Certain parameters of the student loans-in particular, borrowing limits, interest rates, and repayment plans-changed over time, which affected borrowing and repayment, but the largest drivers of that growth were factors outside of policymakers’ direct control
Between 1995 and 2017, students could borrow through two major federal student loan programs, the Federal Family Education Loan (FFEL) program, which guaranteed loans issued by banks and other lenders through 2010, and the William D. Ford Federal Direct Loan program, through which the federal government has issued loans directly since 1994. The two programs operated in parallel through 2010, either guaranteeing or issuing loans to students under nearly identical terms and conditions.
The direct loan program continues to offer various types of loans and repayment plans. Loans are limited to a maximum amount (which differs by type of loan) and are extended at an interest rate specific to loan type and year. After borrowers finish their schooling, they repay their loans according to one of the available repayment plans. Required monthly payments are determined by the amount borrowed, the interest rate, and the repayment plan. Borrowers who consistently fail to make the required payments are considered to have defaulted on their loans, at which point the government or loan provider can try to recover the owed funds through other means, such as by garnishing wages. Under certain repayment plans, qualified borrowers can receive forgiveness of their remaining loan balance after a specific amount of time-10, 20, or 25 years.
The volume of student loans has grown because the number of borrowers increased, the average amount they borrowed increased, and the rate at which they repaid their loans slowed. For example, total enrollment in postsecondary schooling and the average cost of tuition both increased substantially between 1995 and 2017.
Much of the overall increase in borrowing was online payday advance Fort Worth the result of a disproportionate increase in the number of students who borrowed to attend for-profit schools. Total borrowing to attend for-profit schools increased substantially, from 9 percent of total student loan disbursements in 1995 to 14 percent in 2017. (For undergraduate students who borrowed to attend for-profit schools, the share grew from 11 percent to 16 percent; for graduate students, it grew from 2 percent to 12 percent.) Moreover, students who attended for-profit schools were more likely to leave school without completing their programs and to fare worse in the job market than students who attended other types of schools; they were also more likely to default on their loans.
How Have Changes in Student Loan Policies Affected Borrowing and Default?
The parameters of federal student loans available to borrowers have changed periodically, and those changes have affected trends in borrowing and default. Between 1995 and 2017, policymakers introduced new types of loans and repayment plans (some of which allow for loan forgiveness after a certain time) and adjusted the parameters of existing loan types and repayment plans. This report focuses on changes in loan parameters that are most relevant to borrowers-borrowing limits, interest rates, and repayment plans-and the consequences of those changes on borrowing and default.
- Borrowing Limits. Federal student loans are subject to borrowing limits. All loans are limited by the student’s expected cost of attending a school, but most loans have more stringent annual and lifetime borrowing limits. For example, since 2009, dependent undergraduate students have not been allowed to borrow more than $31,000 in federal student loans for all of their undergraduate schooling. Borrowers have responded to those loan limits; when the limits increased, they tended to borrow more, which also increased their required monthly payment. After accounting for the borrowers’ and schools’ characteristics, CBO found that larger monthly payments were associated with a slightly increased likelihood of default.