutions to fund need-based grant programs. Federal policymakers may also reduce the negative consequences of loans by improving students' and families' knowledge and understandings of college costs, different forms of financial aid and the appropriate mix of loans and paid employment. Finally, federal policymakers can reduce the negative consequences of loans by supporting efforts that increase the likelihood that Americans who enter college will complete their educational programs — and thus realize the economic return required to repay their loans.

Perna is the executive director of the Alliance for Higher Education and Democracy, a professor at the Graduate School of Education at the University of Pennsylvania and coauthor, with Joni Finney, of The Attainment Agenda: State Policy Leadership for Higher Education.