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REACHING NEW HEIGHTS
Higher education debt has reached unprecedented
heights. Chart 1 shows the percentage of all full-time
undergraduates who received student loans, broken down
by the type of institution (public two-year, public four-year,
private nonprofit four-year, and for-profit) in the five most
recent academic years that the NPSAS was administered:
1992–93, 1995–96, 1999–2000, 2003–04, and 2007–08.
In 1993, overall, only 32 percent of undergraduates borrowed
to attend college. Borrowing rates were lowest among
students attending community colleges—unsurprising given
that two-year public institutions are usually inexpensive.
Roughly 32 percent of public four-year students borrowed,
compared to 46 percent of students at private nonprofit
institutions and 53 percent of those in for-profit colleges.
In every year since, nearly every one of those
percentages has increased. As recently as the mid-
1990s, borrowing was the exception. Now it’s the rule.
While community college students have remained
relatively debt-free—only 23 percent borrowed in
Charts You Can Trust
Drowning in Debt:
The Emerging Student Loan Crisis
by Erin Dillon and Kevin Carey
July 9, 2009
Higher education has never been more expensive.
The price of attending a public university doubled,
after inflation, over the last two decades, and
family income and student financial aid haven’t kept
pace.1 As a result, students have no choice but to borrow,
and more college students are borrowing more money
than ever before.
But a new analysis of federal financial aid records reveals
more than just surging debt levels. Students are taking
on more of the riskiest debt: unregulated private student
loans. Here, students have the least protection and pay
the highest rates. For-profit colleges are leading the way
in this trend, and minority college students appear to be
borrowing a disproportionate share. If this continues, the
consequences will be severe: reduced access to higher
education, diminished life choices, and increasing rates of
catastrophic loan default.
There are many culprits to this emerging student loan
crisis: out-of-control tuition increases, lack of commitment
to need-based financial aid, and states and universities
increasingly spending scarce financial aid dollars on
wealthy students. President Obama recently proposed
reforming the federal student loan program by having
all students borrow directly from the government. The
money saved from this change would go to making Pell
grants, which are targeted to the neediest students, an
entitlement. The new plan would also tie annual increases
in Pell grants to inflation. This is a good start to solving the
problem of rapidly growing student debt, but much more
needs to be done—from reforming state and institutional
aid policies to creating better incentives for colleges to
restrain prices.
Based on recently released data from the U.S.
Department of Education’s National Postsecondary
Student Aid Survey (NPSAS) and an analysis of the past
15 years of NPSAS data, the following charts show just
how much higher education debt is increasing, as well
as identify several reasons for the surge and what steps
policymakers can take to help students attend college
without drowning in debt.
Chart 1. Percentage of Full-Time, Full-Year Undergraduates
Who Received Any Student Loans, by Institution Type
Private for-profitPrivate not-for-profit 4-yearPublic 4-yearPublic 2-year
Pecentage Receiving Loans
NPSAS Year
0
20
40
60
80
100
2007–082003–041999–20001995–961992–93
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
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2008—this is still nearly twice the percentage who
borrowed in 1993. Even public four-year universities
that receive large cash subsidies to keep tuition low
have edged above the 50 percent borrowing threshold.
But by far the biggest increase in the percentage of
students borrowing is in for-profit education, which
grew from 53 percent of students borrowing in 1993 to
92 percent in 2008.
In addition to the percentage of students borrowing, the
amount borrowed is increasing too.
Chart 2 shows the average yearly amount students
borrowed, adjusted for inflation. From 1993 to 2008, the
average yearly debt load increased by over 50 percent—
even as the percentage of students who borrowed
increased as well. Average annual debt for borrowers at
four-year private universities increased by 70 percent.
Average debt for students attending for-profit colleges
increased by 57 percent, to $9,600 per year.
RISE IN PRIVATE LENDING
The new data also show that private student loans are
exploding. In 1993, such loans barely existed. The vast
majority of all loans were issued through federal programs
like the Stafford Loan Program and the Perkins Loan
Program. Interest rates are subsidized and regulated
in these programs, and borrowers are given specific
protections like income-based repayment options and
loan deferment if they return to school.
But there are limits to how much money students can
borrow under federal loan programs. Chart 3 shows the
average amount of “unmet need” compared with the
maximum federal loan limit on Stafford loans during that
year. Unmet financial need is the difference between a
student’s total expenses for college and the sum of their
expected family contribution (EFC) and the total amount
of grant aid they receive.
As Chart 3 shows, over the last 15 years, students’
unmet financial need has increased much faster than the
maximum amount of money they can borrow through
subsidized federal loan programs.
As a result, a multi-billion dollar private student loan
market sprang into existence to fill the gap. Fueled by
the simultaneous availability of cheap credit, firms with
names like EduCap and Campus Door, along with well-
known companies like Sallie Mae and Bank of America,
began aggressively marketing private loans to hundreds
of thousands of college students. Interest rates were
often steep—as much as 19 percent in some cases. And
unlike federal loans, it is much harder for students to delay
payment on private loans if they go on to graduate school
or become unemployed.2
The recent tightening of the credit markets has made it
difficult for many private lenders to do business—Campus
Door, for example, has stopped accepting new applications
for loans. But as long as college prices increase faster
than grant aid, family income, and available federal loans,
students and families will have to borrow the difference
from somewhere, and at market rates.
As Chart 4 shows, 5 percent of undergraduates borrowed
private loans during the previous NPSAS in 2003–04. But
that proportion nearly tripled in the next four years, to 14
percent.
The increase wasn’t evenly spread among students or
institutions. As Chart 5 shows, by far the biggest increase
Chart 2. Among Full-Time, Full-Year Undergraduates Who
Received Any Student Loans, Average Amount of Loans
Received, by Institution Type
Private for-profit
Private not-for-profit 4-yearPublic 4-year
Public 2-year
Average Loan Amount (in 2007 Dollars)
NPSAS Year
2007–082003–041999–20001995–961992–93
0
2000
4000
6000
8000
10000
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
Chart 3. Average Unmet Need Among Full-Time, Full-Year
Dependent Undergraduates and Maximum Federal Loan Limit
Maximum Annual Loan Limit*
Average Unmet Need
Average Unmet Need and Loan Limits (in Dollars)
NPSAS Year
2007–082003–041999–20001995–96**1992–93
0
2000
4000
6000
8000
10000
12000
*The maximum annual limit on Stafford loans for dependent
undergraduates in their junior and senior years, including both
subsidized and unsubsidized loans. Annual loan limits are lower for
freshman and sophomore students. Historical data on federal loan limits
can be found here: http://www.finaid.org/loans/historicallimits.phtml.
**The NPSAS 1995–96 dataset available through the Undergraduate
Data Analysis System did not include a variable calculating total student
budget minus expected family contribution and total grant aid.
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
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in private loans came among students attending private for-
profit institutions—the same institutions that have shown the
biggest increase in the percentage of students borrowing.
In 2004, 15 percent of full-time students attending for-
profit institutions took out private loans In 2008, that
proportion had nearly tripled, to 43 percent. Public and
private nonprofit four-year institutions also had big upticks
in private loan participation during the same time. But
the for-profit sector stands out as becoming increasingly
dependent on student loans, and with many of those
loans outside the realm of public subsidy and regulation.
As Chart 6 shows, private loan trends differ by students’
race or ethnicity.
In 2004, a smaller percentage of black students took out
private loans than did white or Hispanic students. Four
years later, black students had the highest private student
loan participation, with the percentage more than tripling
over that time.
Some might argue that private student loans make sense
as a means of enabling well-off students to pay for an
expensive, high-value education. But as Chart 7 shows,
almost as many students in the lowest income quartile
take out private loans as do students in the highest
income quartile.
This growth in private borrowing exposes more students
to financial risk. Low-income students are less likely
to have a financial safety net from parents if they have
trouble repaying loans. And data from federal surveys
indicates that minority students are more likely to default
than others.3 The default rate for black students who took
out federal Stafford loans and earned a bachelor’s degree
in 1992–93 was nearly 40 percent after 10 years. The
recent surge in risky private borrowing took place after
the survey time period, suggesting that the default risk for
low-income and minority borrowers may have grown even
worse in recent years.
Chart 4. Percentage of All Undergraduates Receiving Private
Student Loans
NPSAS Year
Percentage Receiving Loans
0
3
6
9
12
15
2007–082003–041999–20001995–961992–93
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
Chart 5. Percentage of Full-Time, Full-Year Undergraduates
Receiving Private Student Loans, by Institution Type
2007–081999–2000 2003–041995–961992–93
Percentage Receiving Loans
0
10
20
30
40
50
Private
for-profit
Public
2-year
Private
not-for-profit 4-year
Public
4-year
Institution Type
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
Chart 6. Percentage of Full-Time, Full-Year Undergraduates
Receiving Private Student Loans, by Student’s Race/Ethnicity
2007–081999–2000 2003–041995–961992–93
Percentage Receiving Loans
NPSAS Year
0
5
10
15
20
25
Native American/
Alaskan Native
AsianHispanicBlackWhite
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
Chart 7. Percentage of Full-Time, Full-Year Undergraduates
Receiving Private Student Loans, by Income
2007–081999–2000 2003–041995–961992–93
Percentage Receiving Loans
NPSAS Year
0
5
10
15
20
25
Upper Income QuartileMiddle Income QuartilesLowest Income Quartile
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
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SHIFTING PRIORITIES FOR GRANT AID
One way to reduce the need for risky student borrowing
is to provide students with direct cash subsidies in the
form of grants. Most grants come from three sources: the
federal government (primarily through Pell grants), state
governments, and colleges and universities themselves.4
But as Chart 8 shows, these entities vary tremendously in
who they give aid to. And institutional and state financial
aid programs are increasingly less focused on helping
low-income students afford college.
Federal grants and scholarships are highly targeted to low-
and moderate income students. Nearly 80 percent of full-
time students from households in the lowest income quartile
receive federal grants. But participation falls off quickly from
there—only 26 percent of those in the middle two income
quartiles receive federal grants, and virtually no one earning
more than that receives scholarships from Uncle Sam.
State aid programs are less targeted, but still vary
inversely with income. Forty percent of those in the lowest
income quartile receive state grants, compared to 12
percent of those in the top income quartile.
Institutional aid—grants paid directly to students in
the form of scholarships or foregone tuition—is barely
targeted at all. Thirty-four percent of the lowest-income
students receive institutional aid—only 0.2 percent
more than the percentage of those in the middle income
quartiles, and barely more than the 30 percent of the
wealthiest students who get grants from their college or
university.
Also, as Chart 9 shows, the patterns are even more
pronounced for the amount of aid students receive.
Lower-income students aren’t just more likely to receive
federal aid—they receive larger aid amounts. This is the
logical outcome of programs designed to help students
with fewer financial resources attend college.
At the same time, state aid is only slightly concentrated
among low-income families. But interestingly, the
average amount of institutional aid steadily increases
as students earn more money. To some extent this is
because wealthy students are more likely to attend
expensive colleges. A student getting a $10,000 discount
at a $50,000 private liberal arts college receives a larger
grant in absolute terms than a student receiving an
$8,000 scholarship at a $12,000 public university. But
it’s also because institutions are, increasingly, using a
significant amount of their student aid money to attract
wealthy students.
It didn’t used to be this way. As Chart 10 shows, private,
four-year institutions 15 years ago were more likely to
spend their aid dollars on low-income students.
Chart 8. Percentage of Full-Time, Full-Year Undergraduates
Receiving Grant Aid, by Aid Source and Income (2007–08)
Highest Income QuartileLowest Income Quartile Middle Income Quartiles
Source of Grant Aid
Percentage Receiving Grant Aid
0
10
20
30
40
50
60
70
80
Institutional Grant AidState Grant AidFederal Grant aid
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Study (2007–08). Author
analysis with Undergraduate Data Analysis System.
Chart 9. Average Amount of Grant Aid Among Full-Time, Full-
Year Undergraduates Receiving Grant Aid, by Source of Aid
and Income (2007–08)
Highest Income QuartileLowest Income Quartile Middle Income Quartiles
Source of Grant Aid
Average Amount of Grant Aid (in Dollars)
0
1000
2000
3000
4000
5000
6000
7000
8000
Institutional Grant AidState Grant AidFederal Grant Aid
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Study (2007–08 ). Author
Analysis using Undergraduate Data Analysis System.
Chart 10. Percentage Receiving Institutional Aid Among
Full-Time, Full-Year Undergraduates Attending Private, 4-Year
Institutions, by Income
2007–081999–2000 2003–041995–961992–93
Percentage Receiving Aid
Income Level
Upper Income QuartileMiddle Income QuartilesLowest Income Quartile
0
10
20
30
40
50
60
70
80
Source: Laura Horn and Katharin Peter, What Colleges Contribute:
Institutional Aid to Full-Time Undergraduates Attending 4-Year Colleges
and Universities (Washington, DC: National Center for Education
Statistics, 2003). Tables 1a and 1b. Updated with author analysis of
NPSAS 2007–08 data using the Undergraduate Data Analysis System.
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In 1993, the majority of students from the lowest and two
middle income quartiles received financial aid directly
from their college or university, compared to only 36
percent of students from the top quartile. Over time,
the percentage of all students receiving institutional aid
has increased—reflecting, in part, more aggressive and
sophisticated use of “tuition discounting” policies by
colleges and universities. But the steepest increases
came among the wealthiest students. The proportion of
the wealthiest students getting institutional grants jumped
to 59 percent.
Wealthy students are also keeping pace in the amount of
institutional grants. As Chart 11 shows, at private, four-
year institutions in 2008, the wealthiest students received
institutional grants of nearly identical size to those
received by the lowest-income students.
Public four-year universities appear to have made similar
choices. Charts 12 and 13 show the percentage and
amount of institutional aid given by public universities
to students of different income groups. While public
universities have increased institutional aid to students of
all types, the percentage of wealthy students receiving aid
has proportionally increased the most. Wealthy students
who receive aid also get the highest average institutional
grant awards—more money than students from middle-
and lower-income backgrounds.
Overall, it’s clear that colleges and universities are spending
an increasing percentage of their financial aid dollars on
students who have the least financial need. This is partly a
function of simple bottom-line concerns: A few thousand
dollars spent to induce the child of wealthy parents to
enroll can be money well spent if his or her parents write a
check for the remainder and make a donation to the alumni
fund in the bargain. Such aid is often misleadingly labeled
“merit aid,” a catch-all phrase that unfortunately has come
to encompass all non-need-based aid programs.
Universities also use a substantial amount of their
discretionary aid dollars to attract students who do have
academic merit, at least as measured by factors like class
rank and SAT and ACT scores, both of which contribute to
the influential U.S. News & World Report college rankings.
Prestige in higher education is partly a function of attracting
“better” students to enroll, and prestige has a price.
State governments have also shifted their priorities in
recent years. As Chart 14 shows, state governments were,
back in 1993, almost exclusively in the business of giving
financial aid to students who need financial aid. Fourteen
percent of full-time undergraduates received some form
Chart 11. Average Amount of Aid Among Full-Time, Full-Year
Undergraduates Attending Private, 4-Year Institutions and
Receiving Institutional Aid, by Income
2007–081999–2000 2003–041995–961992–93
Average Amount of Aid (in 2007 Dollars)
Income Level
0
2000
4000
6000
8000
10000
12000
Highest QuartileMiddle QuartilesLowest Quartile
Source: Laura Horn and Katharin Peter, What Colleges Contribute:
Institutional Aid to Full-Time Undergraduates Attending 4-Year Colleges
and Universities (Washington, DC: National Center for Education
Statistics, 2003). Tables 1a and 1b. Updated with author analysis of
NPSAS 2007–08 data using the Undergraduate Data Analysis System.
Chart 12. Percentage Receiving Institutional Aid Among
Full-Time, Full-Year Undergraduates Attending Public, 4-Year
Institutions, by Income
2007–081999–2000 2003–041995–961992–93
0
5
10
15
20
25
30
35
40
Highest Quarter Middle Two Quarters Lowest Quarter
Perc en tage Receiving Aid
Income Level
Source: Laura Horn and Katharin Peter, What Colleges Contribute:
Institutional Aid to Full-Time Undergraduates Attending 4-Year Colleges
and Universities (Washington, DC: National Center for Education
Statistics, 2003). Tables 1a and 1b. Updated with author analysis of
NPSAS 2007–08 data using the Undergraduate Data Analysis System.
Chart 13. Average Amount of Aid Among Full-Time, Full-Year
Undergraduates Attending Public, 4-Year Institutions and
Receiving Institutional Aid, by Income
2007–082003–04 1999–20001995–961992–93
Average Amount of Aid (in 2007 Dollars)
Income Level
0
1000
2000
3000
4000
5000
Highest QuartileMiddle QuartilesLowest Quartile
Source: Laura Horn and Katharin Peter, What Colleges Contribute:
Institutional Aid to Full-Time Undergraduates Attending 4-Year Colleges
and Universities (Washington, DC: National Center for Education
Statistics, 2003). Tables 1a and 1b. Updated with author analysis of
NPSAS 2007–08 data using the Undergraduate Data Analysis System.
6
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of state-funded need-based aid, compared to just over 1
percent of students receiving non-need based aid.
Over time, state investment in need-based aid rose from
14 percent of students to nearly 19 percent, but increased
by only 1 percent between 1996 and 2008. At the same
time, the percentage of students getting “merit” or non-
need based aid increased by a factor of six. During that
time, Georgia’s popular, lottery-funded “Hope Scholarship”
program shifted the focus from low-income to middle- and
upper-class students, as state policymakers fought to keep
academically promising students in-state—and assuage the
anxieties of middle-income families growing increasingly
alarmed about college cost. Other states copied the
Georgia program, funneling hundreds of millions of dollars
into what has become, for all intents and purposes, a new
middle class entitlement—on top of the implicit subsidy that
comes through subsidized tuition at state universities.
As Chart 15 shows, the changes in state aid and
institutional aid at four-year colleges are part of a
Chart 14. Percentage of Full-Time, Full-Year Undergraduates
Receiving State Grant Aid, by Aid Type
Non-need and Merit-based Grant AidNeed-based Grant Aid
Percentage Receiving Aid
NPSAS Year
0
5
10
15
20
2007–082003–041999–001995–961992–93
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
larger trend of more “merit” aid going to upper-income
students.
In 1993, nearly as many low-income students received
“merit” aid as upper-income students. But, since then, the
percentage of upper-income students receiving “merit”
aid has more than doubled to 25 percent, surpassing both
low-income and middle-income students.
If tuition increases continue to grow faster than inflation
and family income and grant aid fails to keep pace, more
students will be left with few choices beyond student
loans—and, increasingly, private loans. This course is
particularly risky for low-income and minority students, who
have historically been more likely to default. The fact that
the biggest increases in loan amounts and loan participation
are occurring in the fast-growing for-profit sector—which
historically has had higher default rates—suggests that
worrisome default rates are likely to worsen in the future if
more effective financial aid policies are not adopted.
Recent efforts to solve the problem may not be enough.
President Obama’s proposal to substantially increase
funding for the federal Pell Grant Program and to tie
annual increases to the Consumer Price Index will ensure
that federal grant aid increases regularly each year.
But even though Pell grants are well-targeted and an
important source of grant aid for low-income students,
they only constitute one-third of total grant aid.5 State
grant aid and institutional grant aid make up over half of
total grant aid, and as this report shows, those grants
are increasingly going to middle- and upper-income
students.
Even more significantly, the president’s proposals do
nothing to address the single biggest driver of higher
education unaffordability: rapidly escalating tuition costs.
Until federal and state governments work with institutions
to restrain prices while simultaneously re-focusing
financial aid on needy students, the tide of college debt
will continue to rise.
Endnotes
1 College Board, “Average Published Tuition and Fees in
Constant (2008) Dollars, 1971–72 to 2008–09,” Trends in
College Pricing, available at: http://www.collegeboard.com/
html/costs/pricing/index.html
2 Diana Jean Schemo, “With Few Limits and High Rates, Private
Loans Deepen Student-Debt Crisis,” New York Times, June 10,
2007 and Deanne Loonin, Paying the Price: The High Cost of
Private Student Loans and The Dangers for Student Borrowers,
(Boston, MA: National Consumer Law Center, March 2008).
3 Erin Dillon, Hidden Details: A Closer Look at Student Loan
Default Rates (Washington, DC: Education Sector, 2007).
4 College Board, Trends in Student Aid, 2008. Available at:
http://www.collegeboard.com/html/costs/aid/index.html
5 College Board, Trends in Student Aid, 2008.
Chart 15. Percentage of Full-Time, Full-Year Undergraduates
Receiving Non-Need and Merit-Based Aid, by Income
2007–081999–2000 2003–041995–961992–93
Percentage Receiving Aid
NPSAS Year
0
5
10
15
20
25
Upper IncomeMiddle IncomeLower Income
Source: U.S. Department of Education, National Center for Education
Statistics, National Postsecondary Student Aid Survey (1993–2008).
Author analysis with Undergraduate Data Analysis System.
