Is “Overborrowing” for College an Epidemic?

As the Senate Health, Education, Labor, and Pensions Committee continues to slowly move toward Higher Education Act reauthorization, the committee held a hearing this week on the possibility of institutional risk-sharing with respect to federal student financial aid programs. This idea, which has bipartisan support at least in principle, would require at least some low-performing colleges to be responsible for a portion of loans not repaid to the federal government. (I’ve written about this idea in the past.)

Sen. Lamar Alexander (R-TN), the committee chair, began his opening statement with a discussion of “overborrowing,” which he defines as students borrowing more than they need to in order to attend college. Along with Sen. Michael Bennet (D-CO) and other colleagues, he is sponsoring the FAST Act, which contains a provision that would prorate the amount of funds part-time students can borrow for living expenses. Financial aid administrators are also concerned about overborrowing, as evidenced by their professional association’s push to allow colleges to offer students less than the maximum loan amount. This is also something that Sen. Alexander discussed in his opening statement.

But there is no commonly-accepted definition of “overborrowing,” nor is there empirical research that clearly defines how much borrowing is too much. I can see why policymakers want to limit the amount of money that part-time students can borrow for living expenses while in college, as students may hit their lifetime loan caps before completing their degrees as part-time students. But, as research that I’ve conducted with Sara Goldrick-Rab at Wisconsin and Braden Hosch at Stony Brook shows, about one-third of all colleges set living expenses at least $3,000 below what it likely costs to live. This effectively limits student borrowing, as they cannot have a financial aid package exceeding the cost of attendance.

Some people have said that high student loan default rates are a clear indicator that overborrowing is a common concern. Yet students with a small amount of debt are at a higher risk of default, as many of them dropped out of college without a degree and were unable to find gainful employment. It could be the case that borrowing more money would be a better decision, as that money might help students stay in college and complete degrees. However, a substantial percentage of students from low-income families are loan-averse—either completely unwilling to take on debt or only willing to take on a bare minimum as a last resort. Underborrowing is the concern in higher education funding that few people are talking about, and it deserves additional study.

Finally, it is worth a reminder that the typical student graduating with a bachelor’s degree has about $30,000 in debt, although there are huge differences by race/ethnicity and family income. This is in spite of media reports that focus on borrowers with atypically high debt burdens. While I’m concerned about the substantial percentage of students borrowing large amounts of money for graduate school (and particularly the implications for taxpayers due to the presence of income-based repayment programs), it’s hard to convincingly argue that overborrowing for an undergraduate degree is truly an epidemic.

How Should State Higher Education Funding Effort Be Measured?

The question of whether states adequately fund public higher education has been a common discussion over the last few decades—and the typical answer from the higher education community is a resounding “No.” This is evident in two recent pieces that have gotten a lot of attention in recent weeks.

The first piece is a chart put out by the venerable Tom Mortensen at the Pell Institute that shows that higher education funding effort (as measured by appropriations per $1,000 in state personal income) has fallen to 1966 levels, which was then picked up by the Washington Post with the breathless headline, “How quickly will states get to zero in funding for higher education?” (The answer—based on trendlines—no later than 2050.) The second piece is from Demos and claims that state funding cuts are responsible for between 78% and 79%1 of the increase in tuition at public universities between 2001 and 2011.

Meanwhile, state higher education appropriations are actually up over the last five fiscal years, according to the annual Grapevine survey of states. In Fiscal Year 2010 (during the recession), state funding was approximately $73.9 billion, falling slightly to $72.5 billion by FY 2013. But the last two fiscal years have been better to states, and higher education appropriations have risen to nearly $81 billion. Higher education has traditionally served as a balancing wheel for state budgets, facing big cuts in tough times and getting at least some increases in good times. However, this survey is not adjusted for inflation, making funding increases look slightly larger than they actually are.

So far, I’ve alluded to four different ways to measure state higher education funding effort:

(1) Total funding, not adjusted for inflation (the measure state legislatures often prefer to discuss).

(2) Total funding, adjusted for inflation.

(3) Per-full time equivalent student funding, adjusted for inflation (the most common measure used in the research community).

(4) Funding “effort” per $1,000 in state income (a measure popular with education advocates).

So which measure is the right measure? State legislatures tend not to care about inflation-adjusted or per-student metrics because their revenue streams (primarily taxes) don’t necessarily increase alongside inflation or population growth. Additionally, enrollment for the next year or two can be difficult to accurately predict when budgets are being made, so a perfect per-FTE funding ratio is virtually impossible. But on the other hand, colleges have to make state funding work to educate an often-growing number of students, so the call for the maintenance of funding ratios makes perfect sense.

I raise these points because policymakers and education advocates often seem to talk past each other in terms of what funding effort for higher education should look like. It’s important that both sides understand where the other is coming from in terms of their definition in order to work to find common ground. And I’d love to hear your preferred method of defining ‘appropriate’ funding effort, as well as why you chose that method.

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1 I question the exact percentage here, as it’s the result of a correlational study. To claim causality (as they do in Table 6), the author needs to establish causality—some way to separate the effects of dropping per-student state support from other confounding factors (such as changing preferences toward research). This can be done by using panel regression techniques to essentially compare states with big funding drops to those without, after controlling for other factors that would be affecting higher education across states. But it’s hard to imagine a situation in which per-student state funding cuts aren’t responsible for at least some of the tuition increases over the last decade.