More Student Debt, Please: Why College Students Don't Borrow Enough

If more students took out loans, they might be more likely to stay in school


After the months of teeth gnashing and media panic over America's ballooning student debt burden, what I'm about to suggest will strike some readers as a bit ... nuts. But consider this possibility: U.S. undergraduates aren't deep enough in debt. They should take out more loans.

It sounds inconceivable. Outstanding student loans have shot up to around $1 trillion, a roughly four-fold increase since 2003. Thirty-eight percent of undergraduates now borrow for school, and more than half of full-time students do so, according to the most recent Department of Education statistics. The default rate, meanwhile, is increasing.

Yet, for all the real concerns we should have about the weight college debt places on young people, it's also possible that encouraging more students to borrow would help solve one of the most vexing problems in American higher education: Our terrible graduation rates.

The sad fact is that less than half of all Americans who start college ever finish, which leaves the United States dead last among the industrialized countries tracked for the Organization for Economic Cooperation and Development. Our dropout rates are worst at community colleges and other two-year schools, but only about 56 percent of students seeking a bachelor's degree make it to commencement within six years.

For the country that invented modern higher education, that's a pretty embarrassing record.


There is a line of thought that says our dropout problem should make us more cautious about giving out loans -- that the government is doing a disservice to ill-prepared students by allowing them to go into debt, no matter how unlikely they are to get a degree.

But the hard evidence we have suggests a different story.

First off, students who take out loans for tuition may be more likely to stay in college, not less. A 2005 paper by the National Center for Public Policy in Higher Education, which tracked undergraduates who enrolled in the 1990s, found that 23 percent of borrowers dropped out, compared to 44 percent of non-borrowers. The difference was most pronounced at two-year schools, which are generally responsible fore educating the poorest students. At those institutions, about only a quarter of pupils who took out loans failed to graduate, whereas 55 percent of non-borrowers dropped out.

Those findings were echoed in a a follow-up study this year by Education Sector, which looked at similar data for students who enrolled in the 2003-2004 academic year. They found that more borrowers were dropping out, but that the portion had only gone up to 29 percent. Of those in the data set who didn't borrow, 44 percent dropped out.* A 2008 analysis of Department of Education figures found that Black and Hispanic students with significant financial need were much more likely to make it through school if they took out a loan than if they didn't.

Finally, a survey by Public Agenda and the Bill and Melinda Gates Foundation found that just about three out of every ten dropouts left with student loans.

Why would students who take out loans be more likely to get their degree than those who don't? To get a really solid understanding of that question, we would need a more sophisticated data analysis that controlled for the umpteen different factors that can impact student success. But the research we have offers some clues.


Students who don't take out loans are more likely to delay going to college, attend part time, and work long hours to put themselves through school. All of those things are known dropout risks, and perhaps not surprisingly, the Public Agenda survey found that one of the most cited reasons for dropping out was the inability to balance a job and class. So by taking out loans, students are buying time they can dedicate to school. By trying to work their way through it debt free, they're setting themselves up for failure.

The point isn't that all debt is good and all work is all bad. Some students, particularly at for-profit colleges, take on reams of debt, graduate, and default anyway. Yet one of the most consistent predictors of whether a student can eventually pay back what they owe is whether they graduate. If they can get the degree, they can earn enough later to make the investment worth it.

This wouldn't be so big an issue if college was more affordable to begin with. But tuition inflation isn't something students can control. How they finance their education is. And until the U.S. finds a way to bring down the cost of college, undergraduates need to use the resources available to them. To all those high school guidance counselors out there: Make sure your students don't have an irrational aversion to debt, no matter how much we in the media scream about it.


*That last figure isn't actually included in the published study. It's from the Department of Education's PowerStats database.