Student Loans: What Students Don’t Know Can Hold Them Back

Matthew M. Chingos

A postsecondary credential is almost universally viewed as important. As student debt levels continue to rise, however, Americans are losing confidence in the quality and affordability of their higher education. A clear majority of Americans think that the quality of higher education in the United States has stagnated or declined, and almost three-quarters think that higher education is not affordable for everyone who needs it.

At the same time, in spite of rising costs and debt levels, investments in postsecondary education continue to pay significant dividends to individuals who persevere through graduation. For the typical household with student loan debt, monthly payments are no more burdensome than they were a generation ago. The average household with debt devotes only 7 percent of its income to making student loan payments — just slightly more than what it spends on entertainment.[1]

The average bachelor’s degree holder who borrows leaves college with $27,300 in student loan debt. A major concern is that students often have little idea what they are getting themselves into. A majority of college freshmen are not aware of how much debt they are taking on, and some do not even know that they have borrowed to attend college. This is consistent with a college search process in which potential students choose a college based on reputation or a campus tour rather than on good measures of quality and price. As a result, colleges face no strong incentives to rein in rising prices and debt.

Recent nationally representative data detail how woefully uninformed college students are about their borrowing. About half of all first-year students in the U.S. seriously underestimate how much federal student debt they have, and less than one-third provide an accurate estimate within a reasonable margin of error. The remaining quarter of students overestimate their level of federal debt. Among all first-year students with federal loans, 28 percent reported having no federal debt and 14 percent said they did not have any student debt at all.[2]

Students who underestimate their borrowing may end up borrowing too much and then find themselves struggling when the payments come due, potentially leaving taxpayers to foot the bill.

Ninety-three percent of student loans are made directly by the federal government.[3] As the Federal Reserve Bank of New York notes, after mortgages, student loan debt is the largest type of debt.[4] Like any single indicator, rising student debt levels cannot tell the whole story, but they should continue to raise an alarm that all is not well in American higher education.

Matthew M. Chingos is a Senior Fellow at the Urban Institute.

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1. Elizabeth J. Akers, “The Typical Household with Student Loan Debt,” Brown Center on Education Policy, Brookings Institution, June 19, 2014, (accessed June 19, 2015).

2. Elizabeth J. Akers and Matthew M. Chingos, “Are College Students Borrowing Blindly?” Brown Center on Education Policy, Brookings Institution, December 2014, (accessed June 15, 2015).

3. Josh Mitchell, “Federal Student Lending Swells,” The Wall Street Journal, November 28, 2012, (accessed June 15, 2015).

4. Student Loan Debt By Age Group, Federal Reserve Bank of New York, March 29, 2013, (accessed June 15, 2015).

© 2015 by The Heritage Foundation. All Rights Reserved.

2015 Index of Culture and Opportunity

The Social and Economic Trends that Shape America

Heritage Foundation

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2015 Index of Culture and Opportunity

The Social and Economic Trends that Shape America

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