Student Loans Now Outpace Revolving Consumer Debt

According to the Federal Reserve, outstanding student loans in June reached the $830 billion mark. In comparison, revolving consumer debt — comprised mostly of credit card balances — was $826.5 billion.

The federal government backs the majority of outstanding student loans —about $665 billion, based on about $605 billion allocated in the current fiscal year's budget, combined with almost $60 billion in additional stimulus money earmarked for student loans. According to FinAid.org, outstanding non-federally backed private student loans account for the remaining $168 billion in student loan debt. Mark Kantrowitz of FinAid.org says his estimates are conservative, and the total value of private student loans could actually be substantially higher.

To be fair, many factors are at work to explain this shift in national debt levels. At its peak in the fall of 2008, U.S. consumer debt reached nearly $1 trillion. Since then, confronting a weak economy, stagnant wages, and an epidemic of foreclosures, U.S. consumers have made a concerted effort to reduce their outstanding consumer debts and have succeeded in retiring about 15 percent of their revolving credit balances. 

At the same time, the need for college loans has gone up as more people, left unemployed by the current recession, return to college or enter college for the first time. According to the U.S. Department of Education, college enrollment increased by 14 percent between 1987 and 1997. By comparison, college enrollment increased by 26 percent between 1997 and 2007, and full-time students represented the majority of the growth in enrollment. The NationalCenter for Education Statistics predicts that between 2006 and 2017, enrollments for students over the age of 25 will increase by nearly 20 percent.

Rising Cost of College Contributes to Increase in Student Loans 

The cost of higher education continues to rise faster than the rate of inflation and has risen more than twice as fast as U.S. household income since 1970. The Higher Education Price Index (HEPI), a predictive measure of the costs of higher education, showed that the inflation rate for higher education in 2009 was 2.3 percent — 64 percent higher than the overall consumer inflation rate of 1.4 percent.

Public higher education institutions are becoming less affordable over time. According to the HEPI, costs at public, four-year institutions have risen faster than costs at private and two-year schools. This divergence is significant since, over time, this trend, if it continues, will eat away at the cost advantage four-year public institutions currently hold over private schools and will gradually eliminate lower-cost options for lower- and middle-income students who wish to attend college. 

Over time, the distribution of federal financial aid has shifted from grants to student loans. According to the 2008–09 year-end report on federal Pell Grants, slightly more than half of the 16.4 million Pell Grant applications received by the U.S. Department of Education were eligible for funding. In comparison, the Education Department routinely received 65 percent or more eligible Pell Grant applications in the 1980s. Beginning in the mid-1990s, the percentage of Pell Grant applications eligible for funding dropped into the 50- to 60-percent range, and by the 2005–06 and 2006–07 academic years, fewer than half of the Pell Grant applications submitted to the Department of Education were deemed eligible for funding. 

The average Pell Grant award remains stubbornly low: As of the 2008–09 academic year, the average Pell Grant award has never exceeded $3,000 in any given year.

At the same time, lending caps for student loans issued through the federal Stafford Loan program have risen. Currently, eligible undergraduates can borrow up to a lifetime maximum of $23,000 in subsidized Stafford student loans and up to a total of $31,000 in both subsidized and unsubsidized Stafford loans.

Alongside this shift, federal limits on student grants and student loans have not kept pace with the cost of a college education. In a recent issue, U.S. News and World Report estimated that the average annual cost of attending a four-year private, non-profit institution was $35,000; the annual cost of attending a four-year public institution was nearly $20,000. These figures mean that a student who qualifies for the maximum cumulative undergraduate Stafford student loan award would still need to come up with between $50,000 and $110,000 in additional financial aid in order to complete a four-year degree at a U.S. higher education institution.

In the face of rapidly rising higher education costs and federal financial aid that has not kept pace with either the growing number of financially needy applicants or the need for more assistance per applicant, many students are turning to private student loans to fill in the financial aid gaps. Most private student loans can tend to carry higher interest rates than federal student loans, which — in part —– accounts for the growing student loan debt in the United States.

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