Students Borrow Twice as Much as They Did 20 Years Ago
October 17, 2014

Recently, the US Department of Education announced that the national 3-year Cohort Default Rate (CDR) for federal student loans had dropped from 14.7 percent to 13.7 percent. This is good news no doubt, especially as it is the first improvement in the CDR ever since the subprime mortgage credit crisis began.

Image Courtesy of Flickr user Jason Baker

Image Courtesy of Flickr user Jason Baker

The Department of Education shares the preliminary data with schools in February-March. Thereafter, they publish the official CDRs once the schools have rectified any errors in the draft data, typically around mid-to-late September.

According to the data shared by the Department of Education, the 3-year CDR decreased:

–        By 0.1 percent in public institutions

–        By one percent in private non-profit institutions and,

–        By 2.7 percent in private for-profit institutions

This announcement might raise the levels of optimism about the burgeoning volumes of student loan debt. However, the fact remains that student loans have doubled over the past two decades, based on a report released by the non-profit Pew Research Center.

The report mentions that students borrowed a median loan amount of $12,434 two decades back. Currently, they borrow a median loan amount of $26,885. However, it is not just the median loan amounts that have increased. Even the volume of student loans have risen from $24 billion two decades ago to $110 billion in 2012-13.

In his write-up on the subject, Quentin Fottrell of MarketWatch also mentions that several state legislatures have reduced the aid they provide for higher education. Therefore, while students only borrowed about 38 percent for financing their tuition in 2000, these loans have increased to nearly 50 percent of net tuition costs over the past three years. Fottrell cites this data courtesy the 2013 study by the Brookings Institution, a Washington, DC-based think tank.

The report from the Pew Research Center also highlights that:

–        Female graduates are more likely to borrow money for financing their college education than their male counterparts are

In 1993, 49 percent of female graduates borrowed money for financing their college education, as opposed to 50 percent of male graduates. In 2012, 71 percent of female graduates have borrowed money for college as opposed to 67 percent of male graduates.

The report mentions that this increase might stem from the fact that more women than men from disadvantaged backgrounds are completing college.

Regardless of the gender gap, the fact remains that student loans often cast long shadows on the future of many borrowers. These borrowers would need to earn about one-third more annually than those graduates without a student loan, when they decide to purchase a home.

Therefore, the default rate of nearly 14 percent has severe implications for education. It serves as a cautionary reminder to students about taking on too much student loan debt. It also serves a warning to students about enrolling in schools that have poor records, when it comes to preventing loan defaults.