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Understanding Student Loan Debt

Today, New America’s Education Policy Program released the fourth in a series of College Decisions Survey briefs that analyze new survey data about what prospective college students know about the college-going and financing process. Part IV: Understanding Student Loan Debtfocuses on prospective and recently-enrolled college students’ perspectives on taking out and repaying student loans. It looks at estimates of the amount students plan to borrow, their monthly payments, and their repayment strategies.

It’s well-known that graduating from college with debt has become a reality for the majority of American college students, but this study sought to better understand what amount students thought is reasonable to borrow for their undergraduate education. Most students (87 percent) thought that some debt was reasonable, but they varied widely on how much they think they should personally borrow for their undergraduate degree. Of those who thought borrowing for an undergraduate education was a reasonable expectation, 55 percent said the total amount borrowed should be $10,000 or less, and another 31 percent indicated borrowing should be kept to between $10,001 and $35,000. The median amount students deemed reasonable was $10,000 over four years of college.

However, when students intending to borrow were asked how much debt theyactually expectedto accumulate, the median amount jumped to $15,000 over four years. Some outlying students estimated they would borrow much more, pulling the average expected loan debt much higher to $25,295.

Prospective and recently-enrolled students also have a difficult time estimating their monthly student loan payment. Students who anticipate borrowing estimate that they will repay $545 per month, on average. Using the repayment estimator that the U.S. Department of Education Federal Student Aid office provides, the monthly payment on the estimated average debt of $25,295 at current interest rates would be approximately $260 on the ten-year standard repayment plan.

“Students struggle to understand exactly how student loan repayment is structured compared to how much they’re borrowing,” said Rachel Fishman, senior policy analyst with New America and the report’s author.

Three possible policy changes could greatly improve student understanding of their debt and repayment options:

  • Under the current system, financial aid packages fluctuate year-to-year. A system that used an average of several years of income to produce an aid package valid over the course of a degree would make it possible for students to interpret their aid amount in cumulative terms

  • Entrance counseling for federal loans could be enhanced by providing information to students each time they take out new loans detailing their cumulative loan balance, interest rates, and estimates of time to repayment

  • A simplified federal loan repayment system of three options—the ten-year standard repayment, income-based repayment, and a consolidation option that will extend the payment horizon—would help alleviate student confusion

More About the College Decisions Survey

New America commissioned Harris Poll to create and administer the College Decisions Survey. A national online survey was conducted between October 7th and November 3rd, 2014. The sample included 1,011 completed interviews and consisted of U.S. residents ages 16 to 40 who do not have college degrees and plan on enrolling in a two-year or four-year college within the next 12 months (n=747). The survey also included individuals who were in the first semester of their first year at a two-year or four-year college (n=264).

The five College Decisions Survey briefs will be released during the spring and summer of 2015 and will cover topics including:

  • Financial concerns during the postsecondary decision-making process

  • The application process for different types of students

  • Students' familiarity with financial aid

  • Students' ability to estimate their loan debt and monthly payment

  • The college search process and helpfulness of various common resources