INSIGHT newsletter

February 2006

A periodic newsletter on a single topic of interest published by the Office of Higher Education

Student Borrowing Increases - Much Growth Among Higher-Income Families

This issue of Insight takes a look at undergraduate borrowing in the 2003-2004 academic year. The student borrowing information here is based on a survey administered by the U.S. Department of Education called the National Postsecondary Student Aid Survey. See also a report on student borrowing, produced by the Minnesota Office of Higher Education.

Overall, 49 percent of all undergraduate students in Minnesota (or approximately 150,000 students) took out student loans in 2004. This is a moderate increase since the 1999-2000 academic year when 41 percent of Minnesota undergraduates took out student loans.

In Minnesota, 63 percent of students who attended full-time for the full academic year had student loans. Among those who borrowed, the average annual amount was about $6,600, which is slightly higher than the national average of $6,210. In contrast, 19 percent of students who attended part-time for part of the academic year took out student loans. Undergraduates attending part-time and taking out loans borrowed an average of $4,390, which is slightly lower than the national average.

Average borrowing by full-time, full-year undergraduates in Minnesota in 2004

Full-time, full-year students borrow more than their part-time counterparts
In 2000, 41 percent of all Minnesota students borrowed an average of $5,650. In 2004, 49 percent of all students borrowed an average of $6,120.

Since student borrowing has increased over time, there is concern that debt repayment could adversely affect graduates' career plans, employment or their ability to pursue graduate school once they complete their undergraduate education.

Changes in undergraduate borrowing from 2000 to 2004

Borrowing Increases Among Higher-Income Families
From 2000 to 2004, the percentage of dependent students from families with incomes of $90,000 and higher who took out student loans doubled, from 28 percent to 57 percent. It is also important to note that interest rates decreased from 2000 to 2004. For example, the interest rates paid by Stafford Loan borrowers while attending were 6.32 percent in Fiscal Year 2000 and 2.82 percent in 2004.¹ While some of the increase in borrowing among the families in the over $90,000 income category may have been to meet the increases in tuition, some may have been because the families sought the opportunity for low interest loans.

Changes in borrowing by full-time, full-year dependent undergraduates attending Minnesota postsecondary institutions by income

Increased Borrowing Mirrors a National Increase in Personal Debt
The use of student loans in Minnesota mirrors high levels of consumer debt nationally and in Minnesota.

"U.S. consumers have taken on record levels of debt as low interest rates have lured them to buy bigger houses and fancier cars and to charge more on credit cards than ever before." (USA Today, 3/17/04)

Families at the top of the income distribution are increasing their use of student loans and their use of consumer debt in general. From 1995 to 2002, consumer debt for households in the top-fifth of incomes grew 20 percent, while it grew 10 percent for households in the bottom four-fifths of incomes. (Wall Street Journal Classroom Edition, 11/2/2002)

Minnesota ranks 11th among the states in overall levels of consumer debt. (USA Today, 3/17/04) Minnesota has a higher median income than the national average. High median incomes and high consumer debt may go together - most of the states with high consumer debt also have higher than average median incomes.

Reliance on Unsubsidized Loans Increases
The reliance on different types of loans shifted from 2000 to 2004. The percent of students borrowing Subsidized Stafford and Minnesota SELF Loans remained approximately the same. However, a larger percent of students borrowed Unsubsidized Stafford loans in 2004 (32 percent). The percent borrowing private loans doubled from 6 percent in 2000 to 12 percent in 2004.

Changes in borrowing by full-time, full-year dependent undergraduates attending Minnesota postsecondary institutions by type of loans

Middle Income Families Most Likely to Borrow
More than half of all dependent students, regardless of their families' income, borrowed during the 2004 Fiscal Year. Dependent students whose parents belong to the middle income categories ($30,000-$89,999) were more likely to borrow than those in the lowest or highest income categories. Due to the small size of the independent student sample, the estimates for independent students by income are not provided. More than half of all independent students (59 percent) borrowed. Many students borrowed the maximum amounts allowed under the federal borrowing limits.

Average borrowing by full-time, full-year undergraduates in Minnesota

Loan sources and limits
Students can borrow from several sources: federal, state, private and institutional. The federal government administers the Stafford loan program. Stafford loans are either subsidized (meaning the government pays the interest while the student is enrolled) or unsubsidized (the interest accrues while the student is in school but can be deferred until graduation). All students, regardless of need, are eligible for Unsubsidized Stafford loans. The eligibility for subsidized loans is determined by the student's calculated need. The current interest rates for the Stafford loans are 4.70 percent while in-school and 5.30 percent after graduation.² While these interest rates are variable, they are capped at 8.25 percent.³

Several states offer loan programs, including Minnesota. Minnesota's Student Educational Loan Fund (SELF) loan program began in 1987. Administered by the Minnesota Office of Higher Education, SELF Loans are for Minnesota residents enrolled for at least half-time, non-Minnesota residents enrolled at least half-time in postsecondary institutions in Minnesota, and Minnesota residents attending participating institutions in other states. SELF Loan interest rates are currently 7.5 percent.

Federal and state loans have limits based on various criteria, such as the student's dependency and attendance status. Table 1 shows the loan limits for the Stafford and SELF Loans for both dependent and independent students. The loan limits increase as the student's class level increases. Loan limits are not only for the annual amount borrowed, but also on the cumulative amount that a student can borrow during her/his educational career. The Stafford loan's cumulative limits are $23,000 for undergraduate study but, if the student pursues graduate study, the cumulative loan limit for both undergraduate and graduate study is $65,000. The SELF Loan limit for undergraduate study is $25,000. If the student pursues graduate study, she/he is eligible for $40,000, but the combined total of undergraduate and graduate SELF Loans cannot exceed this amount.⁴

Students can also borrow private (or alternative) loans from non-governmental sources. These loans are not relied on as heavily as the government student loans, but a greater number of students are borrowing from private sources. Loan limits and interest rates vary.

References:

The interest rate on variable rate FFEL Stafford loans (first disbursed after July 1,1998) for July 1, 1999 through June 30, 2000 was 6.32% in-school and 6.92% in repayment (Federal Register, Volume 64, No. 205, p. 57525). The interest rate on variable rate FFEL Stafford loans (first disbursed after July 1,1998) for July 1, 2003 through June 30, 2004 was 2.82% in-school and 3.42% in repayment (US Department of Education, Information for Financial Aid Professional Library, Electronic Announcement 6/30/2003). [ back ]
Interest rates from Sallie Mae website. [ back ]
In addition to the Stafford loans, the federal government also oversees two other loan programs: the Perkins loans and the PLUS loans. Perkins loans are available for students who demonstrate exceptional need. There is no interest on the Perkins loans while the student is in school and 5 percent after graduation. The PLUS loans, or Parent Loans for Undergraduate Students, can be borrowed by the parents to cover the costs of attendance. PLUS loans have a higher interest rate than Stafford loans; currently, the interest rate is 6.10 percent. [ back ]
Information on federal loan eligibility and limits from FinAid and SELF Loan information from the Minnesota Office of Higher Education. [ back ]

About the Office of Higher Education

The Office of Higher Education is a state agency providing students with financial aid programs and information to help them gain access to post-secondary education. The agency serves as the state's clearinghouse for data, research and analysis on post-secondary enrollment, financial aid, finance and trends.

The Minnesota State Grant program, which is administered by the agency, is a need-based tuition assistance program for Minnesota students. The agency also oversees tuition reciprocity programs, a student loan program, Minnesota's 529 college savings program, licensing and an early awareness outreach initiative for youth. Through collaboration with systems and institutions, the agency assists in the development of the state's education technology infrastructure and shared library resources.

» TABLE OF CONTENTS «

Full-time, full-year students borrow more

Borrowing Increases Among Higher-Income Families

Increased Borrowing Mirrors a National Increase in Personal Debt

Reliance on Unsubsidized Loans Increases

Middle Income Families Most Likely to Borrow

Loan sources and limits

» RELATED TOPICS «

Tuition and fee increases in Minnesota

» FEATURED LINKS «

Increasing Consumer Debt by State

National Information on How Students Pay for College