Student Loans: Not Just About Going to College

Student loan debt skyrocketed around 2000. Adam Looney and Constantine Yanellis tell this story in “What’s Wrong with Federal Student Loans?” (Economic Outlook Journal(Summer 2024, pp. 209-236). They note: “Between 2000 and 2020, the total number of Americans owed federal student loans more than doubled, from 21 million to 45 million, and the total amount owed more than quadrupled, from $387 billion to $1.8 trillion…”

Looney and Yanellis note that there have been several boom-and-bust cycles in the United States, with rules on student loans being relaxed and tightened. For example, there were waves of student loans in the 1950s and 1980s, followed by “crises” and tightening of rules. The stated goal of the looser rules on student loans is to expand educational opportunities, but the general pattern is to dramatically expand loans to high-risk students who attend low-quality schools, where they are less likely to earn a useful degree.

Consider two charts. The top chart shows the results of dividing higher education institutions into five groups, sorted by the likelihood that students at those institutions will repay their loans. The vertical axis shows the enrollment rate, which is set to 1 for all five groups in 2000. As you can see, it changes over time. And the different colors show institutions by their student loan repayment rates. As you can see, the total enrollment at the institutions where students were most likely to repay increased over time (the line with the red x). But it increased slowly. The total enrollment at the institutions where students were least likely to repay increased more quickly. It increased sharply after about 2000, peaking around 2010.

The panel below shows the change in enrollment of first-generation college students since 2000, measured in millions of students. First-generation students can be seen as a category that comes from families with, on average, limited financial resources and social support systems for attending higher education. The thin red area below shows that first-generation college enrollment increased very slightly at institutions with the highest student loan repayment rates. Most of the increase in first-generation college enrollment occurred at institutions with the lowest student loan repayment rates.

Looney and Yannelis summarize this pattern:

In fact, in 2011, the institutions in the lowest repayment quintile, as shown in Figure 3, had an average enrollment-weighted degree completion rate of 23%, an average post-enrollment income of $27,760, and an average student loan default rate of 20%. In contrast, the institutions in the highest repayment quintile had a 73% graduation rate, an average income of $48,375, and a default rate of 3%. What kind of schools are these? The largest institutions in the lowest repayment quintile were the University of Phoenix (then the largest online for-profit institution), Kaplan University and Ashford University (formerly large online for-profit institutions that have since been acquired by Purdue University and the University of Arizona, respectively, and now operate as online offerings of those public universities), and two large community college systems operating around Houston, Texas, the Houston Community College System and Lone Star College. The largest institutions in the highest repayment quintile are large public institutions. Texas A&M, Pennsylvania State University, University of Texas at Austin, Michigan State University, and University of Minnesota Twin Cities. These institutions are prestigious but not very selective, with acceptance rates ranging from 31% to 75%. The pattern is the same across a range of student debt, education, and labor market outcomes. The institutions that provide the highest quality education and have the best outcomes have expanded enrollment the least, while the institutions that have the lowest performance have expanded enrollment the most.

The enrollment patterns shown in the figure show that the proportion of students borrowing money increased until about 2010 and then decreased, and that the average amount borrowed per student also increased until about 2010 and then decreased, and Rooney and Yanellis provide evidence that this is true. They detail the loosening and tightening of student loan rules over time.

With this factual basis in mind, the public policy issue here becomes even more acute. Many people will have a knee-jerk reaction to the idea of ​​expanding student debt. But if the expansion of student debt applies to students who are more disadvantaged in terms of academic preparation and family finances, and those students attend low-quality schools with 23% degree completion rates, the trade-offs of expanding student debt, while still meaningful, become considerably less appealing.

Especially between 2000 and 2010, I believe that a significant number of disadvantaged and at-risk students (and I’m talking about adults here, but remember they’re often very young adults) were given poor advice and made poor decisions. They were encouraged (by teachers, families, counselors, politicians, institutions, society) to borrow large sums of money to attend institutions that, on average, they could not afford to pay back. Of course, the purpose of student loans is not just to get students into college for the first year, but to complete their degrees. Perhaps an alternative and complementary social goal is needed: to expand enrollment at institutions that tend to have higher graduation rates and higher post-graduation salaries.