Patterns of Student Debt Use: Implications for Education Policy

Fletcher, Cynthia

Affordable higher education is a key element of social policy in the United States. Both state and federal governments allocate significant direct appropriations to higher education to increase access and opportunity. Many argue that education has positive externalities and that broader access to education promotes equality. Since the mid-20^th century the federal government has provided a growing array of grants, subsidized loans, subsidized work-study jobs and other financial supports to college-going Americans. However, personal borrowing to finance education has been increasing as public support has declined and college costs have risen. Americans’ student loan debt has reached $1.2T, surpassed by only debt from mortgages, and delinquencies on student loans exceed that of mortgages, credit cards, and auto loans. The magnitude of student debt has led many policy makers to think that college costs are creating an insurmountable financial burden on families and to question how to minimize debt and make higher education more affordable.

The purpose of the paper is to explore key factors such as taking a course in personal finance, financial knowledge, and student aid history that may influence the total amount of undergraduate student debt accumulated. Subsequently we investigate the linkage between student debt and educational outcomes, including degree attainment. Our study combines self-reported survey data with detailed term-by-term administrative data on financial aid and education outcomes reported by the financial aid and registrar’s offices at a large public Midwest university. The survey data include demographic characteristics; work experience; financial education and experiences since childhood; financial knowledge, attitudes, and behaviors; and perceptions of financial well-being. Data drawn from administrative records and matched to each survey respondent for every term of enrollment include demographics, academic major, ACT (national college aptitude test) score; grade point average, measures of SES, and student loan behaviors tracked by the financial aid office. We observe students for a minimum of six years, a timeframe within which the majority of undergraduates who persist complete their degrees. We note whether or not students complete an undergraduate personal finance course and, using a national database, we also follow students who leave the institution to determine whether they persist in higher education elsewhere. Our analyses begin with a description of patterns of enrollment by academic and loan behaviors. Next, multivariate analyses investigate the influence of personal, demographic and academic factors on the total amount of student debt incurred and degree attainment. We have a particular interest in exploring the role of financial literacy on debt regardless of socio-economic background.

Our paper concludes with discussion of the implications of findings for policies regarding higher education access and affordability as well as the potential impact on social mobility. Past discussions among higher education stakeholders and policy makers have focused primarily on restoring public funding for state-supported universities and restructuring debt repayment schedules; only recently has attention turned to the role that financial education may play in influencing the total amount of debt students incur in pursuit of degrees. Our study offers new evidence to inform policy decisions.

Association for Public Policy Analysis & Management

Panel Paper: Patterns of Student Debt Use: Implications for Education Policy