Introduction

In 2013-14, undergraduate students borrowed an average $5,490 per full-time equivalent (FTE) student, a decline of almost $600 (10%) over three years and $330 (6%) over one year, after adjusting for inflation. When graduate students are included, postsecondary students borrowed $7,040 in federal and nonfederal loans per FTE student in 2013-14, $420 less than the year before and over $700 less than in 2010-11. Total annual education borrowing increased by 18% (in constant dollars) between 2007-08 and 2010-11, but declined by 13% between 2010-11 and 2013-14 (online Table 3).
 
This information seems counter to the widespread discussions of student debt, which in recent months have focused on the idea of an accelerating student debt crisis both for individual students and for the economy as a whole. The reality is that students are leaving school with more debt than their counterparts five or ten years ago. Moreover, because the number of people going to college has increased significantly over the past decade, the total amount borrowed each year and the total amount of outstanding debt have grown much faster than individual debt levels.
 
The data in Trends in Student Aid 2014 do not address the questions of how much students should borrow; of how the responsibility for paying for postsecondary education should be divided among students, families, and society as a whole; or of the varying outcomes for students. But the data do make it clear that borrowing levels are not on a continually accelerating path, that the portion of undergraduate aid in the form of loans has been declining since 2007-08 (Figure 3A), and that many students are in income-based loan repayment plans that limit their monthly obligations to a manageable percentage of their incomes (Figure 12). 


The Context: The Economy, College Prices, and Enrollment

Making sense of recent changes in student aid requires some background on college prices and enrollment patterns in the shaky economy of recent years. The national unemployment rate rose from 4.7% in July 2007 to 9.5% in July 2010. In July 2013, it was 7.3%.Average published tuition and fees at public four-year colleges and universities increased by 18% between 2007-08 and 2010-11, and by 9% over the next three years, after adjusting for inflation.Median family income, which declined by 7% in constant dollars between 2007 and 2010, declined by less than 1% between 2010 and 2013. 

The economy is not back to its prerecession condition. But the circumstances facing college students — and other Americans — were very different in 2013 than in 2010. It should be no surprise that the trends in college enrollments and in student borrowing look different today than they did two or three years ago.

Undergraduate FTE enrollment increased by 16%, from 11.8 million in fall 2007 to 13.7 million in fall 2010. Over the next three years, enrollment declined to 13.0 million in fall 2013. As discussed above, both total borrowing and borrowing per student have also turned around. Total federal borrowing for undergraduates, which increased by a startling 55% between 2007-08 and 2010-11, after adjusting for inflation, declined by 17% over the next three years. Average federal borrowing per FTE undergraduate, which increased by 33% from 2007-08 to 2010-11, fell by 13% over the next three years.

Federal student aid patterns fit into the larger economic context. The federal government made dramatic increases in Pell Grants, in aid to veterans, and in federal tax credits during the years of the most severe downturn. Total federal grant aid increased by 128%, from $23.1 billion (in 2013 dollars) in 2007-08 to $52.6 billion in 2010-11, as the federal government stepped in to support students facing rapidly rising tuition levels in a weak economy. Federal education tax credits and deductions increased from $7.5 billion to $20.5 billion over the same three years. That rate of growth was not likely to continue. In 2013-14, declining enrollments have generated an estimated decline of 9% in total tax benefits; total federal grant aid to postsecondary students was 7% lower in inflation-adjusted dollars in 2013-14 than in 2010-11.

Student Borrowing and Student Debt

The recent decline in annual student borrowing is not yet reflected in the amounts of debt with which students graduate. As Figure 14A reveals, the percentage of bachelor’s degree
recipients graduating with $40,000 or more of student debt (in 2012 dollars) increased from 2% in 2003-04 to 8% in 2007-08, and to 18% in 2011-12. Figures 13A and 13B indicate that average debt rose again in 2012-13.

Among students who received their bachelor’s degrees from the public four-year institution in which they first enrolled, the percentage graduating with debt increased from 55% in 2006-07 to 56% in 2009-10, and to 59% in 2012-13. The average debt of these borrowers increased by 8% (in constant dollars) over each three-year period, from $21,900 to $23,600 to $25,600 (Figure 13A). It is too soon to know whether the decline in annual borrowing will continue in future years. If it does, average debt levels will likely not continue to grow at this rate.

Trends in Student Aid 2014 includes information on outstanding debt and on the repayment status of that debt, in addition to the data on annual borrowing and average debt levels. The percentage of students taking advantage of income-related repayment plans, to prevent their federal loan payments from being unmanageable, is increasing (Figure 9B and Trends in Student Aid 2013 Figure 12A). It is also notable that the percentage of dollars of federal loans in default is lower than the percentage of borrowers in default (Figure 19A). In other words, the average debt level of borrowers in default is lower than the overall average. As the data on the difference between undergraduate and graduate debt indicate (Figures 14A and 16A), high debt levels tend to be concentrated among graduate students who also have higher earnings than those with undergraduate degrees, or with some college but no degree.

Types of Student Aid

Trends in Student Aid reports on a complex array of grant, loan, tax-based, and work programs that support postsecondary students. These programs have changed over the years for which we report data and comparisons over time are not always straightforward. For example, until 1994-95, federal student loans were made by private lenders and guaranteed by the federal government. After the Federal Direct Loan program was introduced, the two programs, both known as Stafford Loans, co-existed through 2009-10. Since then, all federal education loans have been Direct Loans. What were called Stafford Loans are now Direct Subsidized and Direct Unsubsidized Loans. As has been the case since the introduction of unsubsidized loans in 1992-93, the government pays the interest only on subsidized loans while the student is in school. Keeping all of the programs and terminology changes straight while examining trends over time is not simple. But the most important issue is how the circumstances facing students have evolved over time. 
 
In addition to grants and loans, there is a small amount of federal funding for the Federal Work-Study (FWS) program, through which student wages are paid through a combination of federal and institutional funds. The federal government also provides subsidies to students through tax credits and deductions that, in 2013-14, are equal to 38% of the total amount of federal grant aid.


The Distribution of Student Aid

The effectiveness of student aid in increasing educational opportunities depends to a great extent on how the funds are distributed across students in different financial circumstances. For some students, aid is a pure subsidy, reducing the price of the educational paths they would take even without assistance. For other students, grant aid means the difference between a high-tuition private institution and a public university or between a public four-year institution and a community college. For still others, the amount of grant aid they receive determines whether or not they will enroll in postsecondary education at all.

As documented in Trends in College Pricing 2014, the net prices students pay, after taking grant aid into consideration, increase with family income levels. Federal Pell Grants constitute one-third of the grant aid received by undergraduates in 2013-14 (Figure 2A). Almost 60% of Pell Grant recipients are independent students, for whom parental income is not considered in determining financial aid eligibility. Among dependent recipients, 77% of Pell recipients are from families with incomes below $40,000.

The distribution of federal education tax credits and deductions is quite different. As Figure 25B reveals, 24% of tax credits and 56% of the benefits of the tuition tax deduction go to taxpayers with incomes of $100,000 or higher.

A significant portion of state and institutional grant dollars are allocated on the basis of academic qualifications or other personal characteristics, but most of the funds go to students with financial need. Patterns vary considerably across states, with 23 states considering students’ financial circumstances in allocating at least 95% of their state grant aid in 2012-13, while 14 states considered financial circumstances for less than half of their state grant aid (Figure 26B). The percentage of all state grant aid distributed on the basis of financial need declined from 77% in 2002-03 to 71% in 2010-11, and was 75% in 2012-13 (Figure 26A). 

Institutional grant aid is a much larger portion of the aid received by students enrolled in private nonprofit institutions than in other sectors. About 48% of institutional aid in public four-year colleges and 70% in private nonprofit four-year colleges goes to meet financial need. The rest is used for other purposes and provides discounts to students who, according to the need analysis system, could afford to pay without assistance. Neither sector has seen a decline in the portion of aid going to meet need in recent years. 

Monitoring the distribution of student aid is at least as important as monitoring its level in assessing how well these funds serve to help students overcome the financial barriers to postsecondary access and success. 

The Student Aid System

Student aid reduces the financial barriers many individuals face to postsecondary access and success. Grant aid and tax benefits lower the overall price of education for students and families, making the net price of college less than the published price. Education loans do not lower the price, but they do make it possible to spread payments out over time. Parents can also spread their contributions to their children’s education out over time. Work-study earnings frequently replace other earnings, but may increase the availability of employment for students.

The complex set of financial aid programs described in Trends in Student Aid 2014 creates opportunities for students, but there is broad consensus that the same number of dollars could be used more effectively. Understanding what the components of the system are; how grants, loans, tax benefits, and work-study aid are distributed; and how they have changed over time is a first step. But the growth in aid dollars has meaning only in the context of the growth in the price of college and in the number of students enrolling — information included in Trends in College Pricing 2014.

The information in both publications is a prerequisite for improving the student aid system. Incorporating evidence about what makes aid programs effective in supporting college access and success is a vital next step. Most obvious from the review of the system presented here is the problem of complexity. If successful, current efforts to simplify the array of programs, the application processes, and the eligibility criteria are promising. It is also critical to focus on directing subsidies to students whose educational outcomes are most likely to be improved because of the aid.

The student aid system is a vital component of efforts to increase economic mobility, the quality of the labor force, and the long-run strength of the economy. The information in Trends in Student Aid provides valuable perspective on how that system is operating.

1. Bureau of Labor Statistics, http://data.bls.gov/timeseries/LNS14000000.
2. The College Board, Trends in College Pricing 2014.