Student loan debt took off around the year 2000. Adam Looney and Constantine Yanellis tell the story in “What Went Wrong with Federal Student Loans?” (Journal of Economic Perspectives, Summer 2024, pp. 209-236). They point out: “Between 2000 and 2020, the total number of Americans owing federal student loans more than doubled from 21 million to 45 million, and the total amount they owed more than quadrupled from $387 billion to $1.8 trillion …”
Looney and Yanellis point out that student loan boom-and-bust cycles have happened several times before in the US, as rules for student loans are loosened and tightened. For example, there was a wave of student lending, followed by a “crisis” and a tightening of the rules, in the 1950s and again in the 1980s. The stated goal of looser rules for student lending is to expand educational opportunities, but a common pattern is a dramatic expansion of lending to students that are a higher-risk for repaying the loans to attend lower-quality schools–where the chance of graduating with a useful degree can be low.
Consider two figures. The top figure shows the result of dividing higher education institutions into five groups, according to how how likely students from that institution are to repay their loans. The vertical axis shows enrollment, with enrollment at all five groups set equal to 1 in the year 2000. As you can seen changes over time. and the different colors show institutions according to their student loan repayment rates. As you can see, total enrollments at the institutions where students are most likely to repay has grown over time (the line with the red x’s), but slowly. Total enrollment at the institutions where students are least likely to repay has risen more quickly–and in particular, it zooms higher after about 2000 and peaks around 2010.
The bottom panel shows the change in enrollment for first-generation college students since 2000, measured in millions of students. First-generation students can be viewed as a category that, on average, comes from families with lower financial resources and perhaps also less of a social support system for attending higher education. The slim red area at the bottom shows the very small rise in enrollments of first-generation college students at institutions with the highest student loan repayment rates. The bulk of the rise in enrollments of first-generation college students was at institutions with the lowest rates of student loan repayment.
Looney and Yannelis summarize this pattern:
Indeed, in 2011, the average enrollment-weighted degree completion rate at institutions in the lowest-repayment rate quintile illustrated in Figure 3 was 23 percent, the average post-enrollment earnings were $27,760, and the average student loan default rate was 20 percent. In contrast, at institutions in the highest repayment rate quintile, 73 percent graduated, their average earnings was $48,375, and the default rate was 3 percent. What kinds of schools are these? In the lowest repayment quintile, the largest institutions are the University of Phoenix (at the time, the largest online for-profit institution); Kaplan University and Ashford University (which previously were large online for-profit institutions, but have since been acquired by Purdue University and University of Arizona, respectively, and are now operated as the online offerings of those public universities), and two large community college systems operating around Houston, Texas—the Houston Community College System and Lone Star College. The largest institutions in the highest repayment rate quintile are large public institutions: Texas A&M, Pennsylvania State University, University of Texas at Austin, Michigan State University, and University of Minnesota Twin Cities. Note that while these institutions are prestigious, they are also not highly selective, with acceptance rates between 31 percent and 75 percent. Across a range of student loan, educational, and labor-market outcomes, the pattern is the same—institutions offering the highest-quality educations and with the best outcomes expanded enrollment the least, whereas the lowest-performing institutions expanded the most.
The enrollment patterns shown in the figure imply that the share of students who were taking out student loans rose up to about 2010, and then declined, and also that the average borrowing per student rose up to about 2010, and then declined, and Looney and Yannelis present evidence that this is the case. They describe in some detail the loosening and tightening of student lending rules over time.
With that fact base in mind, the public policy questions here become sharper. Many people will have a reflexive positive reaction to the idea of expanding student loans. But if the expansion of student loans goes to student from backgrounds that are more disadvantaged–in terms of academic preparation and family finances–and those students then attend lower-quality schools where the degree-completion rate is 23%, then the tradeoffs of a policy of expanding student loans might still make sense, but it will look considerably less attractive.
From 2000-2010 in particular, my sense is that a substantial number of disadvantaged and at-risk students (and remember, while we’re talking about adults here, they are often very young adults) got poor advice and made a poor decision. They were encouraged (by teachers, families, counselors, politicians, institutions, society) to borrow heavily to attend institutions that, on average, were not going to pay off for them. The goal of student loans, of course, is not just to get students to begin a first year of college, but to have them complete a degree. Perhaps there needs to be an alternative and complementary social goal: getting those institutions that tend to have higher graduation rates and higher salaries after graduation to expand their enrollments.
