The Downside of Reduced Student Borrowing

New research shows more student borrowing is connected to greater academic success -- at least at community colleges -- and indicates reduced borrowing could lead to higher loan defaults.

July 12, 2019
 
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The student debt crisis has become ubiquitous in headlines and even in the mouths of some lawmakers.

New research, though, suggests that if many students are taking out unnecessary loan debt, others aren’t borrowing enough to support their pursuit of a degree.

The studies found that community college students who borrow more have stronger academic outcomes than those who took out fewer loans or reduced their borrowing. And one experiment involving Maryland community college students found that positive effects of increased borrowing carry over to students’ financial well-being after college -- whether or not they actually completed the degrees.

As both federal officials and college administrators raise concerns about overborrowing, the new research points to the possible downsides of messaging that could make low-income students averse to loan debt.

Andrew Barr, an assistant professor of economics at Texas A&M University, who co-wrote the study involving Community College of Baltimore County, said the findings show more nuance is necessary in discussions of student loan debt.

“There clearly are downsides to borrowing for certain people. But there is a reason we have student loans,” he said. “It allows students to finance their education. And for certain students, if you reduce the amount they perceive they can borrow, they seem to do worse.”

Barr, along with Kelli Bird, an assistant professor of education at the University of Virginia, and Ben Castleman, an associate professor of education at UVA, tracked the effects of a monthlong outreach campaign that used text messages to inform students at the Baltimore community college about their student loan debt. Students who received the texts reduced their borrowing through unsubsidized federal loans by about $200, or 7 percent, on average.

That reduced borrowing resulted in students performing worse in their courses. Those who received the texts and subsequently took out lower loan amounts were less likely to earn any credits and more likely to fail a class in the semester studied. Barr said that could be because students cut back on costs like food or spent more time working outside class to cover additional costs after reducing their borrowing amount.

The study also notably found that students who borrowed less were 2.5 percentage points more likely to default on their loans within three years. But those who borrowed more were less likely to default whether or not they completed a degree, Barr said.

“Even for people very unlikely to get a degree, academic performance matters for their likelihood of eventual default,” he said.

Higher ed researchers have found that students who leave college without a degree or credential are at the highest risk of default. But the study suggests that those with worse academic performance are at even greater risk of default. Barr said it’s not clear why that’s the case, but credit accumulation, a higher grade point average or some other factor involving academic achievement appeared to make a difference for students who borrowed more in the experiment.

The study builds on previous findings from a study by Benjamin Marx, an assistant professor of economics at the University of Illinois at Urbana-Champaign, and Lesley Turner, an assistant professor of economics at the University of Maryland at College Park. In a separate study of community college students released earlier this year, Marx and Turner found that messaging from a college could lead students to make substantial reductions in their borrowing.

The study looked at the results when an unnamed college didn’t include student loans in financial aid packages. Colleges that participate in the federal student loan program can’t dictate the amount of loans available to students. But they can choose the loan amount displayed in financial aid letters.

Students who randomly received financial aid offers including student loans were 40 percent more likely to borrow than were those who got an offer with no student loan funds. And students who received award letters with student loan aid borrowed an additional $4,000 and completed 30 percent more course credits.

“It’s important to avoid a knee-jerk reaction that we need to get rid of student loans,” Marx said. “Lots of community colleges are dropping out of the federal loan program entirely. And there’s evidence that that’s harming students.”

Some community colleges have incentives not to participate in the federal loan program. Consistently high default rates on student loans can lead an institution to lose access to any federal student aid, although very few institutions have suffered that consequence for loan outcomes.

Nine percent of community college students in the U.S. attend institutions that have opted out of the federal loan program, the Institute for College Access and Success found in 2016. Some public four-year institutions have also pursued policies to encourage students to limit their borrowing levels.

Education Secretary Betsy DeVos has warned that outstanding student loan debt has created a looming “crisis” for higher education. And top department officials have pushed for tools that would allow colleges to restrict improper spending by student aid recipients.

Matt Chingos, director of the Urban Institute’s Center on Education Data and Policy, said there are clearly people who are borrowing too much -- usually those pursuing a credential with little economic value. While researchers have raised questions about whether others aren’t borrowing enough, he said until recently there wasn’t good evidence showing the effects of underborrowing by college students.

“What these papers give us is some solid evidence, at least with the two community colleges studied, that borrowing too little is a real thing and that people benefit from borrowing more,” he said.

Chingos said it’s important to note that those findings don’t say anything about whether it would be preferable to give low-income students a larger Pell Grant or to make college free instead of offering loans. But given current higher ed policy, he said, the studies indicate borrowing can lead to more academic success.

Mark Huelsman, associate director of policy and research at the progressive think tank Demos, said the studies make clear that taking away one financing tool for college will have a negative impact on students. But those concerned with the effects of student loans don’t want to see reduced borrowing with no other financial backstop for students, he said.

“If a student, today, is on the margins of dropping out or working too many hours, I would advise them to use the tools at their disposal, including loans,” he said. “But from a policy perspective, it makes little sense why we’re asking community college students to borrow in the first place rather than meeting their financial need at the outset.”

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