Reliance on borrowing to pay for higher education in flux
Minnesota undergraduates borrowed more than $1.2 billion in 2007 to pay for college, up 14 percent from 2005. Increasingly they have been turning to private loans. Student use of these private loans grew 52 percent from 2005 to 2007. These numbers come from the August 2008 financial aid report from the Minnesota Office of Higher Education. It shows students borrowing $211 million from private lenders in 2007 compared to $159 million in 2005 (this does not include second mortgages or home equity lines of credit).
For students attending nonprofit institutions, which includes the 17 members of the Minnesota Private College Council, borrowing from private lenders also increased 52 percent.
The increasing reliance on private loans is of concern for higher education leaders and policy makers, as well as student advocates. The challenge with private loans is that the rates will be higher and the terms less flexible than with loans students secure through government programs. The availability of these private loans has already begun to constrict, given changes in the credit markets. The latest financial upheavals on Wall Street will make credit conditions even tighter, especially for families with low credit scores or current credit problems.
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While federal loans to students still represent the largest source of loan aid, they grew very modestly due to low borrowing limits. Federal parent loans grew much more dramatically, however (see chart).
Increasing reliance on borrowing has been propelled by relatively stagnant state and federal investments in need-based aid. Recent decisions by federal and state lawmakers have allowed for an additional $11.3 million increase into the State Grant program, but that investment needs to be far greater if we are to reverse the trend of forcing families to borrow increasingly large sums to afford higher education.
Students and their families will continue to rely on borrowing to help pay for college expenses. The key questions for the future are:
- Will the capital markets continue to be a reliable source of reasonably priced loans?
- What effect would a federal monopoly on student loans have for borrowers and higher education institutions?
- How will students and families who financial institutions deem higher-risk be assured access to manageable levels of higher education debt?