Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.
New numbers from the U.S. Department of Education show that federal student-loan disbursements -- the total amount borrowed by students and received by schools -- in the 2008-09 academic year grew about 25% over the previous year, to $75 billion.
The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama's proposed 2010 budget.
The sharp growth is "definitely above expectations," says Robert Shireman, the deputy undersecretary of the Education Department. "But we're also in an economic situation that nobody predicted." The eye-opening increase in borrowing is largely due to the dire economic environment, which is causing more people to seek federal loans, he says.
The new numbers highlight how debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate, according to an analysis of the government's National Postsecondary Student Aid Study, conducted by financial-aid expert Mark Kantrowitz.
Only a dozen years earlier, according to the study, 58% of students borrowed to pay for college, and the average amount borrowed was $13,172.
The ripple effects for today's heavily indebted young people are becoming palpable. A growing body of research suggests that tough loan payments are affecting major life decisions by recent graduates, forcing them to put off traditional milestones, from buying a first home even to marriage and having children.
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Barmak Nassirian, the associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says this phenomenon is playing a role in why tuition grows at about twice the rate of inflation. "Instead of imposing tougher choices" on college costs, he says, it's "easier to raise prices . . . because this additional loan amount is made available."
These and other impacts are likely to continue to spiral for future generations of tuition payers, college finance experts say. It is unclear whether we have seen the worst of it. Kantrowitz predicts the rate of increase will slow to 12% for the 2009-10 school year due mainly to what he expects to be a rebounding economy.
On the other hand, Mark Zandi, the chief economist for Moody's Economy.com, says he thinks unemployment rates will be at least as high as they are now and that housing prices will fall further, making it difficult for families to borrow against home equity. "Growth in student lending can remain very strong, at least through the next school year," Zandi predicts.
The total borrowing limit for dependent undergraduates who take out federal Stafford loans -- the most popular federal aid program -- grew to $31,000 this past school year from $23,000. Raised limits on federal loans may have siphoned some borrowing away from riskier -- and costlier -- private loans, which are now harder to get due to the retrenchment of that business.
The move away from these risky loans may be one bright spot in an otherwise frenzied student credit environment, Kantrowitz says.
Still, many students cringe when they think of what they will owe by the time they graduate.
Continued: The long-term impact
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