Students Think It’s OK to Borrow, But Expect To Take on More Debt

Quick Takeaways:

  • More than three-quarters of students (87 percent) think taking on some debt is reasonable for higher education, and 60 percent said they expected to take out loans.
  • Most students (55 percent) said the total amount borrowed for an undergraduate degree should be $10,000 or less, but most expected to borrow much more – $25,295 on average.
  • Students largely overestimated what their monthly loan payments would be – on average, students estimated they would pay $545 per month, but it would actually be closer to $260 on a 10-year standard repayment plan.
  • Most students (65 percent) said they would plan on making a budget to deal with their loan payments. Fewer than one-quarter (22 percent) said they would ask for an income-driven repayment plan.

By Allie Bidwell, Communications Staff

Incoming and recently-enrolled college students generally think it’s reasonable to take on some student loan debt to finance a higher education, but expect to borrow more than what they think is an acceptable amount, according to a recently-released survey from New America.

The survey is the latest in a series examining what factors contribute to students’ college-related decisions, and focuses on how prospective and current students view taking out and repaying student loans. Most students – 87 percent – said it’s reasonable for a student to take out loans to pay for college, and 60 percent said they expected to borrow. But the students showed a disconnect between what they think is a reasonable amount to borrow, and what they expected to borrow in reality.

Of those who expected to borrow, 55 percent said it should be $10,000 or less, and another 31 percent said it should be between $10,001 and $35,000. But the average expected student loan debt of those who intended to take out loans was $25,295, according to the survey.

“It’s clear that students who plan on borrowing estimate they will borrow more than they think is reasonable,” Rachel Fishman and Ivy Love write. “This has wide implications for how we structure repayment to ensure students understand their accumulating student loan debt and their options for dealing with that debt.”

Younger students also had a larger gap between what they thought was a reasonable amount to borrow ($19,500), and what they said they expected to borrow ($33,000). Older students – between 20 and 29 – showed a much smaller gap, saying about $15,000 was an acceptable amount of debt to take on, and that they expected to borrow around $17,000.

When looking at the differences between white, African-American, and Hispanic students, white students said they thought a higher amount of debt was reasonable, and also expected to borrow more than their peers.

White students, for example, said $19,862 was a reasonable amount to borrow on average, compared with $12,459 among African-American students, and $16,845 among Hispanic students. White students on average said they expected to borrow $27,450 for an undergraduate degree, compared with $16,902 and $23,934 among African-American and Hispanic students, respectively.

The survey respondents considered a number of options to manage repaying their estimated student loan debt. Most students (65 percent) said they would develop a budget. The next most-common answers were paying off high interest rate loans first (37 percent), exploring repaying part of a loan while still in school (36 percent), and exploring student loan forgiveness options (29 percent). Fewer than one-quarter of students (22 percent) said they would ask for an income-driven repayment plan, and just 18 percent said they would consolidate their loans.

But the students surveyed also were unable to accurately determine how much their monthly student loan payments would be in a standard repayment plan. Fishman and Love estimate that based on the average estimated debt of $25,295, the monthly payments would be $260 per month at current interest rates. Yet the student respondents on average estimated their monthly payments would be $545 per month.

“Students are likely so far off because they lack information on the front-end for figuring out their monthly payment,” Fishman and Love write. “As the debt accumulates year after year, students have a hard time understanding the total amount of debt accumulated, let alone what their monthly payment will look like.”

Fishman and Love recommend more clearly aligning information about loans, repayment and college price with per-year debt and year-over-year cumulative debt, because students said they thought about college cost as more of a per year cost. The authors also advocate for more proactive outreach on the part of the university – such as Indiana University’s initiative to send students annual letters about how much debt they’ve accumulated – and enhancing student loan entrance counseling.

It’s also possible that students have trouble accurately estimating their monthly loan payments, the authors write, because there are so many repayment options.

“Because each repayment plan involves different tradeoffs, students may have trouble deciding which will work best for them,” Fishman and Love write.

Downsizing the loan repayment options to just three (standard repayment, income-based repayment, and a consolidation option) would make it easier for students, the report said.

In its next and final brief on college decisions, New America will examine where students get information about colleges, and whether they think the information is accessible and useful.


Publication Date: 9/2/2015

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