Clueless: Many College Students Don’t Understand How Much Debt They’re Accumulating

With much public attention focused on the increasing costs of college education and the ever-growing levels of student loan debt saddling graduates of higher education institutions, recent research into what students understand – or don’t understand - about their debt is raising some concern. A significant share of undergraduate college students, it turns out, do not realize how much they are paying for college or how much debt they are taking on to do so.  That is the conclusion of a study of college students’ awareness of their level of debt as they accumulate various loans to pay for their higher education.

The report, by Brookings Institution, found that “about half of all first-year students in the U.S. seriously underestimate how much student debt they have, and less than one-third provide an accurate estimate within a reasonable margin of error.”

Surprisingly, among students with federal loans, 28 percent reported having no federal debt and 14 percent said they didn’t have any student debt at all, the researchers found. “Enrolled college students,” the report says, “do not have a firm grasp on their financial positions, including both the price they are paying for matriculation and the debt they are accruing.”

Improving the college search process by making college costs more transparent to potential students and their families has been a primary focus of recent higher education policy efforts, the Brookings report points out. “But the importance of this information does not end at the university gates,” the report states.

In the analysis, study authors Elizabeth Akers and Matthew Chingos of the Brown Center on Education Policy at Brookings find that:

• Only a bare majority of respondents (52 percent) at a selective public university were able to correctly identify (within a $5,000 range) what they paid for their first year of college. The remaining students underestimate (25 percent), overestimate (17 percent), or say they don't know (seven percent).
• About half of all first-year students in the U.S. (based on nationally representative data) seriously underestimate how much student debt they have, and less than one-third provide an accurate estimate within a reasonable margin of error. The remaining quarter of students overestimate their level of federal debt.
• Among all first-year students with federal loans, 28 percent reported having no federal debt and 14 percent said they didn’t have any student debt at all.

The report suggests that without a solid understanding of the financial situation, “it’s unlikely that students will be able to make savvy decisions regarding enrollment, major selection, persistence, and employment. Without knowledge of their financial circumstances, a student with a large sum of debt might be unprepared to compete for the jobs that would pay generously enough to allow them to repay their debt without having to enter an income-based repayment program.”

The report also concludes by noting that “many students look back on their educational experiences with some regret about the financial circumstances. Some wish they had not gone to college in the first place, while others wish they had borrowed less or earned a different degree. The lack of literacy about the personal finances of college going is almost certainly leading some students into decisions that they later come to regret. The problem with the lack of financial savvy among enrolled college students is that the consequences of their decisions come as a surprise to them once it’s too late.”

The Brookings Institution is a private nonprofit organization devoted to independent research and innovative policy solutions.  The mission of the Brown Center on Education Policy at Brookings is to bring rigorous empirical analysis to bear on education policy in the United States. The primary activities of the Brown Center are based on quantitative social science, and are responsive to the immediate interests and needs of those who participate in policymaking.

Student Debt Nationwide Shows Geographic, Income, Racial Divisions; CT in Debt-High Northeast

Across the country, an average 16.2 percent of consumers owe some amount of student debt. But if you look at the state level, the country appears split along the Mason–Dixon line, with a higher percentage of the population owing money in northern states than southern states, according to numbers published by the College Financing Group, citing data from the Federal Reserve Bank of New York.

Overall, Hawaii has the lowest share of consumers with student debt, just 12 percent. That’s less than half the rate in Washington, D.C., where 25 percent of the population in Washington, D.C. owes student loan money, according to data compiled through 2012. Connecticut’s rate hovers in the middle, within range of the national average. 

According to the Federal Reserve Bank of New York, student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.

The full report also shows that 11.9% of all borrowers are 90 days or more past due on their loans, and the average student debt per borrower stands at $24,810. Interestingly, despite Washington D.C.’s high percentage of people with student loans, it has a lower-than-average delinquency rate of only 7.3%.

In its most recently updated 2013 quarterly report, the Federal Reserve Bank of New York noted that outstanding student loan balances increased to $994 billion nationwide as of June 30, 2013, a $8 billion increase from the first quarter this year.  Other estimates have placed outstanding student debt in excess of $1 trillion.

Life on Hold, Especially Among Lower Income Families

According to a 2012 online web survey conducted by American Consumer Credit Counseling, over 35 percent of respondents reported that they have had to delay saving for retirement because of their student debt, while 27 percent also reported that their ability to buy a car has been impacted, and 29 percent said it has affected their ability to buy a house. Nine percent of respondents said student loan debt has even impacted their ability to get married.

A report this year from Demos, “At What Cost:  How Student Debt Reduces Lifetime  Wealth,” stated that “though a college education remains the surest path to a middle-class life, evidence has begun to mount that student debt may be far more detrimental to financial futures than once thought, particularly for those with the highest levels of debt: students of color and students from low-income families.”  The data used was of 2008 bachelor’s degree recipients.

The Consumer Financial Protection Bureau has reported that the share of young consumers among first-time homebuyers is falling. According to the National Association of Realtors, Americans between the ages of 25 and 34 made up 27 percent of all homebuyers in 2011, the lowest share in the past decade. That percentage represents a 25 percent decline year-over-year from 2010.

Young borrowers with student debt are less likely to own a home than those with no debt. According to recent analysis by the Federal Reserve Bank of New York, young borrowers with student debt - historically an indicator of a college education and an accompanying boost in wages - demonstrate a lower rate of homeownership than their peers with no student debt, breaking a decade-long trend.

The demos report found that family income has a large impact on the debt levels of college graduates. Seventy-five percent of bachelor’s degree recipients from families with incomes of less than $60,000 graduated with some student loan debt in 2008, compared to just 48% of students whose families earned $100,000 or more. Students from poorer families were also much more likely to graduate with large amounts of debt: 14% of graduates from lower-income families had more than $30,500 in debt, compared to just 9% of students from families who earned $100,000 or more.

A report by the Project on Student Debt in October 2012, an initiative of the Institute for College Access & Success, indicated that Connecticut students graduating in the class of 2011 had the fifth highest average student loan debt in the nation, at $28,783.  That report also indicated that “high debt states are mainly in the Northeast and Midwest, with low debt states mainly in the West and South.”  The report found that 64 percent of graduating students in 2011 had student debt, which ranked Connecticut 15^th in the nation that year.

Earlier this year, the Consumer Financial Protection Bureau indicated that 1 in 5 U.S. households have student loans, and the number of student loan borrowers increased 31 percent between 2007 and 2012.  Demos predicting that the “impact on the lifetime assets of indebted households will be nearly four times the amount borrowed.”

Student Debt Continues to Climb; CT is 5th Highest in USA

Two-thirds of college seniors who graduated in 2011 had student loan debt, with an average of $26,600 per borrower, up from $25,250 in 2010, according to a recent report from the Project on Student Debt at The Institute for College Access & Success (TICAS).  The loan burden of Connecticut college students, on average, exceeded the national average. The top-five leading high-debt states were New Hampshire ($32,440), Pennsylvania ($29,959), Minnesota ($29, 793), Rhode Island ($29,097)and Connecticut ($28,783).  In addition, 64 percent of Connecticut college students have debt, which places the state 15^th in the nation.

The five-percent increase from 2010 to 2011 is similar to the average annual increase in recent years. The report also found that about two-thirds of the Class of 2011 had loans, and that private (non-federal) student loans comprised about one-fifth of what they owed.

The report’s findings focus solely on public and private nonprofit four-year colleges, because so few for-profit colleges chose to report the necessary data. However, federal survey data show that nationwide, graduates of for-profit four-year colleges are much more likely to borrow federal and private student loans, and they borrow significantly more than their counterparts at other types of colleges.

Utah and Hawaii had the lowest and second lowest average debt at $17,250 and $17,450.

In looking at the institutions specifically, the only Connecticut higher education institution to reach the top 20 High-Student Debt Public Colleges was the University of New Haven.   Among the top 20 “low-debt” institutions was Yale University.