Pushing the Limit on Federal Loans

U.S. report on trends in student borrowing shows sizable uptick in who borrows and finds increases are heftiest among costlier unsubsidized loans.
March 19, 2008

It probably won't surprise too many people that a new federal report shows sizable increases in borrowing of federal loans by undergraduate students. But the extent of the borrowing, and the changes in who is borrowing and the kinds of loans they are taking, may well open some eyes, at a time when policy makers are intensely focused on student debt and the availability of loans.

The report, "Trends in Undergraduate Borrowing II: Federal Student Loans in 1995–96, 1999–2000, and 2003–04," comes from the National Center for Education Statistics at the U.S. Education Department's Institute of Education Sciences. It updates a 2000 report that examined how student borrowing had changed from 1989-90 through 1995-96, spinning the data forward to provide a near-current picture.

Among the report's key findings:

  • More students are borrowing. The proportion of all undergraduate students who received federal loans increased from 25 percent in 1995-96 to 33 percent in 2003-4.
  • Most of that increase resulted from growth in borrowing of unsubsidized loans. Unlike subsidized loans -- on which the federal government pays the interest while borrowers are in school and which are available only to borrowers who qualify under the federal definition of financial need -- unsubsidized loans are available to students who do not show financial need and the students pay in-school interest, though the rates are capped and are lower than for private, or alternative, loans. While the percent of undergraduates with subsidized loans grew to 26 from 22 percent between 1995-6 and 2003-4, borrowing of unsubsidized loans more than doubled, to 21 percent from 10 percent of all undergraduates. The percentage of all undergraduates with both subsidized and unsubsidized loans also doubled, to 15 percent from 7 percent, over that period.
  • More and more borrowers are borrowing as much as they can in federally backed loans. In 1995-6, 57 percent of dependent students (those who are financially supported by their parents) and 13 percent of independent students had borrowed the maximum amount in subsidized and unsubsidized loans allowed under federal law. By 2003-4, those proportions had soared to 73 and 36 percent, respectively. Sen. Edward M. Kennedy (D-Mass.) suggested this month that the government consider increasing the limits on how much students can borrow (most likely in unsubsidized loans) both in response to the credit crunch and to growing concerns about how much students are borrowing from private, non-government sources.
  • Middle income students are seeing the sharpest increase in borrowing. The proportion of students from low-income backgrounds who had subsidized and/or unsubsidized federal loans grew only slightly from 1995-6 to 2003-4, from 34 percent to 36 percent for independent students and 37 percent for dependent ones. By contrast, the proportions increased by 4 points for dependent students from lower middle income backgrounds, 8 points for dependent upper middle income students, and 10 points for dependent high income students. Among independent students, the increases were 15 percentage points for both lower and upper middle income borrowers and 9 points for high income students.
  • Students at for-profit institutions were likeliest to borrow. In 2003–4, 72 percent of undergraduates enrolled in private for-profit institutions took out a federal loan, compared to 11 percent of undergraduates at public 2-year, 42 percent of those at public 4-year, and 53 percent of students at private nonprofit four-year institutions. But while the rates of borrowing at two-year institutions remained low, and were kept low in part because federal loans are restricted to students attending at least half-time, the proportion of two-year college students who held federal loans did nearly double between 1995-96 and 2003-4, from 6 percent to 11 percent.

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