Borrowing for college students continues to rise
Minnesota college students rely increasingly on borrowing to pay for college: In 2009, total loans taken out by students and their families exceeded $1.6 billion — up from $1.2 billion in 2007. Over those two years, student reliance on borrowing grew faster than their use of public or institutional grants.
Student borrowing patterns vary among different kinds of institutions. According to analysis from the Minnesota Private College Research Foundation of the most recent data, students enrolled at for-profit institutions rely the most on borrowing; on average 80% of all aid used at those institutions is borrowed. Meanwhile, students at the Minnesota Private College Council (MPCC) nonprofit member institutions receive 42% of their aid through borrowing. That’s the lowest share among the higher education sectors.
Currently, more than 70% of Minnesota college graduates accumulate debt. The amount students borrow varies by sector. The average debt of graduates from four-year publics and four-year nonprofit privates (including MPCC institutions) ranges from about $24,000 to $29,000. Meanwhile, graduates from for-profit institutions see their debt averaging $40,000 — far exceeding the other sectors.
MPCC member institutions minimize student debt by providing substantial institutional grant aid. The $375.5 million in institutional grant aid and discounts awarded by the 17 member institutions makes up nearly half the aid used by their students. (Further, the grant aid provided by MPCC member institutions is 70% of all institutional grant aid awarded in the state.)
When looking at borrowing over time, each sector has experienced growth. This growth could be due to enrollment growth (more students to borrow money), borrowing to cover rising tuition in lieu of equal increases in government aid or families borrowing due to losses in household income due to the economic recession.
The for-profit institutions show the greatest increase between 2007 and 2009, with borrowing nearly doubling; meanwhile, their enrollment increased 31%. State four-year institutions had the second greatest enrollment increase over 2007 but had a smaller change in borrowing. Minnesota Private College Council member institutions had the smallest increase in student borrowing over 2007, while enrollment increased 2%.
One principal concern about rising student borrowing for financing higher education is the payback amount required. Banking industry studies suggest that a manageable student loan payment should equal 8% or less of a borrower's gross income. That means that for a student to pay off $25,000 in 10 years, with a payment of 8% of income, the student would need to earn $45,000 or more. As borrowing rises, another area for attention is how default rates may be impacted. Overall, the concern is that as students rely more heavily on college loans, the debt involved can create a financial burden that takes years to shed.
Tempering any worries about borrowing levels should be consideration of the value of the investment. Certainly, recent research substantiates the longer-term benefits of completing a post-secondary degree. But students do need to take care in determining the level of debt that is appropriate for them, given in part the degrees they are earning and their ability to forecast future income. A level of debt that may make sense for completing one kind of program at one institution may not make sense for another program elsewhere. At our member institutions, admission and financial aid officers are available to help families with these questions.
And for policymakers, concern about rising levels of student borrowing should trigger renewed attention to financial aid. While at our nonprofit private colleges, institutional aid has continued to grow rapidly, public need-based aid — through Minnesota's State Grant program and the federal Pell Grants — has failed to keep up. Underinvestment in the State Grant program could threaten the ability of low- and middle-income students to be able to access higher education at any institution.