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Fear of Borrowing
Debt aversion is a barrier to college access, especially for low-income students

By Pamela Burdman

I didn't learn about interest rates and loan terms during high school, and neither did most students I know. And yet, when it comes to one of the most important decisions of their lives—where, when, and whether to attend college—students are expected magically to have this information at their fingertips. That's because for many students, deciding to attend college involves borrowing, a step most are ill-prepared to take. If they are exposed to student loans during high school, it is typically part of a dry description at a financial aid night or a visit from a local college admissions officer.

The nuances of interest rates, loan terms and repayment options are rarely explained, but even less common is any discussion of the tradeoffs implicit in student loans: Is it advantageous to finish school in four years, even if it means large payments after graduating (or worse, if the student doesn't complete college at all)? With loans increasingly dominating aid packages, a student's attitude toward borrowing may determine whether she enrolls full-time or part-time, selects a two-year or four-year institution, or attends college at all. Yet often students and families are left to their own to mull these critical questions.

These questions are being considered amidst increasing anxiety about paying for college, with media headlines both echoing and feeding the fears. Even financial aid officers are not immune. "We now have a kid in college," said one aid officer in an interview. "Despite what I do, when he started school last year, I started worrying." If an expert well-versed in the nuances of tuition and aid policies can't help worrying, how would a low-income parent with no experience borrowing, or an immigrant student whose parents speak no English, become comfortable with the idea of student loans?

Not very easily, I found out, after conducting a series of interviews with students and counselors last year for The Project on Student Debt, a non-profit advocacy group. The conclusions were summed up in a report called "The Student Debt Dilemma: Debt Aversion as a Barrier to College Access." In the interviews it became clear that though loans are a cornerstone of federal financial aid policy, many students don't view them as a worthwhile option, and some don't consider them under the rubric of financial aid at all.

Take Demetria Jackson, 28, who spent eight years at the University of the District of Columbia before earning her degree last year in criminal justice. "In my first two years, I got financial aid," said Jackson. "The last two years, I had to take out loans. It was my last resort. I was trying to avoid it; that's why it took me so long. I always heard so many horror stories about having to pay the loans back. It's just a hassle being in debt your first couple of years, trying to get your career going."

While attending high school in Hartford Connecticut, Alicia Bray had a similar attitude toward borrowing. "I was very set on not being in debt coming out of college, just because of financial issues in my family," she said. "I saw my uncles and aunts having financial problems, and I didn't want that." Though Bray's grades would enable her to attend some of the finest private institutions, her plan was to stay at home and attend a public university. Princeton University's no-loan program changed that, by enabling her to attend a top-ranked school without having to borrow.

Princeton and a few other institutions have eliminated loans for the lowest-income students, making up the difference in grants. But few students who fear borrowing have the option of attending one of these schools.

Though Bray found a way out of the debt dilemma, and Jackson managed to graduate eventually, an unknown number of students end up pursuing money-saving strategies that may reduce their chance of graduation: choosing lower-cost institutions, enrolling part-time, or delaying college. Even less clear is how many students give up educational aspirations altogether in order to avoid debt.

Though discussions about spiraling student debt frequently focus on students with large debt loads, students whose educational careers are stymied or curtailed because of loan aversion may be an equally serious concern. If students who are struggling to repay loans are the visible face of the debt crisis, the loan-averse students are its invisible face.

About two-thirds of students now graduate with loans, and their average debt grew more than 50 percent over the past decade, even when accounting for inflation. For graduates of four-year public institutions, average debt levels have risen to $18,000. As interest rates rise for the first time in years, auguring higher payments for today's borrowers, the barriers to borrowing are only likely to increase.

To be sure, loans have created invaluable opportunities for millions of students who have attended college, repaid their loans, and gone on to productive lives and careers. But at least some evidence, empirical and anecdotal, suggests that the very students who can least afford to attend college are also the least likely to consider borrowing. Available research suggests that students who avoid borrowing tend to be low-income, minority, immigrant, first-generation students, or some combination of these. If equalizing access to higher education is the goal of financial aid programs, this evidence is a troubling indication of a potential Achilles heel in the programs.

Students whose families don't have experience with credit, which tend to be lower-income families who don't own their homes, are less likely to be comfortable borrowing, say counselors. Susan Bonoff, a counselor at North Hollywood High School in Los Angeles, sees such attitudes about loans daily among her students, many of whom are low-income Mexican immigrants. "It's something they're pretty intimidated about. It's just a fear of the unknown and a fear of what the future holds. The parents don't want more bills and they don't want to see their kids starting off adulthood in debt. When you say schools cost thousands of dollars, that's just a mind-boggling number. There are no role models to say, 'When I went to college, I got a good job and paid off my loan in five years.'"

The last comprehensive study of attitudes of population sub-groups toward borrowing for college was conducted more than 15 years ago, using Federal Reserve data that is now 23 years old. In that examination, researcher Tom Mortenson found that women, Hispanics, low-income individuals, and those with less education were less inclined to borrow. All of these groups (with the exception of women) are still disadvantaged in terms of college attainment.

In a recent National Postsecondary Student Aid Study, parental education levels appeared to be one of the strongest predictors of borrowing behavior. Of students whose parents did not complete high school, 12.59 percent worked full-time and took no loans. Only 5.74 percent of those whose parents had graduate degrees fell into that category. Clearly a higher level of education would make parents more familiar with the nuances of student loans, but it also is one of the best ways to acquaint them with the benefits of borrowing.

Other recent evidence also points to the conclusion that the prevalence of loans is influencing the decisions of low-income and minority students. A study by economists at Princeton University found that a college's elimination of loans from financial aid packages for low-income students had a "statistically discernable effect" on the yield rate of minority applicants. The researchers speculated that the differences "may be due to greater uncertainty among minorities about the future returns to college education, and hence ability to repay loans."

Borrowers from low-income backgrounds are more likely to see loan repayment as a major burden, reports the Nellie Mae Corporation, a student loan provider, in the results of its 2002 National Student Loan Survey. "Black, Hispanic, and Asian American debtors are all more likely than their white counterparts to feel burdened by their debt," reported Nellie Mae, even when controlling for income level and other factors. "The difference is strongest for Hispanics, but is also statistically significant for African Americans," the study said, noting that "African American borrowers express greater perception of burden, even with lower debt-to-income ratios, and less satisfaction that the benefits of borrowing were worth it."

Perhaps the 2002 survey's most interesting finding was that increased borrowing in recent years placed the greatest burden on students from low-income families. These students were the most likely to say that debt caused them to delay returning to school or to change their choice of institution. That finding, according to Nellie Mae, was a change from earlier studies, which did not find a significant attitude difference between low-income students and other students.

The survey also found that among students who did not graduate, low-income students were much more likely than others to cite loans as the reason. "If the perception of the borrowers in repayment are reliable, the increase in borrowing over the past five years appears to have had its most serious impact on students from low-income families," the authors concluded.

Counselors may need additional training to help students sort through decisions about paying for college. But where to strike the balance in discussing loans is not an easy matter. Counselors and financial aid officers are understandably ambivalent. They often view financial decisions as personal matters rooted in family traditions, and may understandably feel reluctant to push students in any particular direction. And even if they do want to encourage a student to consider a loan, they realize that a decision against borrowing can be perfectly rational, particularly for students who are not well-prepared for college.

"There are many reasons why it may be unwise for students to borrow the maximum allowed," wrote Susan P. Choy in "Characteristics of Student Borrowers 1999-2000," a National Center for Education Statistics report. "Students' ability to repay their loans after they leave school depends on their being able to obtain a well-paying job, which depends in part on economic conditions when they finish their education. The uncertainties surrounding the ability to meet repayment obligations are a particular problem for students whose academic success is uncertain or whose families lack the resources to help them financially if they have difficulty repaying their loans."

Even some of the most thoughtful efforts to get information to students illustrate the challenge of developing general guidelines for students' diverse array of circumstances. Ohio State University offers a "debt management" link on its website, where students are advised to keep debt payments below five percent of expected salary. The site provides budget planning worksheets, and a chart with four colored zones. Students are advised to avoid the red "danger" zone of over ten percent. And they can see a list of graduates' typical starting salaries—ranging from $22,000 at the College of Social Work to $47,500 at the College of Pharmacy. It is valuable information, but few students are clear enough about their career objectives to be able to use it.

What's more, this information reaches students after they have made the critical decision of whether to attend college or not. More resources and more creativity need to be devoted to integrating financial issues into high school counseling and college outreach programs to ensure that more students understand loans as an option.

Another obvious approach to mitigating debt aversion is to make more grant money available. Programs that eliminate loans for the lowest-income students have been tried successfully at Princeton and other elite institutions. And public flagship institutions, including the University of Virginia and the University of North Carolina, have emulated these programs. Research suggests that the role of grants in promoting student success is most pronounced in the first year or two of college. According to a Government Accountability Office study, an additional $1,000 grant reduced students' dropout rate by 23 percent in the first year and by eight percent in the second year. But the grant-loan mix cannot be addressed by a handful of colleges: It requires both state and federal commitments to expanding need-based grant programs.

Lastly, redesigned loan programs could help make borrowing both more attractive and more efficient, and relieve the undue burden faced by lower-income students. As outlined in a recent white paper by the Project on Student Debt, new repayment policies could help address debt aversion by ensuring manageable payment burdens for borrowers with low post-college earnings and finite repayment obligations, so students know that eventually they will be able to carry on with their lives debt-free.

Pamela Burdman, a former higher education reporter, is currently a program officer at the William and Flora Hewlett Foundation, which supports numerous higher education programs, including The Project on Student Debt.

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National CrossTalk Spring 2006



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