Many prospective college students are strongly opposed to taking out federal student loans to finance their college education, even when doing so could provide a positive return on investment, according to a new study from researchers at Vanderbilt University.
The study examined survey responses from a diverse sample of 6,000 high school seniors, community college students, and adults who are not currently enrolled in higher education about their general attitudes toward borrowing, borrowing specifically for education, and their choices between hypothetical financial aid packages – some containing only cash, only grants, or a combination of grants and loans. The researchers found that many prospective students are loan averse, meaning they are unwilling to go into debt to pay for college, even if it could benefit them in the long-run.
Overall, about one in five high school seniors and non-student adults said they were opposed to borrowing money specifically to pay for college, compared with about 9 percent of community college students. Many respondents were also wary of accepting financial aid packages that contained loans – 39 percent of high school seniors, 33 percent of community college students, and 23 percent of adults were opposed to accepting packages with loans.
“Certainly on average, the returns to a degree are significant and large. If one of the ways to get you to be able to complete your degree would be to borrow … on average, we would say that is a wise financial decision to students,” said Angela Boatman, a co-author of the study (with Brent Evans and Adela Soliz) and an assistant professor of public policy and higher education at Vanderbilt. Boatman noted that she and her co-authors were interested in those who would borrow the average amount – which researchers estimate is around $30,000 – and whether borrowing that amount could help students get a degree. If so, she said, “that’s an incredibly sound investment.”
There are many reasons prospective students might be deterred from taking on debt to pay for college, such as personal past negative experiences with debt, overweighting extreme circumstances like defaulting, or a larger societal narrative that emphasizes the potential negative consequences associated with debt.
But as a trade-off to avoiding loans, Boatman said a certain subset of students could end up working more hours to bridge the gap, which research has shown can have a negative impact on students’ academic performance. Some students might also enroll part-time, or use unusual enrollment patterns to cover the cost without borrowing, but ultimately prolong their time to degree. “Stopping out” – even for short periods of time, Boatman said – is highly correlated to never actually getting a degree.
Brent Tener, director of the Office of Student Financial Aid and Scholarships at Vanderbilt, said it’s important for those in the financial aid office to help loan averse students understand what their options are, whether that means ending up with debt or not.
“Frankly, in some cases they may not have a lot of other good options that in the situation they’re in, and a loan is going to be necessary to let them enroll that semester or keep them enrolled,” Tener said.
But at that point in time, Tener said, it could be a good opportunity to more closely examine the student’s situation, help them estimate their monthly repayment, and discuss whether incurring that debt is better than having to stop out of school temporarily.
“Is that investment right now going to pay dividends to get you where you want to go in the future?” Tener said administrators should ask students. “When you put $7,500 up against $50,000 [in potential lost wages from delayed workforce entry], that $7,500 looks like a pretty good investment.”
It can also help policymakers and researchers to look into the variation among loan averse students across different demographic characteristics, Boatman said. Hispanic respondents and male respondents tended to be more loan averse than white respondents and female respondents, the researchers found. But overall, the researchers also found that their three measures about loan aversion were not highly correlated to each other.
“That was an interesting finding to us because I think it illuminates the fact that this is a more complex phenomenon than I think we previously understood, or at least how we talked about it traditionally,” Boatman said. “The fact that those things don't necessarily align shows us there are multiple dimensions to this phenomenon of loan aversion.”
And like Tener, Boatman said it could be important for aid administrators to try to understand the perceptions students have about borrowing “and really talk with them about what parts of those may be real, serious concerns, and what parts may be informed by conversations they’ve heard, or a larger narrative that may or may not be true.”
“Sometimes they don’t want to borrow,” Boatman said. “And if that’s where that conversation ends, I think it’s missing an important component about what might be underlying that decision.”
Publication Date: 4/13/2017