• Introduction
• Changes in Borrowing: Key Findings
• Summary
• Reference

Between academic years 1989-90 and 1995-96, the total dollar volume in federal student loans doubled, increasing from about $13 billion to about $28 billion (The College Board 1998).¹ Nearly 90 percent of these funds were received by students as federal Stafford loans or Supplemental Loans to Students (SLS).² SLS loans were replaced by unsubsidized Stafford loans in 1993-94. Stafford and SLS were closely related programs and are treated together in this report.

The total amount borrowed by undergraduates through the Stafford/SLS programs increased by about $2 billion between 1989-90 and 1992-93, from approximately $8 billion to $10 billion. Three years later, in 1995-96, the total undergraduate Stafford loan volume had increased by $7 billion, to approximately $17 billion.³ The larger increases in loan volume during the second period came after the 1992 Reauthorization of the Higher Education Act, in which Congress made substantial changes in the federal financial aid need analysis and the structure of the federal student loan programs.

There are two broad categories of federal student loans, subsidized and unsubsidized. For subsidized loans, students are not charged interest while they are enrolled. In order to qualify for an interest-free subsidized loan, students must demonstrate financial need. For unsubsidized loans, the federal government does not pay any of the interest for the students, who may obtain them to pay for educational expenses without demonstrating need. Depending on the circumstances, students may obtain either subsidized or unsubsidized loans, or a combination of both. In determining the need for financial aid, students are considered either dependent on their parents for support or independent and self-supporting. The federal student loans have limits on the maximum amounts that students may borrow. These limits vary by dependency, class level, and the type of loan. In general, independent students may borrow larger amounts than dependent students by combining subsidized and unsubsidized loans.

Some of the major changes in the 1992 Reauthorization that affected the eligibility of undergraduates for federal loans, and the amounts that they could borrow, were the following:

• The loan limits on subsidized Stafford loans were increased (except for first-year students).
• Changes were made in federal need analysis (such as eliminating the consideration of home equity) that generally made it easier for dependent students to qualify for subsidized Stafford loans.
• For some independent students, changes in need analysis reduced eligibility for federal Pell grants,⁴ but increased their eligibility for subsidized loans.
• Unsubsidized loans were made generally available to dependent students for the first time.
• The separate SLS program of unsubsidized loans for independent students was phased out and replaced by unsubsidized loans for all students through the Stafford program.
• Dependent and independent students could borrow either subsidized, unsubsidized, or a combination of both types of Stafford loans. The maximum amounts of the combined loans for independent students were about double the amounts available to dependent students, however.

Most of these changes, directly or indirectly, allowed more undergraduates to borrow, and to borrow larger amounts, beginning in 1993-94. In economic terms, there was a substantial increase in the supply of federal loan funds. This report analyzes the effect of the 1992 Reauthorization by comparing undergraduate borrowing patterns in two 3-year periods: from 1989-90 to 1992-93, before the changes; and between 1992-93 and 1995-96, when the changes to the programs were implemented.

In 1989-90, about one-fifth (19 percent) of all undergraduates received Stafford/SLS loans, and this percentage had not changed in 1992-93 (figure A). However, during the same time period, the average loan amount increased (in current dollars) by $500, from $2,600 to $3,100 (figure B). Three years later, when the new loan program rules were in effect, both the percentage of students borrowing (25 percent) and the average loan amounts had increased.

Between 1992-93 and 1995-96, borrowing rates increased substantially among dependent students, rising from 20 to 29 percent. When unsubsidized loans were generally available to dependent students in 1995-96, 9 percent of all dependent students obtained them. In 1995-96, about one-third of the dependent borrowers had unsubsidized loans, either alone (16 percent) or combined with a subsidized loan (15 percent) (figure C). The proportion of dependent student borrowers with unsubsidized loans increased at higher family income levels. Among the borrowers in the highest income quartile, two-thirds received unsubsidized loans, compared with just 13 percent of the borrowers in the lowest income quartile. One-half of the borrowers in the highest income quartile received only unsubsidized loans, which means that they did not qualify for the need-based loans.

The changes in the loan programs and federal need analysis allowed for increased participation in the Stafford loan program by dependent students at the middle and higher income levels. Between 1989-90 and 1992-93, before the changes in the loan programs, borrowing rates had increased only in the lowest income quartile (figure D). After the changes, there was no further increase in the lowest income quartile, but there were higher borrowing rates of subsidized loans in the second income quartile, of both subsidized and unsubsidized loans in the third income quartile, and of unsubsidized loans in the highest income quartile.

The average loan received by dependent students increased by $500 (from $2,200 to $2,700) from 1989-90 to 1992-93, before the loan limits were raised. In that period, the percentage of dependent borrowers with the maximum loan amounts increased from one-third to one-half. Between 1992-93 and 1995-96, when the loan limits were higher and those who did not qualify for the maximum subsidized loan could supplement it with an unsubsidized loan, the average total loan increased again, by $700, to $3,400. The percentage borrowing the maximum amount rose to nearly 60 percent.

Although unsubsidized loans had been generally available to independent students in 1989-90 and 1992-93, the percentage obtaining them doubled in 1995-96 (from 5 percent to 11 percent). In the earlier years, about one-fourth of the independent student borrowers had unsubsidized loans, usually in combination with subsidized loans. In 1995-96, this proportion had doubled, and one-half of the independent student borrowers now had unsubsidized loans (figure C). Independent borrowers in the highest income quartile were the most likely to take out unsubsidized loans, either alone (27 percent) or in combination with a subsidized loan (44 percent). However, about one-half of the borrowers in the other three income quartiles also obtained unsubsidized loans, usually in combination with subsidized loans.

Figure A.—Percentage of all undergraduates receiving subsidized and unsubsidized Stafford loans or Supplemental Loans to Students (SLS) in 1989-90, 1992-93, and 1995-96

Figure B.—Average amount of total Stafford loans or Supplemental Loans to Students (SLS) received by dependent and independent undergraduates in 1989-90, 1992-93, and 1995-96

Figure C.—Percentage distribution of undergraduate Stafford/Supplemental Loans to Students (SLS) recipients with subsidized, unsubsidized, or a combination of both loans, by dependency in 1989-90, 1992-93, and 1995-96

Figure D.—Percentage of all dependent undergraduates receiving Stafford loans or Supplemental Loans to Students (SLS), by family income quartiles in 1989-90, 1992-93, and 1995-96

Because independent students could receive a combination of subsidized and unsubsidized loans with higher limits, their average loan amounts were higher than those of dependent students in all 3 years (figure B). However, independent students did not typically borrow as much as the loan limits. About one-half of the independent students borrowed the maximum subsidized amounts (which were interest-free while enrolled) in all 3 years. The percentage who borrowed the maximum combined total (up to $8,000 before 1993-94, then up to $10,500) was much lower, but it did increase from just 3 percent in 1989-90 to 13 percent in 1995-96.

The large increase in the proportion of independent student borrowers who took out unsubsidized loans in addition to subsidized loans (from about one-fourth in 1992-93 to about one-half in 1995-96) may be related in part to the organizational changes in the Stafford loan program. Unsubsidized loans were available to independent students in 1992-93 and earlier through the SLS program, but required filing a separate application in addition to the application for a subsidized Stafford loan. When unsubsidized loans became available through the same Stafford loan program, they were processed as part of the same application used for subsidized loans, and applicants were notified of the amount of unsubsidized loans for which they qualified.

In any particular year, borrowing rates reflected differences in the average tuition levels at public 2-year, public 4-year, and private not-for-profit 4-year institutions. Students were least likely to borrow at relatively low-tuition public 2-year (community) colleges, more likely to borrow at public 4-year institutions where average tuition is about three times higher, and even more likely to borrow at private not-for-profit 4-year institutions where average tuition is about three times higher than at public 4-year institutions. The highest borrowing rates in all 3 years were among students at private for-profit institutions, which charged relatively high tuition and also enrolled large proportions of low-income students attending full time.

The percentage of all undergraduates with Stafford/SLS loans at public 2-year institutions remained low (6 percent or less) in all 3 years, although there was an increase in the percentage of full-time, full-year students obtaining loans (from 9 percent in 1989-90 to 15 percent in 1995-96). At the private for-profit institutions, the borrowing rates dropped between 1989-90 and 1992-93, but remained higher than in all other sectors (about 50 percent of all students borrowed). As a result of regulatory changes that restricted participation in the Stafford loan program of institutions with high default rates, the proportion of student borrowers attending private for-profit institutions dropped from 29 percent in 1989-90 to 12 percent in 1995-96.

At the 4-year colleges and universities, there was a large growth in the percentage of all undergraduates borrowing between 1992-93 and 1995-96, both at the public institutions (from 23 percent to 35 percent) and at the private not-for-profit institutions (from 33 percent to 43 percent). In 1995-96, about 70 percent of all undergraduates receiving Stafford loans were attending 4-year institutions (45 percent at public and 26 percent at private not-for-profit institutions).

At the public 4-year institutions, the average tuition for full-time, full-year undergraduates increased by $800 between 1989-90 and 1992-93 (from $2,200 to $3,000), and by another $800 in 1995-96 (to $3,800). The change in the percentage of full-time, full-year dependent students with Stafford/SLS loans was 6 percentage points in the first period (from 18 to 24 percent), and then 15 percentage points in the second period (from 24 to 39 percent). The average loan increased by $600 in the first period (from $2,100 to $2,700), and then by $1,000 in the second period (from $2,700 to $3,700). The increases in tuition were the same in both periods, but the increases in borrowing were much greater in the second period. Borrowing increases and tuition increases were not proportional, in part because there were more restrictions on participation in the loan programs during the first period than during the second one.

Over the 6-year period, the borrowing rates of full-time, full-year undergraduates at public 4-year institutions did not vary directly with tuition levels (figure E). The percentage of students borrowing was about the same at all levels of tuition in each of the 3 years. Borrowing rates of students increased to similar levels no matter what the level of tuition was.

A similar pattern is found among full-time, full-year undergraduates at private not-for-profit 4-year institutions. Average tuition was $8,900, $11,100, and $12,600 in the 3 years, respectively. While the tuition increase was greater between 1989-90 and 1992-93 than between 1992-93 and 1995-96, borrowing rates and average loan amounts were greater in the second period. There was also no direct relationship between borrowing rates and the level of tuition within each academic year. With some exceptions, borrowing rates increased to similar levels whether tuition was relatively low or relatively high.

Figure E.—Percentage of full-time, full-year undergraduates receiving Stafford loans or Supplemental Loans to Students (SLS), by tuition and fees charged in 1989-90, 1992-93, and 1995-96: Public 4-year institutions

The annual increases in the size of loans resulted in much higher total cumulative amounts for college seniors at both types of 4-year institutions. Between 1992-93 and 1995-96, the cumulative loan amount for 4th- and 5th-year undergraduates at public 4-year institutions grew from $7,000 to $11,000. At private not-for-profit 4-year institutions, the cumulative loan amount for seniors grew from $9,000 in 1992-93 to $13,100 in 1995-96.

The changes in the loan programs and federal need analysis resulting from the 1992 Reauthorization allowed for increased participation of middle- and higher income dependent students in the Stafford loan program and for borrowing larger amounts. Undergraduates who were independent students took out larger loans, primarily because of a large increase in the proportion of borrowers who obtained unsubsidized loans in addition to their subsidized ones. The increase in unsubsidized loans to independent students was facilitated when the separate SLS program was replaced by unsubsidized loans available through the Stafford program in the same loan application process.

The level of student borrowing at the different types of institutions was directly related to the average level of tuition (with the exception of the private for-profit institutions). However, the relationship between tuition levels and borrowing within types of institutions was not as direct as these general patterns suggest. Within both public and private not-for-profit 4-year institutions, the borrowing rates of full-time, full-year undergraduates did not vary directly with tuition levels. In fact, over the 6-year period, with a few exceptions, borrowing rates increased to similar levels over time at nearly all tuition levels.