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.