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September 3rd, 2009

Borrowing for college costs is surging

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Even as outstanding credit balances have been steadily shrinking for the US population as a whole, one group is borrowing more than ever — college students:

Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.

New numbers from the U.S. Education Department show that federal student-loan disbursements — the total amount borrowed by students and received by schools — in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama’s proposed 2010 budget.

The sharp growth is “definitely above expectations,” says Robert Shireman, deputy undersecretary of the Education Department. “But we’re also in an economic situation that nobody predicted.” The eye-opening increase in borrowing is largely due to the dire economic environment, which is causing more people to seek federal loans, he says.

The new numbers highlight how debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate, according to an analysis of the government’s National Postsecondary Student Aid Study, conducted by financial-aid expert Mark Kantrowitz. Only a dozen years earlier, according to the study, 58% of students borrowed to pay for college, and the average amount borrowed was $13,172.

Mr. Kantrowitz also predicts, quite seriously, that “the rate of increase will slow to 12% for the 2009-10 school year” — assuming a strong economic recovery.

There are several reasons why the costs of continuing education continue to climb far, far faster than inflation — salaries and such, of course, although some argue that Federal subsidies (loans and grants) contribute to education inflation — but the upshot is that it’s getting increasingly more difficult to students (and/or their parents) to be able to afford it.

Moreover, a growing number of states are cutting education aid as they try to trim their budgets. And the problem will only be exacerbated when credit-card issuers start to deny credit to the under-21 crowd, as mandated by the CARD Act.

There aren’t, as usual, any easy solutions to the problem, but it’s one that affects us all in one way or another:

The lack of college affordability places individuals and the whole country at a disadvantage. Internationally, the United States is slipping in college enrollment. Currently, only 34% of young adults (18-24 years of age) in the United States are enrolled in college. The United States is ranked 7th by the Organization for Economic Co-Operation and Development for college enrollment — well behind countries like Korea and Greece; that enroll 53% and 50% of their young adults in college, respectively.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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