Understanding Student Debt

1
Understanding Student Debt

• Sandy Baum
• The College Board and Skidmore College
• Minnesota Association of
• Financial Aid Administrators
• February 2007

2
Grants Versus Loans, Percent Share of Total Funds
1991-92 to 2005-06
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
3
Median Debt Levels of Undergraduate Degree
Recipients Who Borrowed by Degree and
Institution Type in Constant (2003) Dollars,
1992-93 to 2003-04
Source NPSAS 1993, 1996, 2000, and 2004,
Undergraduates calculations by authors.
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
4
Debt Levels

• Overall median debt level for bachelors degree
  recipients who borrowed was 19,300 in 2003-04.
• The median debt level for bachelors degree
  recipients who borrowed will probably be about
  22,000 this year.
• The mean debt level is always higher than the
  median.
• 2/3 of public four-year college graduates borrow,
  compared to 3/4 of private non-profit graduates
  and about 90 of for-profit four-year degree
  recipients.

5
Distribution of Total Debt Levels of Degree
Recipients, 2003-04
Source NPSAS 2004, Undergraduates calculations
by authors.
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
6
Growth of Stafford, PLUS, and Nonfederal Loan
Dollars in Constant (2005) Dollars, 1995-96 to
2005-06
Source The College Board, Trends in Student Aid,
2006
Source The College Board, Trends in Student Aid
2006
7
Education Debt is Good Debt
8
Median Annual Earnings Relative to Earnings of
High School Graduates, Males and Females Ages
2534, 19752005
Source National Center for Education Statistics
(NCES), 2004, Table 14-1, NCES, 2006, Table 22-1
(based on U.S. Census Bureau, Current Population
Survey) and U.S. Census Bureau, 2006. PINC-03.
Source The College Board, Education Pays, Second
Update, 2006
Source College Board, Education Pays 2006
9
The Growing Earnings Gap

• Median earnings of four-year college graduates
  relative to high school graduates
• Men Women
• 1975 119 137
• 1985 137 147
• 1995 156 171
• 2005 163 170

10

• Percentage of Private Sector Entry-Level Workers
  Covered by Employer-Provided Health Insurance, by
  Level of Education, 19792002

Sources Bernstein, Mishel, and Allegretto, 2005,
Table 2.14 and Table 2.15. Calculations by the
Economic Policy Institute. College Board,
Education Pays 2005.
11
Estimated Cumulative Earnings Net of College Costs
Based on average tuition and fees at a public
four-year college and a discount rate of 5.
Crossover point Age 33.
Source Baum and Payea, Education Pays, 2004
12
How Much Debt is Too Much?Baum and Schwartz,The
College Board and TICAS, 2005

• Banking industry standards
• Relative living standards
• Need analysis
• Income contingent repayment
• Studies of borrowers in repayment

13
Life-Cycle Model

• Modigliani and Brumberg (1954), Friedman (1957)
• Consumption depends on permanent income, not just
  current income
• Standard of living smoothed over lifetime.
• Implies young people borrow in anticipation of
  higher earnings.

14
Evidence from Borrowers in Repayment Nellie Mae
2002

• Index of perception of burden
• Is repaying your loans harder than you had
  anticipated it would be?
• If you had it to do over again would you borrow
  less? About the same amount? More?
• How burdened do you feel by your student loan
  payments?

15
Perceived Burden

• Payments lt 7 of income no problem
• 7 - 11 - sense of burden begins to be apparent
• 12-17 - greater expression of difficulty
• gt 17 clear break in calculated index

16
Borrower Perceptions Good News
Source Baum and OMalley, Nellie Mae, 2003
17
Borrower Perceptions Bad News
Source Baum and OMalley, Nellie Mae, 2003
18
Low-Income Borrowers
Source Baum and OMalley, Nellie Mae, 2003
19
Low-Income Borrowers
Source Baum and OMalley, Nellie Mae, 2003
20
Need Analysis Institutional Methodology
21
Proposed Benchmarks20 of income above 150 of
poverty(single individuals)
Source Baum and Schwartz How Much Debt is Too
Much?
22
Other Relevant Issues

• Income-contingent loan proposals in Congress use
  15 instead of 20 of discretionary income.
• Since policies apply only to Stafford loans and
  not private loans, a lower percentage is
  appropriate.
• Geographical differences should be taken into
  consideration.

23
Distribution of Annual Earnings by Level of
Education, Ages 3544, 2005
Source U.S. Census Bureau, 2006, PINC-03.
Source The College Board, Education Pays, Second
Update, 2006
Source College Board, Education Pays 2006