Summarizing the Research: The Impact of Student Loans on College Graduation

The topic of student loans is being debated in the Senate this week, with lawmakers on both sides of the aisle hoping to pass legislation that would curb rising interest rates. Without legislation, interest rates on federal student loans will double from their current rate of 3.4% to 6.8% beginning on July 1st. A recent article in the New York Times provides a good summary of this debate.

Rising interest rates may make obtaining and paying off student loans more burdensome, particularly for students from financially disadvantaged households. Students from lower income households rely on federal loans more heavily than their higher income counterparts, meaning that students from households with fewer financial resources may be disproportionately affected by increases in interest rates. For instance, over half of all lower income students pay for college with federal loans (ranging from 48% to 56%), whereas less than half of all higher income students pay with federal loans (ranging from 27% to 49%). While some research suggests that the overall percentage of students is small who report substantial problems with repaying their loans, those with lower current and lifetime earnings report the greatest difficulty and are perhaps overburdened. Given this, it is critical to find ways of reducing students' reliance on loans—particularly for those from households with fewer financial resources.

Recent research has examined the relationship between household financial resources (e.g., net worth), student loans, student credit card debt, and college graduation. The results and their implications, which are summarized below, suggest the potential for interventions to improve college graduation and reduce students' reliance on loans. This research study entitled The Impact of Youth Debt on College Graduation was conducted by Min Zhan as part of the Assets and Education Research Symposium held in Lawrence, KS on March 29th and 30th. The symposium was sponsored by the University of Kansas School of Social Welfare and the Center for Social Development at the George Warren Brown School of Social Work at Washington University and supported by the Asset Building Program at the New America Foundation. Zhan's paper is available for download here and other related papers from the symposium can be found at the Assets and Education website.

Study Design

This study used data from a total of 1,047 college students available from the National Longitudinal Survey of Youth from 1979 (NLSY79). Students in the sample attended college between 2000 and 2004 and their graduation status (whether or not students earned their bachelor's degree) was measured in 2008. Students who enrolled in college in 2000 had at least 8 years to graduate and those who enrolled in 2004 had at least 4 years to graduate.

Debt was measured by the total cumulative amount of debt accumulated during college enrollment, including the amounts of student loans ($0; < $5,000; $5,000 to < $10,000; ≥ $10,000) and credit card debt ($0; < $5,000; ≥ $5,000). Household financial resources were measured by net worth during the first year that students enrolled in college and were categorized into no net worth (≤ $0), low net worth (< $50,000), and high net worth (≥ $50,000).

The researcher used logistic regression to produce results predicting college graduation with the entire sample (N = 1,047) and separately by household net worth (no net worth N = 288; low net worth N = 384; high net worth N = 375).

What the Researcher Found

Analyses were performed on the sample as a whole and separately by household net worth status. Results are summarized here by household net worth status.

• No net worth (≤$0) = Thirty-three percent of these households were living in poverty. Disproportionate percentages of students from no net worth households were African American and Latino. The average educational loan amount was $8,304 and the average credit card debt amount was $4,270. Students with educational loans greater than $10,000 were 12 times more likely to graduate from college compared to those without educational loans. Credit card debt was not related to college graduation.

• Low net worth (< $50,000) = Twenty-nine percent of these households were living in poverty. Disproportionate percentages of students from low net worth households were African American and Latino. The average educational loan amount was $6,384 and the average credit card debt amount was $3,692. Students with educational loans greater than $10,000 were 8 times more likely to graduate from college compared to those without educational loans. Credit card debt was not related to college graduation.

• High net worth (≥ $50,000) = Eight percent of these households were living in poverty. A majority of students from high net worth households were White. The average educational loan amount was $8,839 and the average credit card debt amount was $3,456. Students with educational loans greater than $10,000 were 2 times more likely to graduate from college compared to those without educational loans; however, those with educational loans between $5,000 and $10,000 were almost 3 times more likely to graduate from college compared to those with educational loans greater than $10,000. Credit card debt was not related to college graduation.

What Does this Mean?

Students rely more heavily on loans to finance their college education when their households have fewer financial resources. However, as Zhan points out, excessive student loans "might undermine their graduation possibilities" (p. 14). This means that increasing student loan amounts may not always result in a greater likelihood of graduating from college—eventually, excessive student loan amounts may decrease the likelihood of graduating from college. An alternate strategy for increasing the likelihood of college graduation may be to help young people and their households accumulate financial resources in advance so they do not need to rely as heavily on student loans.

Things to Keep in Mind

Results suggest that there is a causal relationship between student loans, household financial resources, and college graduation, meaning that the amounts of student loans and household net worth cause young people to experience certain educational outcomes. This can be somewhat misleading, as it is challenging to examine causality within these relationships. Randomized controlled trials (RCTs) are often considered the gold standard in research because they allow researchers to get closer to the question of causality; however this study was not an RCT. While this study used advanced analytic techniques with a reputable, longitudinal dataset, we should remain cautious about inferring causal relationships between student loans, household financial resources, and college graduation from any one research study. Instead, readers are advised to reference the entire body of research that finds support for these relationships rather than basing arguments for or against student loans on any one research study. Readers interested in this topic may be particularly interested in Elliott & Friedline's paper available here, entitled You Pay Your Share, We'll Pay Our Share: The College Cost Burden and the Role of Race, Income, and College Assets.