Loans

Dependent undergraduates and their families have access to two major federally sponsored loan programs: the Stafford loan program for students and the Parent Loan for Undergraduate Students (PLUS) program. Unlike grants, loans do not reduce the price of attending college because borrowers must eventually repay their loans. Nevertheless, loans provide students a way to finance their educational expenses and thus provide college access to students who still lack the personal financial resources to enroll after receiving any grants for which they qualify.

As part of the 1992 Reauthorization of the Higher Education Act, substantial changes were made to the Stafford loan program that affected both the percentage of students who borrowed and the average amounts they borrowed. One important change affecting the percentage who borrow is the introduction of unsubsidized Stafford loans for all students enrolled at least half time regardless of financial need. Previously, only students demonstrating financial need could borrow through the Stafford loan program. These loans were subsidized, meaning that the federal government paid the interest until the student started repayment as well as guaranteeing them.¹⁵ The subsidized program continued for students with demonstrated financial need, but the introduction of unsubsidized loans (which the federal government guarantees but does not pay the interest for) means that all full-time dependent students can borrow.

Another important change to the Stafford loan program, affecting the average amount borrowed, was higher loan limits. Before the 1992 reauthorization, dependent students could borrow $2,625 during each of their first 2 years, and $4,000 thereafter, up to a maximum of $17,250. Since the reauthorization, the limits have been $2,625 for the first year, $3,500 for the second year, and $5,500 thereafter, up to a maximum of $23,000 (U.S. Department of Education 2000). Students may take out subsidized loans up to the maximum allowed to meet their established financial need and then add unsubsidized loans up to the program’s maximum limits. For students without financial need, all loans are unsubsidized.

Finally, the changes in need analysis previously presented reduced the average expected family contribution and therefore increased both the number of students eligible for subsidized loans and the amount they could borrow. This likely increased both the percentage who borrowed and the average amount borrowed.

• The percentage of students who borrowed increased, and among those who borrowed, the average amount increased as well.

The percentage of full-time dependent students who borrowed increased from 30 to 45 percent overall (table 6) and for all income quarters except the lowest (figure 9). This includes all student borrowing for the academic year through federal, state, institutional, and private loan programs and parental borrowing through the federal PLUS program.

In 1990, when only need-based subsidized Stafford loans were available, the percentage of full-time dependent students who borrowed declined as family income increased, reflecting their decreasing eligibility for loans (figure 9). In 2000, in contrast, after unsubsidized loans and expanded eligibility took effect, about half of all students in the lowest, lower middle-, and upper middle-income quarters borrowed. The rate at which students in the highest income quarter borrowed continued to be the lowest among all the income groups, but it rose from 13 percent in 1990 to 35 percent in 2000.

Among students who took out loans, the average amount borrowed through all loan programs (adjusted for inflation) grew from $3,900 in 1990 to $6,100 in 2000 (table 6). The average amount borrowed increased between 1990 and 2000 for students in each income group, reflecting the higher average price of attending (table 2) and the higher loan limits in effect in 2000. In both years, the average amount borrowed increased with income (table 6). This pattern reflects a combination of factors, including variation in the prices of attending the institutions selected by students in each income group and the decreasing likelihood of receiving grant aid as income rises (shown in figure 7).

¹⁵Repayment normally begins 6 months after students graduate, leave school, or drop below half-time attendance status. (back to text)