The Changing Profile of Student Borrowers
Possible Explanations for the Increase in Borrowing by Middle- and High-Income Students
The growth in student debt among dependent college graduates has been particularly pronounced among middle- and high-income families. Explaining this distributional shift is beyond the aims of this report. However, some of the following factors might be at work:
- Policy changes that expanded eligibility for federal loan programs have broadened the pool of potential borrowers. The largest federal loan program is the Direct Loan (previously Stafford) program. In the early 1990s the unsubsidized Stafford loan program was introduced. Prior to this Stafford loans were restricted to undergraduates with financial need. With the introduction of unsubsidized Stafford loans, students could access federal loan programs regardless of need.
- Private or non-federal loans play a much smaller role than they did before the financial crisis. Until 2007-08 there was a substantial run-up in the issuance of private loans. In 2007-08 banks and other non-federal lenders supplied $25.5 billion in private loans, up more than tenfold from the $2 billion lent in 1995-96 (Baum, 2013). As in other areas of private lending, banks may have relaxed lending standards during this run-up such that more credit for education was available.
- The Great Recession destroyed a large amount of household wealth. From 2007 to 2010 the wealth of the typical American household fell 39% (Bricker, al., 2012). The decline was widespread, denting wealth for high net worth households as well as less wealthy ones. With reduced assets to finance college, wealthier families may be resorting to borrowing.
- Availability of other sources of borrowing has been curtailed in the wake of the financial crisis. For example, it is more difficult for a family to borrow the equity in its home in order to finance college expenses. Outstanding balances on home equity lines of credit have fallen from their peak of $710 billion in the first quarter of 2009 to $521 billion in second quarter of 2014 (New York Federal Reserve Bank, 2014).