Degreeless in Debt

by Ryan Law

Student loans are a frequent topic of conversation around my office. We see students who are looking to take out loans, students getting ready to graduate who are looking at re-paying their loans and recent grads that are facing the possibility of not being able to pay off their debts. A group we don’t hear much from, however, are students who have dropped out of school before they graduate and have student loan debt – sometimes a significant amount.

Mary Nguyen, a research assistant at Education Sector, recently wrote an article titled “Degreeless in Debt: What Happens to Borrowers Who Drop Out”, which provides an excellent overview of the trends in student loan and dropout rates as well as the realities facing these students. In today’s Financial Tip I will provide an overview of the article along with some comments, but I highly recommend you read her full article at the link provided below.

First, here are some trends:

·         47% of freshmen borrowed federal loans to pay for education in 2001, while 53% of freshmen borrowed in 2009. While this may not seem like a large increase, it is an increase. A number of factors could be contributing to this, but certainly the increasing costs of higher education play into that. In addition, some people who have lost their job are returning to school and are likely borrowing, and at most institutions of higher learning there is an emphasis on recruiting out-of-state students (which could be an entire other article), who pay much higher tuition that in-state students.

·         The increases in student-loan borrowing were highest at for-profit schools:

o   For-profit less-than four year schools saw a 24% increase, from 62% to 86%

o   For-profit four-year increased 11 points, from 76% to 87%

o   Public two-year went from 30% to 35%

o   Public four-year dropped 3 points, from 61% to 58%

o   Non-profit four year also dropped, from 70% to 65%

o   NOTE: For-profit schools expanded heavily during the 2000s due in part to heavy recruiting and enrollment of low-income students. During a down economy people return to school, and promises made by for-profit schools can draw unemployed people in.

·         Among those who borrowed, however, more students are dropping out:

o   Between 1996-2001, 23% of borrowers dropped out

o   Between 2001-2009, 29% of borrowers dropped out

·         Although increases in dropouts were higher at for-profit schools, every sector saw an increase in drop-outs.

So what happens to borrowers who drop out? They face three realities: higher unemployment rates, lower income and higher default rates.

Higher Unemployment Rates

·         In 2009 the unemployment rates for borrowers who dropped out was 10% higher than borrowers who graduated (25% vs 15%)

·         Interestingly, certificate-only holders faced a higher unemployment rate than borrowers who dropped out (26% vs 25%). Obviously this is an issue that needs more studying.

Lower income

·         Borrowers who graduated have a median income of $30,000, while borrowers who dropped out had a median income of $25,000. Over their working lifetimes this gap will become much larger than first-year median income differences.

Higher Default Rates

·         About 3.7% of borrowers who graduated defaulted on their loans, while 16.8% of borrowers who dropped out defaulted.

·         Default is a serious thing – it will affect your credit report for at least 7 years, the federal government can garnish your wages without a court order, you may be ineligible for future loans, professional licenses can be revoked, and collection fees can add up to an additional 25% to your loan balance. In addition, student loans never go away – there is no statute of limitations (how long they can collect), and they are rarely to never discharged in bankruptcy.

Understanding all of this, would it be better if students didn’t borrow at all? What if, instead, they enrolled part-time and worked part-to-full time to fund their education?

It turns out that these strategies actually increase the drop-out rate. Among borrowers who dropped out:

·         45% delayed entry into college – choosing to work instead for a time

·         16% enrolled part-time

·         28% worked full-time

Interestingly, these same factors are even higher for non-borrowers who dropped out:

·         54% delayed entry into college

·         42% enrolled part-time

·         35% worked full-time

Each of these strategies are used by students to help finance their education, but can obviously hurt them as well. If a student is working too much it may be difficult to focus on studies, thus increasing the likelihood of dropping out due to bad grades. It is entirely possible to borrow too much, but some students they may be under-borrowing. This is not always true – recall Dr. Weagley’s student from last week’s Tip (http://mufinancialtip.blogspot.com/2012/05/at-what-price-college-education.html).  This student took 7 years to finish school, working full-time, and is graduating debt-free.

As Dr. Weagley also stated, it is important that students understand their potential income after graduation.

There are several things to consider as you look at your own education (or that of your children, or grandchildren), either now or in the future:

·         Defaulting on student loans is a serious situation to be in, and one that should be avoided at (almost) all costs. Obviously food, clothing and shelter come first, but student loans should be fairly high on your list of priorities.

·         Consideration needs to be given to how much your chosen career pays after school. Amassing a large amount of student loan debt to obtain a degree that doesn’t have a high payout is not a smart strategy.

·         Consideration also needs to be given to how much you will work while going to school. I happen to know the student Dr. Weagley mentioned last week, and he is extremely disciplined and could handle the schedule mentioned. Can all students do the same, however? Probably not. It may make sense for them to borrow moderately to not have to work so much.

·         Before dropping out due to financial considerations, talk with someone. At the University of Missouri we have the Office for Financial Success. At other universities you can usually find some help thought the Financial Aid office (they will know who to refer you to if someone is available).

·         Parents, teachers and others who have influence on students – talk with them! They may be adults now who can take out large amounts of loans without your approval, but if you talk with them they may listen, even if they pretend not to. Most 18 year olds don’t understand the repercussions of taking out $24,000 or more in student loans. Helping them understand what that will mean in the future may help them to make wiser choices. In addition, help students with debt see the full spectrum of repayment strategies. It is possible for a low-income person to have $0 payments under the Income-Based Repayment strategy.

·         Encourage students to enroll in student success classes. These classes teach basic study skills, time-management, goal-setting and what resources are available on campus (such as the Office for Financial Success and other counseling centers).

o   Tulsa Community College who take these courses are 20% more likely to remain enrolled and earn a C or better in future courses.

o   Durham Tech Community College reported a 30% increase in retention from students who took these courses.

We are interested in your comments on this and other articles. To share your ideas and stories, go to http://mufinancialtip.blogspot.com.

Full article by Mary Nguyen:

http://www.educationsector.org/sites/default/files/publications/DegreelessDebt_CYCT_RELEASE.pdf

Ryan H. Law, M.S., CFP®, AFC
Personal Financial Planning Department
Office for Financial Success Director
University of Missouri Center on Economic Education Director

162 Stanley Hall
University of Missouri
Columbia, MO 65211

573.882.9211 (office)
573.884.8389 (fax)