It's a truism that a college education is the key to better jobs and a brighter economic future for low-income individuals. So what is the effect of the explosion in student debt on low-income students? The Federal Reserve Bank of San Francisco's recent brief, "Student Debt and Default in the 12th District," is a fascinating look at student loan borrowing and default that focuses on students from low- and moderate-income (LMI) households. It provides some clarity, and it's not a pretty picture.
Keep in mind that this report is limited geographically (the 12th District includes nine Western states—Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington—as well as Guam, American Samoa, and the Northern Mariana Islands). But since states in the West tend to have lower average debt levels, we would argue the situation it describes is the same or worse across the country.
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Here's the big picture as the Federal Reserve Bank of San Francisco sees it. In the last three decades, the cost of public four-year colleges more than tripled and the costs of private four-year and public two-year colleges more than doubled. Family incomes haven't kept pace, leading to a greater reliance on educational grants and student loans.
Over the last decade, however, the percentage of college expenses financed by loans increased faster than aid from grants (meaning students borrowed more), and the percentage of lower cost, subsidized Stafford loans (need-based loans on which the federal government pays accrued interest while students are enrolled in school) decreased while the percentage of more costly unsubsidized loans increased.
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The share of private loans also increased rapidly from 2000 to 2007, although it fell off in 2008 as credit conditions tightened. (Remember to E-mail your private loan story to the Consumer Finance Protection Bureau at CFPB_StudentsFedReg@cfpb.gov by January 16 to let it know we need more protections.) The end result: families have to borrow more at higher costs in order to pay for college.
This equation is most risky for LMI students. According to the Fed report, a family in the lowest income quintile—which has an average family income of $17,011 (while the highest quintile has an average family income of $173,474)—would have pay more than 70 percent of the family income to cover college costs after accounting for grant aid. Yes, 70 percent! (Families in the four remaining quintiles would have to pay 36 percent, 27 percent, 21 percent, and 14 percent, respectively.)
LMI students also are less likely to be able to rely on family assistance to repay educational debt and have to overcome burdens (for example, they tend to be older, not receive parental financial support, and more likely to have family and work obligations) that make them less likely to graduate than their higher-income peers. Taking on the burden of student debt without earning a degree that can lead to a higher-paying job can undermine a borrower's financial future.
[See the schools whose 2010 graduates have the greatest student debt burdens.]
In addition, LMI students are more likely to attend for-profit colleges (19 percent of students in poverty attend for-profit colleges while only 5 percent of those not in poverty do), which have much higher default rates than public and private nonprofit colleges. The consequences of default (which can affect credit scores, the ability to obtain mortgages and auto loans, wage garnishment, withholding of income tax refunds or Social Security benefits, and the turning over of the defaulted loans to collection agencies) are particularly dire for borrowers who are already struggling economically.
Ultimately, these difficulties and the fact that LMI students tend to be more debt averse than higher-income students may result in qualified LMI students deciding not to pursue a higher education. The Federal Reserve Bank of San Francisco recommends placing a greater emphasis on educating students about federal grants, subsidized loans, and programs such as Income-Based Repayment.
We are big supporters of these programs (to learn more about Income-Based Repayment, register for one of our free student debt relief webinars), but we have to wonder if they will be sufficient. As long as low-income students have to take on a disproportionate amount of financial risk to get a college degree, their prospects for a brighter future will be dimmed.
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.