Loan aversion might put students at risk of not graduating

Sunday, November 27, 2011 | 6:54 p.m. CST

LONG BEACH, Calif. — Jesse Yeh uses the University of California-Berkeley library instead of buying textbooks. He scrounges for free food at campus events and occasionally skips meals. He's stopped exercising and sleeps five to six hours per night so he can take 21 credits — a course load so heavy he had to get special permission from a dean.

The only thing he won't do: take out a student loan.

"I see a lot of my friends who took out student loans, then they graduated and because of the economy right now, they still couldn't find a job," said the third-year student, whose parents both lost their jobs in 2009 and who grew up in the boom-and-bust town of Victorville, Calif., on a block with several houses in foreclosure. "The debt burden is really heavy on them."

Even as college prices and average student loan debt rise, educators in some sectors of higher education report they're also seeing plenty of students like Yeh. After watching debt cause widespread damage in their families and communities, they're determined to avoid loans no matter what.

What's surprising is this: Educators aren't sure that's always such a good thing.

Students who go take extreme steps to avoid debt at all costs, they say, may get stuck with something much more financially damaging than moderate student loan debt. They may not wind up with a college degree.

To pay for college and minimize borrowing, students are working longer hours at jobs and taking fewer credits. They're less likely to enroll full-time. They're living at home. They're "trading down" to less selective institutions with lower prices, and heading first to cheaper community colleges with plans to transfer later to four-year schools.

Those might sound like money-savers, but in fact each is a well-documented risk factor that makes students less likely to graduate.

"There's been such attention on student debt being unmanageable that current students have internalized that," said Deborah Santiago, co-founder and vice president for policy research at the group Excelencia in Education, a nonprofit advocacy group. In fact, "If you can take out a little bit of loan you're more likely to complete. If you can go to a more selective institution that gives you more resources and support, you're more likely to complete."

To be sure, educators can't help but admire the determination of students like Yeh; if that kind of responsibility was more common, the financial crisis might never have happened. And nobody blames students for being afraid amid a flurry of news about debt, like a recent analysis estimating the average debt burden for 2010 college graduates who borrowed was over $25,000, up 5 percent from the year before.

But getting almost no notice in recent reports was another stat: New borrowing nearly flattened out last year, according to the College Board, and actually declined on a per-student basis after accounting for inflation. Private borrowing (generally more dangerous to students) has dropped from about $24 billion in 2007-2008 to about $8 billion last year. A major factor is likely increased federal grant aid. But another may be students making more sacrifices to avoid loans.

What's the upside of borrowing? Federal data analyzed by Santiago's group and The Institute for Higher Education Policy (IHEP) in 2008 shows roughly 86 percent of students who borrow for college are able to attend full-time, compared to 70 percent of students who don't borrow. That matters because roughly 60 percent of full-time students receive a bachelor's degree within eight years, compared with 25 percent of part-time students.

Other research, meanwhile, shows just 26 percent of students who enroll in a community college hoping eventually to earn a four-year bachelor's degree succeed within nine years. That compares to 50 percent starting at non-selective four-year colleges and 73 percent at selective schools.

The more selective school may have a higher price tag, and you may expect it will be harder. But in fact, even comparably qualified students are more likely to graduate from the more selective school, probably because such schools generally offer more financial aid and academic help.

Student debt aversion is most pronounced among Hispanics and Asians, who borrow at lower rates than whites despite having higher financial need. And it appears to have the greatest consequences for Hispanics and blacks.

Fifty-one percent of blacks who had financial need but decided not to borrow had left school within three years without a degree, compared with 39 percent of those who borrowed, the study by Excelencia and IHEP found. For Hispanics, 41 percent of non-borrowers had left, compared with 32 percent who borrowed.

In Hispanic immigrant populations, "aversion to borrowing stems from a lack of a banking relationship of any sort," said Santiago, who has studied debt aversion in the states along the Mexican border. "They tend to live in a cash economy and (have) a very stringent determination to live within your means."

For Hispanics, she said, the issue isn't new. But more broadly, a new generation is arriving on campus whose financial education was forged almost entirely during the financial crisis and the wretched economy of the last four years.

"I think the foreclosure (crisis) is definitely something that is on my mind," said Yeh. He said he would borrow if it became absolutely necessary. He's doing OK academically, but acknowledged he used to have a few weeks to work on a paper; since upping his course load he typically bangs it out the day before. He's so busy he doesn't have time to cook and eats out regularly, even though that's more expensive.

At California community colleges, students don't usually need to borrow to pay tuition. But the decision affects how much they work outside class — and that affects their path through college.

Isaac Romero, 22, a third-year student at Long Beach City College, works a nearly 40-hour-per-week job with a workforce staffing company that has him on assignment at City Hall. He goes straight from there to class from roughly 4 p.m. until 9:40 p.m. Two bus rides later he gets home, often around midnight. Weekends are for homework.

He hopes to transfer next year, earn a bachelor's degree and then attend graduate school. Someday he wants to teach at LBCC. He figures he'll eventually have to borrow but wants to keep his debt as low as possible. So he ignores the loan solicitations that flood his mailbox.

"Life would be a little more comfortable if I did take some loans," Romero said. "I might have a car. I wouldn't have to take the bus for two hours." But, he remembers his father — both parents are now deceased — agonizing over bills. Several friends have had cars repossessed.

"I just don't want to go through that," he said.

Eloy Oakley, the president of LBCC, said he understands the source of debt aversion.

"The predatory lending we've had from private lenders, credit card companies, has scared students," Oakley said. "I think they have a conception that all debt is bad. They're concerned about that and rightfully so."

But it's so important to move students through community college expeditiously, he said, that he's concluded debt aversion is a more dangerous problem overall than student debt.

"The longer they're in school, the more opportunity they have to be distracted by life events, jobs, families, situations that change in their own families," said Oakley, whose student body is 41 percent Hispanic and 16 percent Asian. "If we can minimize those exit points and shorten their time to degree, that's much more advantageous to them."

The solution is helping students better understand the complexities of financial aid: the difference between government and private loans, how much debt is manageable, the likely returns on various degrees and majors.

"It's hard to get a nuanced message to students so they can act prudently and get their education," Santiago said. "We have to show there's a level of financial aid and loan amount that's reasonable."

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stephanie yoakum November 28, 2011 | 7:08 a.m.

I read this in the AP feed yesterday. I don't agree with the extreme examples they've cited. It sounds like fear mongering. I just still don't think that borrowing to finish school is always best. I know I'm a 'dropout' but I won't be frightened or regret my decision until all of my friends with degrees currently living with their parents and/or under/unemployed are making more than I am with more job stability than I have.

(Report Comment)
Cecil Caulkins November 28, 2011 | 7:17 a.m.

Given an economy where students with shiny new degrees can't find work, why would sane students pauperize themselves and mortgage their futures for a sheepskin that gets them nowhere but deeply in debt? Now more than ever, getting through college with little or no borrowing is critical. Smart parents will help/encourage their children to develop habits of thrift and saving and to earn some money in lieu of 43 extracurricular activities. And "educators" need to spend their time thinking of ways to make college more affordable.

(Report Comment)
Derrick Fogle November 28, 2011 | 8:40 a.m.

Inflation in Higher Ed is 4 times more than general inflation. For comparison, inflation in the medical industry is only twice general inflation. Here's the graph:

In the news lately, aggregate student loans have topped $1 Trillion. While the overall unemployment rate has remained stagnant or gone down slightly over the last couple of years, the unemployment rate among recent college grads has actually gone up slightly. Good news is, it's still less than half the overall rate.

Still, with ~4.4% unemployment among college grads, that means some $4 Billion in student loans is at risk of default. I'm not sure where the "Job Creators" are in all this, but I think they're the ones holding the promissory notes. Too bad when the loans go bust, the taxpayers are on the hook for the loans, and the Lack of Jobs Creators will get to walk away with all the money.

(Report Comment)
frank christian November 28, 2011 | 8:48 a.m.

"Inflation in Higher Ed is 4 times more than general inflation. For comparison, inflation in the medical industry is only twice general inflation"

Now show us how the socialism in these two industries has helped the problem.

(Report Comment)
Derrick Fogle November 28, 2011 | 11:28 a.m.

Relative income of educational attainment:

(Report Comment)
Derrick Fogle November 28, 2011 | 11:28 a.m.

Relative income of educational attainment:

(Report Comment)
Jimmy Bearfield November 28, 2011 | 11:59 a.m.

As shows, as your level of education increases, so does the likelihood that you'll be employed and have a higher-than-average income. The catch is that not all degrees have those two benefits. For example, if your "shiny new degree" is in the humanities, you shouldn't be surprised when you can't find a job that pays more than $25K. You also shouldn't be jealous when those with degrees in the sciences or engineering are making $60K+ straight out of school.

The moral of the story? Regardless of whether you're saving or borrowing, choose your career path with eyes wide open.

(Report Comment)
Derrick Fogle November 28, 2011 | 12:57 p.m.

Sorry for the double-post again. My mouse button is double-bouncing, it's driving me nuts today. Time to buy a new one. (sigh...)

(Report Comment)
Ellis Smith November 28, 2011 | 1:15 p.m.

As the Midshipmen of the United States Naval Academy keep telling students at St. John's College - the two campuses literally butt each other in Annapolis, MD - WHEN ARE YOU GOING TO GET A REAL DEGREE?

It IS sort of weird to be awarded a BA degree with no specified major and no GPA (all courses are pass/fail). Maybe that's why 98% St. John's graduates continue their higher education elsewhere upon graduation. :)

(Report Comment)
Ellis Smith November 29, 2011 | 7:02 a.m.

Last May students from two minor (in terms of size) engineering disciplines walked across the stage at a UM System campus graduation and received their BS degrees. Every one of them not going on to graduate school had already had accepted an offer of employment; most had multiple offers to mull over.

One factor in their bright employment picture is that for one of those disciplines there are only TWO institutions in the United States that offer the discipline, and for the other discipline there are only SEVEN institutions offering that discipline.

Yet we must actively recruit students for both those programs, inside and outside Missouri, starting to work with students as low as middle school. If we didn't do that we could not justify having the programs.

It's because the public isn't fully aware of the disciplines and their importance. We spend almost as much time working with high school guidance counselors as with students. It's paying off.

(Report Comment)
Michael Williams November 29, 2011 | 7:46 a.m.

Jimmy says, "Regardless of whether you're saving or borrowing, choose your career path with eyes wide open."

Exactly right.

There are two aspects to a "successful" career:

(1) Mental health: Choose a career/job that gets you out of bed in the morning with a happy I-can't-wait-to-get-there mood. The best you can hope for in this world is being consciously happy 2/3rds of the time; One third you are working, one third you are playing, and one third you are unconscious (sleep). Why be satisfied with only 1/3rd (playing) and either unconscious or miserable on the job the other 2/3rds?

(2) Financial health: Choose a job (i.e., train yourself) that few folks either want to do or can do. These jobs are the ones in demand and they pay better. If you choose a job that makes you happy but pays little because you have to compete with everyone else, then you have little cause for matter how important the job may be (teaching comes to mind, but that's another topic). Of course, most of these financially helpful jobs do require good youthful decision-making plus paying attention in school, which is where I think most financially-stressed folks went awry.

(Report Comment)

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