High debt levels are most common among students in the for-profit sector of education, according to a report released by the College Board today. The new data comes at a time when there is a flurry of activity in Washington aimed at safeguarding students from crippling debt.
During the 2007-08 school year, 53 percent of Bachelor’s degree recipients at for-profit four-year institutions accumulated $30,500 or more of total debt, compared to 24 percent at private nonprofit four-years and 12 percent in public four-years. That’s in part because "low-income students are disproportionately represented in proprietary [for-profit] schools," said Patricia Steele, co-author of the study.
The report, "Who Borrows Most," focuses on the 17 percent of 2007-08 Bachelor’s degree recipients who graduated with more than $30,500 in education debt. The problem, the study finds, is not that all students are borrowing too much — 34 percent of all Bachelor’s degree recipients have no student debt — but rather that too many students borrow more than they are likely to be able to manage.
Some students are not well-informed about debt, Steele said. Improved financial literacy could help students avoid getting into risky high-debt situations. Overly aggressive marketing of programs in the interest of revenue over students, critics say, are partially to blame for the sector’s debt problems.
While high debt levels are most common in the for-profit sector, private, nonprofit four-years take the cake for the greatest amount borrowed, on average, among high-debtors. Average debt per student in the latter sector rung in at $53,200, compared to $47,600 at for-profits and $45,100 at public four-years.
What the study doesn’t address, Steele noted, is the dropout factor and its relevance to debt problems. "Loan default is greatest for those that don’t complete their degree, because these students face significant debt burden without any credential to augment their income," she said.
To Erin Dillon, senior policy analyst at the Education Sector, the fact that 17 percent of students fall into the high-debt category is "disturbing." "The more students take on loans to pay," Dillon said, "the more college is going to cost." Institutions must find ways to control the cost of tuition, she maintained.
A few weeks ago, lawmakers introduced twin legislation in the House and the Senate that would allow privately issued student loans to be discharged in bankruptcy, as is possible with federal student loans. "People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin," said Rep. Steve Cohen, D-Tenn., in a statement.
The financial regulatory overhaul up for consideration in the Senate this week may also include a provision to help prevent students from taking on unnecessary private student loan debt.
Under the House version of the Wall Street Reform bill, colleges would be required to certify a student’s need for private loans before that individual could receive them. Nearly two-thirds of undergraduates who borrow private loans haven’t exhausted their eligibility for lower-cost federal loans, according to data from the Education Department. "Nonfederal borrowing is riskier than federal borrowing," asserted the College Board report, "because it does not come with the same repayment protections and because nonfederal loans generally carry higher interest rates."
The Senate bill doesn’t include the certification clause at the moment, but consumer advocates and student groups, among others, hope this will change before the final vote.
Lastly, the Education Department is pushing for a regulatory rule intended to safeguard against abuses of the federal financial aid system. Known as "gainful employment," the proposed rule is designed to make sure that vocational students will be able to pay off their student debt with the employment obtained after graduation. Under the regulatory language, the department would designate a program as preparing students for gainful employment if graduates’ debt-service-to-income ratio does not exceed 8 percent.
The Career College Association, the advocacy group for proprietary schools, opposes the measure. "While the department seeks to use its gainful employment definition to rein in a few ‘bad actors,’ research shows that its impact would be far more sweeping," CCA President Harris Miller said in a statement released last week. "It would eliminate programs in badly needed skill areas, including health care, education and information technology."
A study commissioned by the group found that students in programs that would fail the gainful employment test would also be most likely to repay their student loans. As an alternative to the department’s proposed rule, CCA put forth a plan to boost financial literacy among potential borrowers.